Image by: Michael Pardo
By Dexter Lunde
Investment strategies move like waves; what is a fad one year will change with the seasons. One thing that never changes, however, is the fact that people always need homes. If you’re looking to invest in something that is unique and can be rewarding at the same time, consider real estate. It isn’t the easiest investment to get into but it can certainly be the most interesting.
However, in order to succeed in real estate, you must understand the complex nuances of how to begin the process of investing your money and realize that it is a business.
Todd Lee is a realtor who works for Berkshire Hathaway Home Services in Phoenix, Arizona. He sees a bright future in real estate investments. “I see it as a great time for investors to get into the market. In our current market (Greater Phoenix Area) we have recently flipped to a buyer’s market. This means as an investor, especially one with cash, it is a great time to jump in. Our pricing has leveled off and even dipped a bit in some areas. With the rising inventory, sellers are willing to be more flexible with buyers again.”
So before you jump into the real estate market, consider going to a different region. Jim Esposito (a real estate agent in Ft. Lauderdale, fortlauderdalebeachproperty.com) says that, “South Florida Real Estate is a very sound investment right now. Our market has bounced back from the lows of a couple years ago and we are looking at a very good stretch over the next few years. Property values should keep going up into the foreseeable future. In a normal market property in South Florida will appreciate 7-10% a year, and prime real estate in better locations might do better than that.”
There are some big steps and major decisions that need to be made when it comes to jumping into the real estate investment market. I’ve highlighted some major aspects for you to consider before you even think about picking up a real estate market guide.
1) WHERE CREDIT IS DUE
Your credit will determine how much money you will be able to receive as a loan and what sort of mortgage you will get. The better your credit, the better the deal. However, if you have bad credit, there is little that you can do about it. Depending on what is causing your bad credit, you may be able to work past it in seven years (that’s about how long it takes for the most common issues to cycle through your credit history). And that’s the best case scenario…
The best you can do (if you have bad credit and won’t be able to get a loan) is to save your money until your credit gets better and work on cleaning up your financial status. Don’t miss any payments and don’t apply for more credit cards to try and build your credit. Every time that you get rejected by a credit card, your credit takes a hit. Instead, take this time to make a plan for your investments in the future.
2) YOUR GAME PLAN
Determine what your intentions and goals are:
Do you want your cash flow to come in monthly (renters)?
Would you get your income with the appreciation of the house?
Or are you going to make more money from the reduction of the principal of the loan?
“If the mortgage payment on a 15 year loan is being covered 100% by a renter, your equity in the property is growing without any expenditures on your part.” – David Bakke from Money Crashers.
In the best scenario, you will be making money from all three of those scenarios but Bakke says that it isn’t likely so you need to pick a strategy to stick with. While you’re considering those various strategies, keep an eye on how the market is doing. For example, when the economy is terrible, you get more renters (though you may have a hard time getting them to pay at times). Also keep in mind that the market is cyclical.
Look into taking some classes at your local community college if you’re looking at being extremely involved in your real estate investment. While these classes may be a pain to attend, they can give you some valuable information. In addition to this, they will give you the current trends in the market in your specific area. Remember that if you find information online or in a magazine (like this one), the current trends in your particular area will differ slightly.
So talk with your local real estate agents, take the classes, and take a look on Craigslist and your local listings to see what’s selling and for how much.
3) THE LOW DOWN ON LOANS
No one likes to owe anyone money but since you have to spend money to make it, sometimes it is a necessary evil. You’ll need to make renovations, improvements, make repairs (or at least pay for repairs), etc.
Consider the fact that it is tough to get a mortgage for a property that isn’t your primary residence. Not to mention, you’ll be competing with all-cash offers for places that are selling for cheap.
Also, plan for mistakes. During your first year, you’ll probably make a lot of them. So if you think that you can budget out $1,500 a month, plan on using $1000 of that and saving the rest for some inevitable blunders and rainy day funds. When those rainy days work their way indoors, it can get pretty hairy….and wet. Quite literally.
Bakke says to “put at least 25% down. This will give you the most favorable mortgage terms. Better yet, if you can buy for cash, you will maximize your cash flow while limiting your closing costs and carrying costs. But if you utilize all of that money as down payments, you may be able to leverage those funds to purchase a lot more real estate you might otherwise be able to.”
Garrett M. Prom (the founder of Prominent Financial Planning) adds, “I absolutely agree in theory with these thoughts but the reality is that it is very difficult for a first time real estate investor to find a property that will allow you to still cash flow with a 100% loan at a high interest rate. For that reason, I prefer and recommend to put enough money down to get a traditional 30 year loan and avoid PMI. Do not get anything shorter than a 30 year loan or you will not be cash flowing as well as you should. I’ve made this mistake, and I know others that have come to regret this decision as well. Learn from our mistakes and get the longer term loan.”
