Three houses in Shopping Cart with stacks of coins.

Real Estate Investing: Know What You Don't

Residential real estate investing is something that’s strangely simple and complicated at the same time. At the theoretical level, we all recognize the end objective of buying property, letting it gain value over time, and liquidating it at a later date. There is a wide variety of real estate investing one can do, a broad spectrum. You just have to find your niche and comfort level. Some prefer all rentals, for a portfolio of passive income that can pay monthly. There are many options, I will touch on a few.

UNDERSTAND REAL ESTATE INVESTING FUNDAMENTALS

Yet, moving from someone who simply owns real estate to someone who strategically invests and expands their portfolio involves a little more time and structure.  There are various investment scenarios with real estate to consider. It takes a while to understand and recognize all your investment options. Then, when you figure out what style suits you best, you still must ask yourself many things.  What is the market is doing? How much do you have to invest? What does it all entail? Once you figure all of that out,  your path should narrow down. I’ll jog through some quick residential real estate investing starting points, beginning with the strategy.

FIX AND FLIP OPTION 1

  • Buy with a Realtor a low-cost home.
  • Perform budget friendly cost remodel
  • Re-list with Realtor & Sell Higher. 
  • Net a profit. 

FIX AND FLIP OPTION 2 

  • Become Realtor & find a low cost home to purchase, negotiate out Buyer Agent Commission
  • Perform budget friendly cost remodel
  • Re-list on your own and cut commissions
  • Net a profit. 

SELF MANAGED RENTAL

  •  Purchase a property with a Realtor and Manage your self 
  • Marketing Property
  • Processing Rental applications
  • Handling Tenants
  • Background Checks
  • Evictions 
  • Repairs -  Breakdowns, Property Landscape & Maintenance, Etc

PROFESSIONAL PROPERTY MANAGEMENT 

    • Purchase a property with a Realtor and have a Property Manager Manage your Rental(s). They are typically low cost and give a good legal buffer between you and tenants. 
      • They handle all of the above for you 
      • Charge a small fee monthly for service
      • You still have to pay for repairs but they are handled out of a reserve account.

FINDING THE STRATEGY THAT WORKS FOR YOU

There are plenty of residential real estate investing strategies, all varying in complexity. For the sake of this article, we’ll focus on high-level strategies to help get the wheels turning about which one might be a great fit for you.

FIX AND FLIP 

The fix and flip business model is exactly how it sounds. This is where you find a property that you believe you can renovate and resell for a profit. This is usually a short-term investment strategy used by seasoned investors who can spot a good deal. Seasoned investors typically have connections and relationships with contractors they can call on right away to get renovations done within budget. Most investors follow the one percent rule. This rule of thumb states that the monthly rent should be equal to or greater than one percent of the total purchase price of an investment property.

SELF-MANAGED

The self-managed strategy is one where you as the property owner will also take on the management responsibilities. This approach is often considered by real estate investors who live close to their properties. This approach is also taken on by those who have the capacity and know how to handle these type of things. Such as;  maintenance, tenant screenings, legal requirements, evictions, paperwork and marketing the property.

OUTSOURCED

There are myriad benefits to going with a professional property manager. They save you time, stress, and even money by avoiding problems that could lead to legal fees, vacancies, and damages related to mishandled repairs. Working with an experienced property manager who knows the local market and rental dynamics also frees you up to invest without geographic barriers, and own income properties in markets that meet your budget and investing goals.

CHECKLISTS ORGANIZATIONS 

As you move towards digging deeper into Real Estate Investing, here is a good example of things to consider:

  • SET A BUDGET
    •  Set a threshold that makes sense for you and stick to it. If you're financing, you don't want to over-leverage yourself. 
  • GET APPROVED, IF FINANCING
    • If you're serious about buying an investment property, it's helpful to get pre-approved for a mortgage. This way you’ll have a good idea of what you can and cannot afford.
  • EDUCATE YOURSELF ON REAL ESTATE INVESTING
    • Risk/Return Tolerance, Area Market Appreciation, Cap Rate
  • LOCATION
    • Is the city growing outward?  Inward? Or Stagnate? Does it have a diversified economy? Did a major company recently re-locate there? What about the neighborhood? How are the schools? What kinds of nearby amenities are there?  Your realtor can help you with all of this research quickly and easily with the tools they have available. 

1. SET A BUDGET: 

From closin

g costs, unexpected vacancies, renovations and fixes, and more; there's a good chance operating costs will be more than you initially expect. This doesn't mean you made a bad investment, it just means your expectations around operating expenses may have been underestimated. These include basic operating expenses, such as closing costs and other assumptions that should have been outlined in your financial pro forma/plan. Things ranging from property taxes, management fees and insurance. I suggest maintaining a minimum contingency fund of about 1-2% of the purchase price.

