Real Estate Investing

Real estate investing can be very lucrative – if it’s done right. There are many different ways to invest in real estate. You can specialize in just one type such as residential rentals or you can choose several different types of properties and diversify a bit.

If you’re just getting started, take some time to learn as much as you can about real estate before getting financially involved. Go online, read books and talk to other investors. And above all, do your research.

Investment Research

With the proper investment research, you can avoid many of the pitfalls and horror stories of anxious and impatient investors. Sites like Realtor.org can give you lots of helpful statistics for your area like your state and local market information, demographics and economic indicators and forecasts.

You’ll use this and other information to try to determine the market value of the property you wish to purchase. The tax office in the city or county where the property is located is also a good source. While market value is usually considerably higher than tax value, it gives you a good starting point.

Another good thing to look for are comps. These are what properties similar to the one you want to purchase sold for. The closer they are geographically to your property and the more similar in size and type, the more accurate the comp should be.

Since home sales are public information, you can usually find comps at your Register of Deeds office but depending on how their records are organized, it may take some time to locate them. One way around this is to team up with a reputable real estate agent.

They can find comps, tax values and even great property for you and will probably know things about the property you may not. This may cost a little extra but if you’re just starting out in real estate investing, their insight and experience can be priceless. A well connected agent will also have the inside track on new properties becoming available which can give you an edge.

Another important thing to consider is location, location, location. Here is another area where a good real estate agent can be very helpful. Nothing lowers property values quicker than a bad neighborhood.

You can always make improvements to the structure or even demolish it and start over. But you can’t really do much about the condition of the neighborhood. It’s usually a good idea to talk to the neighbors and get their scoop on how things really are.

What’s The Plan?

Before you ever consider purchasing your first property it’s important to have a complete plan for that property. If things change, you can modify your plan but you need to outline what you would like to do with the property upfront.

For example, will you rent the property, buy a distressed property, fix it up and re-sell it, flip it (which is buying well below the market price and then re-selling quickly for a profit) or will you develop it.

You’ll next want to decide how long you plan to keep the property. This is an important part of real estate investing and can affect how profitable the property will be.

If you plan to hang on to the property for twenty years or more you’ll need to budget and plan for major repairs and expenses. These could include things such as a new roof, major appliance replacement and exterior upkeep.

Conversely, if you know you want to sell in a few years you’ll want to be more conservative on major repairs unless you feel that it would significantly increase the value of the property. If you can’t recoup your money, try to hold out and not make the major repairs.

A general rule of thumb in real estate investing is that residential property is much simpler than commercial property. You usually won’t have commercial zoning issues or complicated sales or lease contracts to deal with.

Rental Properties

If you choose to purchase a property to rent to a tenant, you have several decisions to make. Before you purchase, you’ll need to make sure that you’ll have positive cash flow after all expenses have been paid. Don’t gloss over this. It can be difference between successful real estate investing and losing it all.

You’ll need to consider things such as:

  • How much will your mortgage payment cost?
  • What will the taxes be?
  • How much will it cost to insure the property?
  • Major and minor repair costs (Get estimates of how much repairs will cost and when they need to be done. Then set aside money each month in an interest bearing account to cover them.)
  • Vacancy (It’s best to have several months of expenses set aside in case your tenant decides to leave and you have to replace them. This sometimes takes a while so it’s best to have a cushion so you’ll reduce the risk of losing the property.)
  • Management fees (this will only need to be figured if you plan to hire a management company to handle your property for you.)

Once you have these figured you can determine what the rent amount should be. If it’s way out of line with what similar properties in the area rent for, then this is not the property for you.

However, if you can easily cover your expenses, have money left over each month and the neighborhood is stable or growing then you have found an ideal property.

When choosing financing for this type of property, you’ll need to consider your plans. If you plan to sell the property in a few years, an adjustable rate mortgage with a balloon may work best since you’re likely to get lower interest rates. If you’re planning to hang on to the property for many years, it’s best to look for a fixed-rate loan.

The next step is to decide if you’ll manage the property or hire a management company. There are pros and cons to both.

You’ll save a lot of money by managing the property yourself. The trade-off is you’ll be one getting the phone calls when the toilet leaks or the refrigerator needs replacing. You’ll also be responsible for finding tenants and collecting rent.

A management company will handle all of this for you. But you’ll pay for it. If the property budget permits it, this approach will save you lots of headaches and can free you up to locate, research and purchase more rental properties.

However, be aware that most management companies charge a percentage of the monthly income that the property produces. This is for their time. Any repairs that are made are extra and they use their own contractors. So it’s important to make sure you find a reputable firm before signing a contract to work them. Ask other real estate investors before deciding.

If you choose to manage the property yourself it’s important to remember to have any new tenant sign a lease. Verbal agreements don’t hold up in court. Since each state’s laws are different, it’s best to visit an attorney the first time and have them prepare a legal document that will protect your rights.

