Posts Tagged real estate investing tips
A friend of mine recently asked me about how he should start going about when finding a market to invest in. As I answered him on how to approach the market, I noticed his eyes started wandering when I continued to spew information out like a loose fire hydrant for the next fifteen minutes. My diplomatic friend suggested that I should write all my thoughts down instead. So here I am.
How Healthy is the City?
As I stressed in my podcast before, I’d look at where I invest based on how healthy the city is. I do not feel comfortable investing in a city with a declining population such as Detroit. A real estate investment can sometimes take as little as a year or as long as decades before you realize your profit. You never want to be investing in a city where you have no idea where it is going to go in the short to medium term.
Thus, when you pinpoint a market to invest in, make sure you drive around the entire city. Every city has its good neighborhoods and its bad ones. Even within the city there are areas where people are leaving and where people are clamoring for. One of the ways to look for a growing area is to see how the infrastructure is. Is there a Wholefoods? Are there parks? What about the library? Where is Target setting up shop? The more developed an area is, the more likely that the neighborhood will be staying for a long time. Obviously, do check out the houses as well. Good curb appeal typically means that the neighborhood has good homeownership pride. I tend to peek at what cars people are driving as well.
Know the Home Prices in Every Neighborhood
I would then go to Redfin or Trulia and start looking at the price ranges of the homes. For the most part, prices will be higher in premium neighborhoods. But having done the drive, you might start noticing certain neighborhoods which are good neighborhoods but prices haven’t caught up yet. Sometimes you can find bargains there. In any case, after all this you’d have a pretty good idea of whether the city would be worth investing and where you would want to invest in at.
Side note, certain investors enjoy chasing higher rental yields by investing in lower quality neighborhoods. This is a personal choice. I cannot say which one is better. Personally, I prefer to get a lower yield by investing in better neighborhoods. I do not have the time nor the patience to deal with lower quality tenants who tend to reside in those neighborhoods. Time is valuable to me and I believe in investing in good neighborhoods to avoid headaches.
Find the Right People
Then I would visit several property managers and explain to them that I am planning to invest in the city and is potentially looking for someone to work with. Again, depending on where you are and what you do, you may not need a property manager. Nevertheless, they are a good source of information as to which neighborhoods tend to have better tenants. This process is just sort of reaffirming what you have discovered so far.
Lastly, I will now find a real estate agent. I’d want a real estate agent who is willing to hustle and has an investor mindset. An easy question to ask is whether he or she invests in real estate. A real estate agent who does not invest in real estate is not one that you would want to have. Obviously, this depends on the market. But if the market is good, why isn’t the real estate agent investing? Since you will be working with the agent most of the time, you have to test the agent to see if he or she knows as much as you. On the flip side, you have to show the agent that you are a serious investor. If the agent senses that you are just here to play around, the agent is not going to spend a lot of time on you. You, too, have to impress the agent with your knowledge of the market. But do not be afraid to try sending out a bad offer and see if the agent is there to look out for your interest. If you try to “overpay” for a property and your agent is not there to stop you, it is time to look for a new agent.
With that being said, good luck in investigating your next market!
If you’re in the market to buy a new residence this advice may come in quite handy for you. If you’re thinking about it but you’re scared, there may be some gains awaiting for you if you do your homework first. Even if you’re not versed in the real estate market there are many good reasons to diversify your investment portfolio with some income producing properties. I like Real Estate as part of my retirement portfolio for more than one reason. First of all Real Estate is a hard asset, it’s real and it does not vanish like the paper assets manufactured by Wall Street. If bought at the right price and with the right terms it can generate substantially better returns than money kept in the bank. Why many Americans found it to not be a good investment is because most of them bought during the peak of the real estate boom, they over-leveraged themselves, and they did not have the right professional to help them make good decisions.
Not long ago a friend of mine asked me for advise. My friend is smart. He knows that buying real estate today is less risky than buying during the real estate boom. He wants a property in which he can move. But he doesn’t just look for a personal residence, he wants something that he can also call investment. A condo he thought would not be a bad idea yet I found other ways that could potentially be better than this type of real estate.
