There Is No Secret Sauce
While TV home shows make it seem easy, renovating is an expensive proposition that requires much oversight. Joe has had clients who went whole hog on the glitz and gloss and lost money because the market flattened or dropped. And in Victorias busy market, where tradespeople are going full tilt, it means they are hard to find. With high demand comes top dollar rates.
A secret sauce, to cook up a batch of profit, doesnt exist, Joe adds.
Everybodys out there looking for a deal, but deals are rare indeed, especially in this town, he says.
For example, when banks or lending companies accept one offer during foreclosure proceedings in court, the judge is obligated to allow other offers.
Theres almost always a bidding war, Joe says, where prices usually settle at market value, with the unsettling aspect that a quick sale doesnt include subject to conditions. And in addition to legal, mortgage and appraisal fees, real estate investments can be subject to a land transfer tax, GST, a capital gains tax and B.C.s new speculation tax.
Because true deals are rare, real estate investing is a speciality that requires hard work, research, smarts and the ability to make savvy use of the banks money. Survivors build enough equity, which allows them to pay the minimum amount with their own funds. McNaughton believes, The people who do it have the time and inclination.
Know How Financing For Real Estate Works
Financing a rental property can sometimes be a headache for a fledgling real estate investor. Here are two things that can help:
- Make sure that you have a good credit score before attempting to finance a rental property
- Learn about the many options for financing, both traditional and non-traditional
When you talk about the subject of financing in real estate investing, the most common option would have to be conventional bank loans. However, other avenues such as hard money loans, owner financing, and real estate syndication are also available. We suggest that you use them to your advantage you dont have to miss out on real estate investment opportunities because of a lack of financing.
Remember to set a budget for buying an investment property and try your very best to stick to it. Aside from a normal budget, astute real estate investors provide a budget for any unforeseen expenses or emergency repairs that may suddenly crop up.
Consider Outsourcing Property Management
Youve bought and rented a property out. Now, you have a choice. You can either manage your portfolio of rentals on your own or hire a firm to do it for you. While many of us would choose the former method, seasoned investors often go with the latter because this delegates the task of rent collection and property maintenance to a third-party while the investor is left with plenty of free time to find more properties to expand their portfolio further.
There are certain traits that a good landlord must have in order to retain their tenants and while small efforts can keep most tenants happy, tackling tenants complaints as well as finding the right tenant for every property is a job that is best left to a professional property manager, unless you have the expertise and experience required to handle such matters.
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Best For Flippers: The Book On Flipping Houses
If you’re interested in flipping houses as opposed to playing the long game that’s usually associated with owning rental properties, you’ll want to check out J Scott’s “The Book on Flipping Houses.” As a professional flipper, he’s developed a very successful system for finding properties to flip, rehabbing them without eating into his profit margin, and reselling them for maximum gain.
This book covers everything you need to know about flipping as a real estate investing strategy, from how to evaluate potential markets to getting financing for a rehab property to hiring contractors and eventually putting the home back on the market.
Whether you’re interested in flipping one home at a time or building a full-scale house-flipping business, this book is a comprehensive roadmap to all of the most important things you need to know.
How Do I Find A Real Estate Investing Partner
You don’t need a Wall Street connection to find a real estate investor with which to partner. Instead, you can ask your own network of family and friends, find a local real estate investment club, consider real estate crowdfunding, or search for social media groups that target real estate investors.
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How To Get A Mortgage For Rental Property
Though a rental property mortgage is basically the same as a primary residence mortgage, there are some key differences. For starters, there are higher rates of default on rental property loans because borrowers facing financial troubles tend to focus on a primary home’s mortgage first. The added risk means lenders typically charge higher interest rates on rental properties.
Then there are the underwriting standards, which tend to be more strict for rental properties. In general, mortgage lenders focus on the borrower’s credit score, down payment, and debt-to-income ratio. The same factors apply to rental property mortgages, but the borrower will likely be held to more stringent credit score and DTI thresholdsand a higher minimum down payment. Additionally, the lender may take a closer look at the borrower’s employment history and income and want to see prior experience as a landlord.
In general, here’s what lenders require from borrowers to approve a rental property mortgage:
Investing For Beginners: How To Start
- Decide on the type of investment strategy you want to pursue. For example, do you want a traditional route or a current trend like Airbnb?