After that you can simply re-type the lease and change the tenant information for each new tenant and save the extra attorney fees.

Being a landlord can be tough and it’s not for everybody. Some find it rewarding while others know immediately it’s not the right move. Management companies can alleviate most of the stress by being the middle-man allowing you to own the property without managing it.

However, rental properties are by far not the only form for real estate investing. There’s lots of money to be made in buy distressed properties, fixing them up and selling them for a profit.

Distressed Properties – Diamonds in the Rough

Distressed properties can make you quick cash. But as you know, with the potential for great reward comes great risk. This is no different with real estate investing.

These types of properties not only require the investment to purchase them but also the investment to repair them as well, which can be substantial.

You will probably want an interest only loan or an adjustable rate loan with a balloon since these tend to have lower rates. You will also need a construction loan to cover the cost of repairs.

As always do your due diligence. The upfront investment research is the same no matter what you plan to do with the property. The only exception with this type of property is the repair issue.

Although you’ll be selling quickly (hopefully!) the whole idea with this approach is to dramatically increase the property value in a short period of time.

You’ll also look for these types of properties in different places. Foreclosures, tax sales, and auctions are all good places to find distressed properties. Also a good real estate agent can help here, too.

Some agents actually specialize in this type of property so it would be a great benefit for you to find and work with them. They can not only help you locate these properties but can likely sell them much quicker than you could on your own.

Once you’ve found and purchased a distressed property, you’ll need to find good, reasonably priced contractors. Having several contractors bid on the project can help you get better prices.

Make sure you get the bid in writing so there won’t be any surprise additions to your bill. You’ll also want to ask for referrals to make sure they perform quality work.

Another option is to do the work yourself. If the project is small and the repairs are minor (mostly cosmetic) this could work just fine. But if there are structural, electrical or plumbing repairs, it’s best to leave that to the professionals. They should be licensed and insured so if something is not right, you won’t be left holding the bag.

One thing to remember when choosing paint colors – go neutral. Avoid the temptation to decorate and paint according to your taste unless you’ll be the one living there. And splurge for landscaping. Curb appeal is key. It doesn’t matter how wonderful the property is on the inside if you can’t get buyers to stop.

It’s also been shown that buyers are more likely to buy a home that’s furnished than an empty house. Staging has become very popular in the last few years. If you can create a feeling of home it makes people want to buy. And don’t forget air fresheners. Smell is a very powerful and underestimated sense.

If you choose to stage the property, you can rent the furniture for far less than it would cost to buy it. You can offer a furnished and unfurnished price. This way, if the buyer wants the furniture you can accommodate them. But if they have their own furniture, you can simply return the rentals.

If all this sounds like too much work, don’t despair. There are still other ways of real estate investing.

Flipping

Flipping is designed to be the quickest buck you can make in real estate investing. However, it takes real skill. The true definition of flipping is buying a property for far less than market value, holding for a short period of time, and then reselling for a profit. Typically no major repairs are done on true flips.

You have to be really good at estimating property values, be on top of neighborhood trends, be in the inner-circle of real estate investors or be just plain lucky to make this one work. But it can be done. And when it’s done right, it’s amazing.

Finding these types of properties and locking them in before someone else does is the trickiest part. Since this is as close to a get-rich-quick scheme as you’ll find in real estate investing, there will be a lot of competition.

You won’t be looking for distressed properties since you won’t want to tie up a lot of time and money in repairs. You want great properties that are undervalued.

Typically desperate sellers are the target of flippers. Not to say this is always a bad thing. If you’re honest and fair in your dealings then everybody wins. The sellers are relieved of their financial pressures and you end up with a great property.

Pre-foreclosures, bank owned properties and tax sales are other places to find ideal candidates for flipping. But you have to know the values and market in your area. And you have to have a good sense of when repairs need to be made and what can slide.

When financing flippers, interest-only loans are the way to go. You won’t build equity but if you’ve estimated properly and sell quickly you won’t need it.

Developing

This is the most risky and capital intensive form of real estate investing there is. Developing involves purchasing raw land and building homes, apartments, or commercial buildings on it. Developers usually don’t hold onto the properties for rentals. They like to sell them, re-invest the capital, buy new land and start over again.

This is not for the beginner. There’s a lot involved in this process - permits, zoning, general contractors and architectural plans, just to name a few. Location is extremely important to a developer since everything is riding on a great piece of land.

You’ll need a great sense of the area, connections with local contractors, and a great relationship with your banker, attorney and CPA.

However, when properly executed, developing has the potential to provide the greatest return on your money.

Real estate investing is one of the oldest forms of investing there is. And unlike stocks and bonds, real estate investing is less volatile since changes in value generally take place over the course of months or years giving you a better chance of reacting before it’s too late.

Even with the changing economy, the basics of real estate investing have stayed pretty much the same. Perform thorough investment research, partner with a good real estate agent, and above all use common sense.

When done right, you simply can’t beat real estate investing for increasing net worth and building long-term wealth.

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