The first property I owned as a personal residence was a duplex. The experience I gained while owning it helped me feel more comfortable investing in other properties. That’s one of the reasons I am fond of real estate. Statistics reveal that most of the owner occupant buyers in the U.S. go for the single family homes. Indeed there may be some benefits to it with one being the privacy issue. When buying a townhouse or a condo the element of privacy is eliminated since neighbors are “attached” to you. Other than that when you own a house there is still responsibility that comes with it. When it comes to your mortgage and money matters however, here are some thoughts worth considering.
Let’s just say for the sake of proving my point we use a hypothetical example where we compare a house to a duplex. This is not geared towards anyone looking to move into a million dollar mansion. It’s for average folks like many of us out there. Buying a $100,000 house and getting a mortgage with a 10% down payment would result in an estimated $700 per month payment (at today’s low fixed rates), that includes property taxes, insurance, and mortgage insurance. You may say that’s not bad considering you’re probably spending that much in rent. But what if you spend only $425 or less on your mortgage and turn your residence into a real estate investment? If you find a duplex (2 attached units in a building) chances are it won’t cost you double in purchase price, taxes, insurance, etc. At $140,000 price with a 10% down payment the total house payment should be at an estimated $975. Of course, you must have a tenant next door from which to collect rent every month. In our example if the rent you charge for the other unit is $550 you end up paying $425, almost $300 per month less than if you paid the mortgage on a house. You can use this example and modify it based on real estate prices and rental market in your area…you may have a very nice surprise.
You can also use this idea and calculate the figures based on buying up to 4 attached units (fourplex). You may end up having all your tenants pay for your mortgage and in some cases – if bought at the right price – you may benefit from a nice little cash flow. If you don’t need to get financing – and you pay cash – your cash flow would be much higher. One other thing worth mentioning is that if you use financing to purchase a duplex you can qualify just as you would for a single family mortgage; that’s because 1-4 units are classified as residential loans. FHA may even be the right program for the smart and qualified first time home buyer.
Before you start dreaming of buying a duplex let me explain the challenges. Your investment comes with responsibility. You must determine however how much of that are you willing and/or able to handle. You can take on full responsibility or you can hire a reliable property manager. When managing on your own you should know how to pre-screen potential tenants, how to handle plumbing leaks or hire the right plumber that will do a good job charging you a reasonable fee, how to make your tenants responsible for the units they occupy, how to write up lease agreements, and other tasks that require your time and effort. If this is not for you hiring a competent property manager is highly recommended. For a charge of about 10% of the gross monthly rents a professional can handle most of the issues. In addition, you are next door so if you see something that a tenant does – that does not comply with his responsibility under the lease agreement – you can immediately notify the property manager to take action.
You may – and there’s a high likelihood that you will – have times when one or two units will become vacant and there may be a month or two until other qualified tenants move in. In the meantime your mortgage payment is due every month. The lender doesn’t care how many units you have vacant. But that’s why it’s even more important to know what to do with the savings that you get during the times when the property is fully occupied. The savings must be turned into liquid reserves. Those reserves will help you when you have vacancies and they will also help you when repairs in the other units must be completed. The savings I am referring to should be calculated based on how much you’d spend on a mortgage for a single family house – in the above example being $700 – and what you end up paying for the mortgage after receiving the rents from the other units on a multi-units property. In the above example the monthly savings are $275 but they could be more or less depending on each individual case. Spending the money instead of saving it in a separate account will end up with a tragic outcome. Being disciplined with your money will help you turn your residence into a successful investment.
As time goes by more of the loan balance will be paid down and more equity will be gained. If you have to move in another city or another country it may actually become one of the best investments in your life. With a great property manager your once primary residence can become part of your retirement portfolio. Sure, it would have to be well maintained and placed in the hands of a competent professional but it will not vanish like the Wall Street manufactured securities.
We certainly live in times of economic uncertainty. Not only at the macro level but the micro aspect, as well, considering that the big economic picture directly affects individuals’ lives. Volatility is the term used by most economists and finance managers and that simply means risk. So the big question for most people is how to position themselves during such risky economic times and what can they do to protect what they worked so hard for? A small group however is more geared towards how to profit from the opportunities that are offered by an economic crises.