The 2014 trend for getting money seems to be “shadow banking”. For various reasons (poor credit, personal knowledge, etc), shadow banking seems to be the big buzz word for this year. It is similar to traditional lending from banks but it is done outside banks – normally from a smorgasbord of wealthy individuals, refugees from other markets, private funds, etc.
4) FLIPPING OUT
Prom suggests that “For any first time investor, the easiest way to get into real estate investing is to buy a home and live in it with the intention of converting it into a rental property.”
Flipping a home is one of the most high risk strategies in this market. You can make a lot of money fixing up some rundown houses but you can also lose a lot of money if you pick one that won’t sell. If you’re not afraid of the risk and you’ve got the extra money to burn, I suggest that you check out some lonely homes in upscale neighborhoods.
Make sure that you do the research beforehand though. Check out the recent sale prices for the homes that are nearby. Look into who your target market would be. Is the home near a great school? Are you in the heart of the city?
Look for “scratch and dent” properties that have cosmetic problems. These can be fixed quickly and is great for someone who wants to flip a home.
If you find a fixer-upper for cheap, look into how much maintenance you will need to get it in good shape. It may be more trouble than it’s worth. You may even find yourself losing more money than you have if you haven’t thoroughly researched the property first.
5) LORD OF THE HOUSE
Espisito is seeing this trend down in Florida. “I am dealing with a lot of investors who are buying homes and condos which can be rented out. There is a wide range of these properties, though the better deals do not stay on the market very long.”
“These days I am advising investors to buy something, rent it out a year or two, and then re-sell. Our market is too highly shopped, too competitive, to make anything flipping properties. But with our great appreciation you can make a nice profit after renting a home out for a couple years.” – Jim Espisito
Renting your property has much less risk involved because everyone is always looking for a home. Navy towns, college towns, and big cities are always looking for good properties to rent out because of their fluctuating population. Look into the properties in those areas and see if you can’t score yourself a good deal.
Millenials are looking to rent homes instead of buying them. The Census Bureau reported that the U.S. homeownership rate is at the lowest since 1996, at 65.4%.
That has led to low vacancy rates for rental properties in many cities and a rise in rents. (Source: Kiplinger)
In other words, more people are renting properties instead of owning their own homes and those renters aren’t leaving. That is great news for landlords because that is steady income. In addition to that, the National Association of Realtors is prophesying that around the US, the rent rates will increase by 4.6%.
If you can’t find any good homes that may work as rental homes in nearby college or military towns, I suggest that you look for vacation homes that you can rent out instead.
6) ASSEMBLING YOUR TEAM OF AVENGERS
Todd Lee is a realtor who works for Berkshire Hathaway Home Services in Phoenix, Arizona. He suggests that you should assemble a great team no matter if you intend on flipping or renting out a house.
“Having a great team that understands your goals in key. Whether you plan on holding assets or flipping properties, you need to have an agent that can both advise through listing and selling your assets, a CPA that knows how to take advantage of tax laws, a home inspector that is thorough but realistic in his assessments of properties, an attorney that is well versed on state statutes and laws, and a title company that offers investor rates.”
Start networking to find who will work best in your situation. You can find some great prospects by asking friends and business partners and by checking out online resources like Angie’s List (angieslist.com).
7) ALL SMILES ON THE WESTERN FRONT
They’ve talked about it in the past and now it’s resurfaced again: the smile investment philosophy. This philosophy states that those looking to make money in real estate investments should look in the cities in the Northeast and work their way down along the sunbelt, then come up toward the Northwest.
So, New York, Virginia, Florida, Texas, Arizona, California, Oregon, and Washington State. If you highlight those states on a map, you’ll notice that they form a smile across the United States – thus, the Smile Investment Philosophy.
8) THINK “URBAN” MORE THAN “SUBURBAN”
Another trend for this year is the loss of interest in developing suburban homes and the rise of urban development. If you want to follow this trend, look into places that are close to amenities and public transportation. This will tempt true city dwellers (who has the time to drive a car in the city?), college graduates, millennials, and Gen Y.
9) REAL ESTATE IS LIKE MARRIAGE
You have to remember that going into real estate investments is a long term deal. If you go into a project or investment with the mindset that it will be a short term investment, you will be disappointed (and probably a little angry as well).
Keep in mind that while real estate is a long-term investment, the longer that it sits on the market, the less money you will make.
Don’t expect to hit a home run and rake in millions of dollars right off the bat. This type of investment requires money, time, and great networking skills. If you can provide those things, you will learn from your experiences and you can make more money as you move on from investment property to investment property.