So you want to be a Real Estate Investor but have no idea where to start. If you are really serious about getting into Investment property I would advise to start with your budget and how much money you have get started with. The money side of Real Estate investing is the single biggest issue I see people get in trouble with. That said you should also figure out if you are going to fix and flip property or if you are going to acquire long term a rental property. These are two very different strategies and should be understood before jumping into either. The third option is commercial property and the fix and flip market doesn’t really exist for these types of investments as commercial property does not have the demand like housing does, commercial property has traditionally been used to generate income. These are the basic Investments people start with when looking to invest in Real Estate. Not to say there aren’t other options our there but Residential Fix and Flip, Residential income property and commercial income property are the most common Real Estate Investments people want to start with.
Let’s take a look at what a budget should be for investing in Real Estate. To start you should be prepared to be able to make a down payment of at least 20%-30% and if you are fixing and flipping you should also have the money in reserve to pay for the improvements you wish to make. There are some loans that we can arrange for you called After Repair Value Loans (or ARV loans) that will lend you a percentage of the project based on the appraised value of the home after it has gone through your renovation. Generally, these loans will be 65%-75% of the fixed-up value of the property. But if you can put down the required down payment and have the repair money you will see the best gains and not have the worries of overruns and problems that will pop up during a fix and flip project. Some advice I would give for a fix and flip, as I have personally done several, would be to “do the numbers” before even entering into contract to purchase. The numbers are some basic calculations of costs, and as you do more of these the better you become at estimating the costs of repair. Before entering into a purchase contract on any potential fix and flip you should know what the costs to repair will be as well as what you could sell it for once the repairs are done. For example if you are looking at a house that is listed for $200,000 in “as is condition” in a market where is could sell for $300,000 fixed up you need to have an accurate idea of how much it will cost to fix up. In this example if it was going to cost $50,000 to bring the property up to the top of the market you could stand to make $50,000 in profit. Figuring it will take about 3 months of repair before you could put it back on the market. If this is an acceptable profit for your time and energy then it would be a good investment for you. If the costs look like it will be more like $80,000 to fix you have to ask yourself if this is enough for your time and money taking into consideration what you might find when you start demolition. Knowing your costs is the single most important part of the fix and flip investment as it doesn’t make sense if the costs to repair plus the purchase price is greater than what you can sell it for in the end. Also know your market place, if the values are rising due to lack of inventory your project might be worth more when you finish the rehab, but if your market is stagnant or slowing with increasing inventory you need to consider that the project might be worth less when the rehab is done.
If you are buying a property for rental income it is important to note that you should have a realistic income goal you wish to “Net” after all the monthly costs of your rental property. You should also know the tax rules both state and federal with regards to rental property and what the landlord’s responsibilities are. If this is your first attempt at a rental property you may want to explore the cost of having a property manager. A property manager will handle all things to do with the tenant, so you don’t have to, but with that comes with a cost that you must figure in as well. You should be prepared to put an initial down payment of at least 20%-30% down more if you wish to have more return on your money. Again, there are 2 objectives to holding rental property and you should identify what your objectives are. First, are you purchasing a renal for monthly income or are you purchasing and holding hoping for gains on your investment or both? Both plans require you to “run the numbers” to make sure you actually get what you set out to. If you are looking for income after paying a mortgage on your home, you have to ask “how much do you need to make”. For example: You buy a $400,000 single family house put down 30% and have a $280,000 mortgage with a mortgage payment of $1,503 at 5% and your annual taxes for the property are $5,000 a year then divide that by 12 and your monthly taxes are $416, and your insurance is $1,200 annually your monthly insurance is $100. Your base monthly cost before repair contingencies would be $1,716. If the rents you can get on the property are not greater than that you will have negative rent every month which means you will not be making money but paying money. This might be OK if you think the $400,000 property will gain in value over the years at a rate that is acceptable for you. If that is not acceptable then you would have to put more money on the initial down payment to lower the mortgage amount thus lowering the monthly payment to a level where you are receiving the income you want. This example doesn’t take into consideration a work contingency fund for any unexpected problems that may arise with having renters in your property like clogged plumbing, landscaping, broken appliances, etc.. Again this all boils down to your budget if you can afford to pay cash for the property you should look at the return on your investment. That is done by taking your initial investment and dividing the income after expenses into the initial investment. In our example above if you bought a $400,000 house for cash and the rents you could get is $1,800 a month your taxes and insurance are $516 a month and maintenance will average $200 a month you would have a monthly cost $716 a month subtract that from your income and you have a net income of $1,084 times 12 is $13,008 annually then divide that by your initial investment of $400,000 and you get 3.3% return on investment not taking into consideration any increases in value of your property. If that is acceptable return for you then it would be a good investment, if not then do the numbers on another investment where you are getting the return you desire.