I have thought long and hard on the subject of real estate. It is true that prices have dropped tremendously since the bubble burst and it may be an understatement to say that a large group of Americans have been hurt by such an event. Real estate today is in a freezing mode for most potential buyers yet it’s keeping busy a very few that continue to have success with it. I am not surprised because the national media had done a good job of putting Americans in a panic frenzy. But I’ve always been a non-conformist and looked much deeper into assessing the scenario so the first thought that comes to mind is what are those few that find success in real estate today know that the rest of the people don’t? No matter in what investment arena we focus on we’ll find the unwritten rule that a good opportunity exists ONLY until the majority of the people find out about it. Once too many people have discovered it the opportunity loses its value.
One of the things politicians and mass marketers have in common is that they know most people act based on emotions. A politician knows how to make his constituents “feel good” while he/she makes promises (that in many cases are not kept). A TV, radio or Internet commercial is designed to turn a viewer into a buyer. It doesn’t matter if the buyer has a need for the product, it matters how he/she “feels” owning the product. So was the idea of “home ownership for all” promoted by the government, politicians and banks not long ago only to find out that not everyone is fit to own a home just like not everyone is fit to be a doctor. I don’t want to cross the boundary into the political arena so I’ll get back to my original point and keep it simple. Emotions are not facts. Acting or reacting based on emotions is different than acting based on careful evaluations, factual data, and logic.
Investing in real estate is not a glamorous event. I won’t tell you that you’ll wave the magic wand and without any effort you’ll be rich. Now, you may not have to work on doing repairs, collecting rents, or necessarily deal with tenants, but nevertheless there’s effort to be put in planning, budgeting, and managing the managers.
Without planning there’s no reason to even consider investing in anything. A plan is what everyone should have, and experienced investors know this better then anyone else. Sure, plans would have to be adjusted based on factors that often arise but that’s no excuse for not implementing one. Planning is like homework. It gets done you move forward, if it doesn’t get done…well, you get my point!
So what does planning entail? To start with it helps to know where and what you’ll invest in. Are you going to stay in your own backyard or are you going to explore the idea of going in other places of the country? Are you going to invest in houses, apartments, or other type of property? Real estate today is not like ten or more years ago. Technology has made it so much easier to diversify your investment portfolio whereas staying strictly in your neck of the woods may limit your opportunities.
The idea that the property has to be located in your town is viewed by the pro’s like the idea of insuring the stock you invest in has to be of a company that is located close to you. I am convinced that if you are invested in stocks or mutual funds you don’t care where the companies are located as long as they make you a profit. So if you trust a stock broker or a commodity broker to invest for you there must be a good reason to invest through him. Same applies for real estate and you’d have to insure you use a good property manager.
Is it going to be cash or financing? Will you use an IRA to acquire the property? Is it going to be a LLC, LLP, or a corporation in which you’ll take title? If you need financing are you equipped to even qualify for a loan? Do you have enough capital to invest in real estate? You may not know all the answers but that’s why associating yourself with worthy professionals may be a good start. All this takes time and effort and keep in mind that tough times have always made investors more resilient. Barriers insure that only those driven and focused stay on the path and become successful while the rest quickly give up the idea. You see, I am not here to make you “feel good”! Consider it a good dose of reality. After all not everyone is an Olympic champion, right?
Oh yes, just because you have a manager, a maintenance crew, or an accountant it doesn’t mean that you’re off the hook. You still have to watch and question, when necessary, their actions. Going back to my example of trusting your stock broker I hope that you often ask why he’s investing your money in whatever ways he is. You should do the same with your property manager. How does he/she screen potential tenants? How do they handle tenants in default? If they handle repairs for you and your rents pay the bill would they give you a copy of the repair bill? These and so many other questions are important. You may not have to roll up your sleeves and start painting a property but you’ll want to know what’s right and what’s not right. For example, you wouldn’t want to pay $500 for changing a door-lock.
When the manager sends you the monthly report you should have a good knowledge of how your rental income is being distributed to pay for management, taxes, insurance, and maintenance items. By the way, you’ll also want to make sure you have the right insurance coverage for the best premium. Even with a manager, an accountant, or any other professional, know that it’s not their job to shop for you. If you want to save money on insurance then you shop for the best insurance company.
In the end you may say “so if I have to know or learn so much, if it’s not glamorous, and it doesn’t make me feel good why then should I invest in real estate?” I sure hope that this really is not going through your mind. If it is I can honestly say real estate – or any other investment – is not for you. But again not everyone is fit to be successful even though everyone has the same opportunities. If you’re not discouraged by everything that I shared with you then you may be one of the few that has what it takes to become the investor that you envision.