- Determine the amount of time and money you want to spend on your investment strategy and rental scheme.
- Specify your budget. For fund investors, we may be looking at around $1,000 to $5,000 but for a direct real estate investor, youd need about $50,000 minimum.
- Select your investment strategy according to your schedule and financial resources. If youre heading towards the direction of REIT investing, youll need less time and money compared to direct real estate investing.
- Set aside some money for investment-related expenses because whether you like it or not, they will come.
Every investment is unique in the sense that each has its own set of risks and rewards. In the case of real estate investing, there are a few starter options suitable for beginners. Read on to know simple investment tips perfect for neophyte investors:
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Making Decisions On Impulse
When you come across a property that piques your interest, the first instinct may be to get it immediately. You may end up losing your investment for lack of knowledge.
On the other hand, you could be overly cautious, which makes you miss out on great opportunities. Finding that balance is important when it comes to financial investments.
Secure A 20% Down Payment
Investment properties generally require a larger down payment than owner-occupied properties do they have more stringent approval requirements. The 3% you may have put down on the home where you currently live isn’t going to work for an investment property. You will need at least a 20% down payment, given that mortgage insurance isn’t available on rental properties. You may, however, be able to obtain the down payment through bank financing, such as a personal loan.
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Real Estate Investment Groups
Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property but dont want the hassle of being a landlord, a real estate investment group may be the solution for you.
A company will buy or build a set of buildings, often apartments, then allow investors to buy them through the company, thus joining the group. A single investor can own one or multiple units of self-contained living space. But the company that operates the investment group manages all the units and takes care of maintenance, advertising, and finding tenants. In exchange for this management, the company takes a percentage of the monthly rent.
There are several versions of investment groups. In the standard version, the lease is in the investors name, and all of the units pool a portion of the rent to guard against occasional vacancies. This means you will receive enough to pay the mortgage even if your unit is empty.
The quality of an investment group depends entirely on the company that offers it. In theory, it is a safe way to get into real estate investment, but groups may charge the kind of high fees that haunt the mutual fund industry. As with all investments, research is key.
Becoming A Partner In A Relp
A RELP is a partnership formed with the express goal of engaging in real estate investment.
Again, your risk is limited because its diversified.
A RELP is like starting a company thats focused on investing in real estate. But the benefit is that its passive income.
Once you start investing in a RELP, the managing partner manages all the investments. They will be responsible for the asset allocation youll just provide part of the funds.
But that also means that you need to put a lot of faith in the managing partner. And you need to do your research to make sure that they are an accredited investor with experience.
The advantage of a RELP is that the RELP will have significantly more capital to invest with.
Instead of investing in a single condo, you can have some money invested in a dozen condo buildings.
This type of diversification strongly reduces risk.
Its a lot like a private REIT, but because youre investing with the help of a managed partner, you do have a more direct investment. And you do have some control because you and the other investors can vote out the managing partner if they fail to build your portfolio.
A RELP can be complicated to organize. Usually, you will need to network to find the best opportunities. There are RELPs online that are funded frequently these can be a good place to start.
If you feel as though youre a capable and experienced investor, you can always think about setting up and managing your own RELP.
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Five Tips For Getting Started As A Real Estate Investor
Real estate visionary, President & CEO at ABI Multifamily, and Co-founder of Neighborhood Ventures real estate crowdfunding company.
Getty
Ive worked in commercial real estate my entire 30-year-plus career, and I believe this industry has seen a huge change in the past three years. Until recently, the people primarily buying and selling commercial real estate properties were what I call the country club crowd wealthy individuals who made their fortunes investing in projects, selling for a profit, then repeating. But today, a number of factors seem to have drawn the interest of investors of all ages.
Getting started with investing isn’t always easy, however. Below are some of my investing tips for those who are new to the game:
Understand there is no secret club.
I cant tell you how many people Ive met who think there is some secret insiders club of real estate investors. From successful executives to a man I met a few weeks ago when his bike got a flat tire, there seems to be a common misconception that you have to know someone in the business or spend a fortune on seminars and webinars to learn how to invest in real estate. Thats simply not true.