If you are considering commercial property as an investment be prepared to be in a much higher sales price environment than residential Real Estate. Commercial Real Estate is generally not a vehicle that the first time Real Estate Investor should be in unless they really understand the market they are in and the rules of owning commercial Real Estate and have the assets to maintain commercial property. A commercial Investor must be prepared for vacancies in their property unless they are an owner operator of the building, in other words you run your business from the commercial property. It is prudent to own the building you run your business from if it is possible as you can pay yourself rents from your company, which is a conversation for your tax professional as well. There is a lot more to owning commercial property that I can get into in this blog but if you are interested before my commercial real estate blog comes out just give us call and we can help you.
There are many ways to invest in Real Estate these are just a few examples. If you wanted nothing to do with the actual day to day operations of owning Real Estate and you have money to invest you might want to look at being an investor in a private Real Estate Note where you lend your money to someone who needs it that can’t qualify under traditional financing. This is where we at MAE Capital Real Estate and Loan would find someone in need of Private money for a project they have, and we would lend your money to them and every month you would get a check for the interest on your investment. This type of investing is a lot like investing in a Certificate of Deposit but with a high yield. You would have to be prepared to have your money tied up for a period of time of 1 to 5 years. With this type of investment, you will know what your yield will be every month with no expenses to worry about. There are other investments in Real Estate such as Real Estate Investment Trusts, Joint Ventures etc. where you are investing but don’t have the management responsibilities. If you are interest in getting started in investing here at MAE Capital Real Estate and Loan we can advise you in both the Real Estate side and the loan side of the transaction, one call all your answers. We can be reached at 916-672-6130 our website at www.maecapital.com.
Most of us have played a game or two of Monopoly in our life time. Do you remember how you won? Yes, it was the person with the most property and money. This is not far off from real life other than there are no winners in life just degrees of happiness. The Real Estate game starts to get much more complicated after you buy your primary home. Although, your primary home is also an investment and should not be taken lightly as an investment. However, the next house or piece of property you buy is going to be an investment property. This is dictated by the IRS tax codes unless the next house is truly a second home generating no income. The tax codes with regards to Real Estate will be for another blog for some other day. Today we are going to explore the different types of investment property and tactics you can use to invest in property.
Basic Rental Property:
So let’s start with the purchase of a basic single family rental property. If you chose to go down this road you are choosing to be a landlord like it or not. You can employ the services of a property management company to manage your property, but when it comes to getting something fixed on it, you will have to be involved as it will require your money to get the problem fixed. You also might be very handy and can do the work yourself, but you have to be willing to do that work at odd times of the day to keep your tenants happy. You may get lucky to have a tenant that can do the work and deduct it from your rent, at any rate you have to know the game. With a rental property you will have to be prepared to be hands on your investment. This is great from some folks, but before you decide to jump into buying rental property you should know the numbers.
The numbers I refer to are rate-of-return numbers or return on investment (ROI). In a rental property the way to look at the numbers are pretty straight forward. First, you take the price of the house and the amount of income you can make by renting the house out. Then you have to look at the expenses of that you will be paying such as, the mortgage, property taxes, maintenance, utilities, management, etc.. Once you have that information you can start with the basic number of monthly cash flow which is the monthly rental income minus expenses. If this number is positive we call this positive cash flow and if it is negative, well, it is negative cash flow. Another important number one should take into consideration is appreciation. This number can’t be quantified fully, or sometimes at all, at the time you purchase your property, but if you buy in the right location the chances of appreciation will be greater. You will only know the full extent of the appreciation when you sell the rental property.
