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.
Is it time to buy Real Estate? Is it time to invest in Notes? These questions face investors every day. With the Stock Markets hitting all-time highs you might be asking yourself if you should take your money out of those markets and buy real estate or focus your new investments in Real Estate and Real Estate related investments. Great questions, so let’s explore what is going on to drive the Real Estate Markets upward over the next few years in California, and might just be the case for the entire Nation.
Basic economic theory states that where there is a shortage of supply prices will go up. So the question of supply in the Real Estate Markets comes to question here. The supply of Real Estate is actually a ridiculous concept as there has always been a limited supply of Real Estate, as last I checked the world is not adding any new land. That being said, we already know there is a limited supply of Real Estate and we also know that our population keeps growing, and the housing markets have to keep up with that demand. Problem has always been to keep up with that demand and not over building while attempting to keep pace with demand.
In 2005 we hit record highs in building new housing and commercial space. It has taken until now to actually have demand catch supply in housing. In economics we call this the equilibrium point. Have we reached this equilibrium point or is it just a moving target. As we know economics is very fluid and has several factors that affect the theory. In housing there are far more factors that actually effect housing, such as jobs in the area, demographics, or the age of the population. As an example of how jobs affect the Real Estate Market, take a look at the Silicon Valley in the San Francisco Bay area. Here there are a limited supply of housing and high paying tech jobs in a concentrated area. People tend to want to stay within a 20 mile radius of their jobs. Thus, you have a limited supply of homes with a high demand for them with people making a higher than normal income. The average price of a single family home in this region is over $900,000. Prices in this region of California are so high that a worker with a normal paying job just can’t get in to the buying market in this area. If you take this micro economy model and apply the basic theory to any Real Estate area you will be able to see what areas are poised to see increases in Real Estate Values.
Although, this sounds easy, people have been trying to do this with accuracy for decades. We also have to take demographics into the big picture. Yes, that age groups that are buying Real Estate and what has traditionally been their trends. Traditionally, the average age of the first time home buyers have been in their mid-twenties, and we have seen this pretty consistently for the last 70 decades. However, this trend has been bucked in last decade. Yes, the traditional 20 something’s buying their first home has actually moved to the early thirties. This is due largely to the economic rescission that started in 2005 through 2011. When a formative child or teen see their parents go through the Real Estate hangover, or failure, they tend to stay away from what hurt their parents. Another huge reason the 20 something’s have not entered the Real Estate Market has been the lack of good paying jobs. The government has been telling us that the unemployment number has been declining, but what they have neglected to tell us is, the jobs created have only been in the low paying areas. If you have low paying job that maybe you had to take to get started or survive with, those jobs don’t qualify you to buy a home but the unemployment numbers go down. The number of better paying jobs has increased over the last few years allowing for more people to consider buying a home.
Now that your economic lesson is over we can apply what you have learned to the Real Estate Markets. We now know that supply and demand affect the Real Estate Markets, and that good paying jobs or the lack of good paying jobs in a specific area will also affect the Real Estate Market. We know that a certain group of traditional home buyers have stayed away from buying Real Estate longer than normal trends have been. So what does all this mean and how do you apply this to your Real Estate Investing plan? It means that we are starting to see those millennials enter the market several years later than they usually did and we also see that the next generation is right on their heels to buy at the same time. We also know that new house building has not been active since 2005 due to the lack of demand from the recession. We know that it will take time for builders to start building again as the demand heats up. We know the job market is regional and some urban areas have better jobs than others with different pay scales in California.
Looking at California there are areas that are more affordable areas than others due to these factors, but what areas are the best for investors? A first time home buyer will buy in the area in which there income is produced in. A Real Estate investor has to evaluate what their overall plan is, such as flipping, holding and creating rental income, or investing in Notes in a specific area. The affordability has to be taken into consideration as well. We know that places with high demand such as the Silicon Valley, and certain Beach communities in Southern California will always have a high demand. These high demand areas are not really that good for investors as there is a high cost to enter those markets and they are not as liquid as they should be for an investor. Most investors are looking for returns that will can be consistent and fairly liquid. That being said, a stable job area is always a good for investors to be looking in. Areas like Sacramento and surrounding communities have a high government job market which creates a stable job market. Regions like the Los Angeles area have the entertainment industry, as well as a good mix of financial and manufacturing type jobs.
Overall California has a good job market and is poised for growth. The most affordable housing markets in California are located in the Central Valley, From Sacramento on the Northern end to Bakersfield on the Southern end of the Central Valley. As we see more folks hitting the Real Estate Markets we are going to see supply of homes for sale dwindle and that will send prices rising again. This makes now the best time to invest and hold in Real Estate that we have seen in over a decade. Builders will start to enter the market but will not be able to keep up with demand for a year or two, keeping prices rising. Knowing that builders were heavily hit by the last Real Estate Bubble, they will be hard pressed to build as fast as they did in the past, keeping supply limited during this new business cycle and prices up. So all in all Real Estate Investors should be looking to invest now either in the Real Estate itself or by investing in Notes. Notes are a great investment as you can get high yields with very low risk with rising Real Estate Values. As Real Estate rises in value people are far less likely to let their house go to foreclosure, making investing in Real Estate a far safer risk than before. At MAE Capital Real Estate and Loan we look forward to helping you with your Real Estate needs from buying and selling Real Estate to investing in private notes. We look forward to assisting you with all of your Real estate needs.