2. GET PRE-APPROVED: 

If you're serious about buying an investment property, it's helpful to get pre-approved for a mortgage. By doing this, you’ll have an idea of what you can and cannot afford. Your realtor should have a list of Lenders accustomed to doing investment properties. It's also helpful to have a discussion with your lender about the type of loan that makes sense for you. For example, a 15-year mortgage may have lower rates and allow you to pay off your investment properties faster. With a 30-year loan, however, your money isn't as tied up.

3. EDUCATE AND FAMILIARIZE: 

Here is an example of some fundamental things to consider at the start of your investing journey: 

  • Budget: Set a threshold that makes sense for you (and your wallet) and stick to it. If you're financing, you don't want to over-leverage yourself. 
  • Risk/return tolerance: This is not absolute, but sometimes lower-yielding properties tend to be safer investments and higher-yielding homes come with a little more risk. Both potentially have a place in your rental portfolio—it's just a matter why you're investing in rental income properties and what you hope to achieve. Are you looking for higher monthly cash flow, more stability, or something in between? 
  • Appreciation: This is the increase in the value of your investment property over time. If higher monthly cash flow are not as critical and you care more about building up equity over time, you might focus on properties with higher appreciation potential. Knowing this will help you in narrowing down your options. For example, you might focus on relatively "newer" properties (for example - built after a certain year such as 1980), certain markets, neighborhood qualities, etc. and less on cap rate or monthly cash flow. 
  • Cap rate: This is the estimated rate of return on an investment property. Cap rate is calculated by dividing net operating cash flow in the first year by the property purchase price. Higher cap rates may correlate to a higher amount of risk in the purchase, and vice versa. This is why it's helpful to consider your threshold for risk vs. return. 

4. LEARN SOME INDUSTRY LINGO:

There are many important reasons to understand the industry and certainly, language and industry diction is very important. Although, it may seem like a lot of industry jargon and endless acronyms—1031s, REI, REITs, NOI, ROI, leverage, LTV, amortization, Cap Ex—will all become familiar territory in due time. By learning more about the language investors use and you’ll feel more confident and most importantly, be in a better position to make informed decisions.

5. THE PLACE YOU BUY DOESN’T HAVE TO BE IN A PLACE YOU’D LIVE : 

Judging a property based on curb appeal alone is a common mistake new real estate investors frequently make. While it’s natural to form an opinion based on personal bias, instead, try to be neutral.  Is the property I'm buying going to be desirable to some set of tenants?  Different things are going to matter to different people. It’s about whether the property will drive the kind of returns you're looking for. It's not an emotional buy like it would be for a home. You're looking at  the data! What's my return? Where do I want to invest? Where will I see the biggest returns hypothetically?

6. FOCUS ON THE AREA, NOT JUST THE HOME ITSELF: 

As an investor, location should be an important factor in your purchase decision. Is the city growing? Does it have a diversified economy? Did a major company recently re-locate there or open a second headquarters? What about the neighborhood? How are the schools?  What kinds of nearby amenities are there? Do a little research on the market(s) you're considering (this can actually be kind of fun and exciting) to get an idea of what's happening in the area. 

7. PARTNER UP: 

The company you keep will define who you are as an investor. It will also help you  or hurt you in getting the most out of your investment properties. By leveraging the tools, data and connections of today, with the knowledge and services of traditional real estate professionals; the possibilities increase tenfold. From property managers and real estate agents, to handy apps and software, to innovative marketplaces which provide turnkey properties services online, they all have value to provide.

  1.  Own where you live before you buy a rental: Suggesting it’s necessary to own your home before you can become an investor is an increasingly outdated school of thought. 
  2. Only buy where you live: The idea that you have to purchase all of your rental properties near where you live, because it will give you the access and security to handle issues as they arise.
  3. You need to spend a lot of time working on/managing your properties: If you decide to go with the self-managed investing approach, you will clock a lot of hours into your property. There is the passive approach, which is to separate investing from the day-to-day tasks of being a landlord. Hire a property management company.
  4. Needing a lot of money to get started: For as little as 20% down, you can own a quality investment property that generates passive income and helps you build long-term wealth. While 20% doesn't come easy and certainly 20% of anything isn't chump change for the everyday investor, but saving up for that down payment is definitely attainable with a plan and a budget.
  5. Waiting for the next crash before investing: If there’s one guarantee, it’s this: no one can fully predict the future real estate market. Rather, focus on the fact that you can’t predict the future but you can prepare for it.
  6.  Paying for the seminar that’s being advertised to you. While all of this is important, above all else, I advise caution and pause before forking over thousands of dollars to just any local real estate seminars.  It's hard to measure what kind of ROI you'll get out of this, if any. There are so many fantastic (and free) educational resources for real estate investors, some of our favorites being podcasts, forums and blogs.