Flipping:
Another tactic to purchasing investment property is buying with the intention of fixing the property and selling it for more without putting a tenant in the property. This is called flipping. Flipping is highly speculative and before one tries to make money flipping homes they should know the numbers inside and out. The numbers you need to know for making money in flipping homes are; one, what are similar houses in fixed up condition are selling for in the same neighborhood. Two, what will the cost be to fix up the potential flip. Three, and probably most important, what is the initial price of the home you want to flip. Once you have this determined then you have to decide if it is worth the investment for you. You will have to determine if you got the property for X amount and you put Y amount into the property will it sell for more than X+Y+Expenses of selling? If the answer is yes, there will be money left over after the purchase price, plus the costs of repairs, and the expenses to sell it when it is done, then you have to see if that profit is worth the time, money, and effort. This acceptable profit number will vary from person to person. You also have to take into consideration the time it will take to flip, from the time you purchase, fix it up, and then the time it will take to sell on the market. The time on a quick flip would be about 90 days, but I would say be prepared for 6 months financially.
Commercial Property:
Investing in commercial property can be very lucrative but you need a considerable investment to get started in this type of property. With any investment property you have to have the means to purchase the property either with cash or the use of a loan. Commercial property, generally being more expensive than residential property, will require a larger down payment. Commercial property comes in many forms from Office space, to retail space, to restaurant space. If you are not going to be an owner operator and are just looking at commercial property from an investment point of view the numbers here will be crucially import to you. In Commercial Real Estate we look at the Capitalization Rate (Cap Rate) which is the annual net income after expenses divided by the purchase price of the property. The higher the “CAP Rate” the better the investment, generally. So when you are looking a commercial property you should not only like the area it is in but you need to get the operating statement from the owner prior to purchasing the property to see what the income and expenses are prior to purchasing. You will have to determine what Cap Rate you like, generally a good rate is a 6 or higher.
Notes:
Yet another way of investing in Real Estate without the typical ownership hassles is to be the lender. Yes, if you lend money to someone to purchase real estate and secure your loan with a Note and Trust Deed you have ownership rights without having the ownership headaches. As a lender you will receive a set rate of return over a period of time. You will not have the opportunity to make the appreciation on the investment, but you will receive a yield higher than you could receive in most investments. The way this works is pretty straight forward, you tell a Broker, which is in the business of lending, that you wish to lender your funds to folks that want to invest in Real Estate. The Broker will provide you with the legal paperwork and once you have signed you will be given opportunities to invest. The Broker will have the amount you want to lend, what you want to lend on, and he/she will find a borrower that fits your needs and give you the opportunity to view the property and the borrower’s qualifications. As an investor you have the right to see and verify anything you wish. The biggest consideration will be the amount of equity that is in the property after you lend the money. This is called loan to value or LTV. The lower the LTV the lower the risks. A borrower will be less likely to default on their loan if there is a large equity position in the property, and if they do default and there is a large equity position in the property, you as the lender will gain that equity after a foreclosure. Returns on these types of loans are generally between 7% up to 16% depending on the risks, with the higher the risk the higher the rate.
Conclusion:
There are many ways to invest in Real Estate and these are just a few. We have negotiated all kinds of Real Estate investment over the years and these are just the most popular ways of getting involved. Investing in anything should be done with careful consideration and a good education. You should know your risk tolerance before you go into investing in anything, as with any investment the risk of losing money is there as well. This is why we at MAE Capital Real Estate and Loan do our best to run the numbers for you before you even look at a potential investment. This is your money and your future and we don’t take that lightly at MAE Capital Real Estate and Loan, for that we make sure you understand what you are investing in before we can, in good conscience, recommend any investment. As always please leave any comments you might have.