December 12th, 2018 11:08 AM by Gregg Mower
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.