When I met the man with a flat tire, he, like many, had the impression you had to be in a special club to find an opportunity for a rental property. In reality, you do not need to spend thousands to learn how to invest in real estate. I believe you just have to do it.
Do your research, and proceed with caution.
What Are The Five Types Of Real Estate Properties
Having a good understanding of the different types of real estate properties can help you organize your to-do list for beginning in real estate investment. The five types of real estate properties are residential, commercial, industrial, retail, and mixed-use. Each one requires its own financing, responsibilities, and long-term plan.
The Balance does not provide tax, investment, or financial services advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
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Crushing It In Apartments And Commercial Real Estate: How A Small Investor Can Make It Big
Many of the books in this list focus on single-family homes or duplexes, but not many touch on commercial real estate.
Large buildings or office properties can be even more intimidating and is a much bigger investment. But the rewards can be great!
This is where Brian H. Murrays book, Crushing It In Apartments and Commercial Real Estate can be extremely beneficial.
If you are interested in commercial real estate, this beginners guide will cover what you need to know as well as Murrays experience going from newbie investor to award-winning CEO of Washington Street Properties.
Youll learn how to find and finance commercial property, grow your portfolio without any help from other investors and without taking on debt, and learn easy ways to increase profits while keeping costs low.
Why Invest In Real Estate
Real estate can enhance the risk-and-return profile of an investors portfolio, offering competitive risk-adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate is also attractive when compared with more-traditional sources of income return. This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low.
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What Is A Bad Deal Exactly
This discussion begs the question: what is a bad deal? The answer is hard to nail down, as every piece of real estate and every investor is unique.
There are, however, some pieces of sage advice that you can use to hopefully bypass the bad deals that come your way.
1. Numbers Never Lie
Many of the mistakes I have seen investors make stem from ignoring or massaging a potential deals numbers. Again, the urge to do a deal, any deal, can be so strong that exuberance wins the day. Cash flow is found where none exists and the song in the musical chairs of property flipping will surely not stop.
Yes, as entrepreneurs, we investors need to take risks. But learning how to do that is a carefully crafted art that is learned in part by sticking to the numbers.
2. Partnerships Very Often Sink
Some say a partnership is the ship that never sails. There is some truth in that saying! A bad partnership will make an otherwise great real estate deal hellish.
Partnerships do have their place though. They can be very successful at times. But one has to be especially vigilant before they enter into any partnership deal, especially with friends and family.
Clearly define who does what, where the money goes and how the partnership can be dissolved. Assuming someone else in the partnership will take care of some role or always do the right thing is a recipe for disaster.
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3. Listen When Someone Says No
Spell Out Your Financial Goals
Before you let go of your cash to buy your first property or even just to write down your step-by-step plan, be certain of what you expect from your venture.
Ask yourself: what are my financial goals?
People would be quick to point out the time vs. money concept in reaching your goals. They say that the more you have of one, the less you need the other. This only cautions you not to shy away from spending the time to understand your goals and align each investment toward achieving them. If you are not sure how to define your financial goals, seek help from a financial advisor.
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Manage Your Risks In Real Estate Investment
There are several ways in which you can manage risk in a real estate investment. First, dont go deeply into debt. When buying an investment property for sale, aim to put at least 10% down. Twenty percent is better since it eliminates private mortgage insurance and often yields a lower interest rate on the loan as well. Second, maintain a large cash reserve. Youll reduce the risk of having to sell a property fast at a loss if you have the cash to carry the property long before it needs to move.
Dont buy a property for which the math looks bad because youre afraid youll lose out on the deal. Never fall in love with an investment property. Youre not going to live there someone else will. Be aware of your risk tolerance. Then take action to manage the risk, whether youre avoiding the fixer-upper youre afraid will be a money hole or improving your cash position before you buy it. If you cant handle the potential stresses of fix and flip, buy turnkey properties instead.
Real Estate Limited Partnerships
A real estate limited partnership is similar to a real estate investment group. It is an entity formed to buy and hold a portfolio of properties, or sometimes just one property. However, RELPs exist for a finite number of years.
An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners. The partners may receive periodic distributions from income generated by the RELPs properties, but the real payoff comes when the properties are soldwith luck, at a sizable profitand the RELP dissolves down the road.
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