Buy Below Market Value
I always get a good deal when I buy rentals. One of the greatest advantages of real estate over other investments is that you can buy it below market value. Every house is different. It is in a different location than other houses and it has different features. This makes real estate hard to value, and because it is hard to value, that creates opportunities to get great deals. Some sellers want to sell quickly, dont want to make repairs, or dont care about money .
When I buy rentals, I create instant equity by purchasing below market value. Here is an example:
- I bought my first rental for $97,000
- It needed $5,000 in work to get ready to rent out
- I fixed it up and rented it out for $1,050 a month
- After I had fixed it up, I could have sold it for $130,000 to $140,000
I created instant equity and increased my net worth by $30,000 to $35,000 with one rental. When you get a great deal, it makes investing in real estate much less risky.
Education It All Starts Here
Before you begin investing, educate yourself on everything about the housing market and the workings of property investing. Discover the meaning of jargon such as positive and negative cash flow, cash by cash return, cap rate, and return rate. The numbers are everything, including the purchase and ongoing costs, the rental income, mortgage repayments, and other regular outgoings, including rates, insurance and maintenance. The only way to know if the property is a good investment is to know the numbers inside and out and off the top of your head too. Once you know how to calculate the return on investment, then you can consider other buying drivers.
- Location is the property near amenities, entertainment, schools, transport infrastructure
- Rentability is the property attractive to prospective tenants?
- Return on Investment can you make a profit from the property? Will the property grows in value, so you can achieve a healthy capital gain when you sell it?
Crowdfunds For Real Estate
Real estate crowdfunding platforms offer investors a way to place small amounts of capital in large real estate projects, such as single-family rental home developments, apartment buildings, office properties, and shopping centers.
However, unlike publicly traded REITs, money invested in a crowdfund may be locked up for several years, and in most cases crowdfund shares are illiquid and difficult to trade. Another potential drawback to crowdfunds for real estate is that some opportunities are restricted to accredited investors with a net worth of at least $1 million or with an annual individual income of $200,000 or more.
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Get Started In Real Estate: Four Properties Perfect For First
Investment Specialist, Team Denver Homes – RE/MAX Professionals.
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Your first step as a real estate investor is usually the most difficult. I often talk to new investors who feel overwhelmed by everything they dont know about real estate: the terminology, the market, the capital, the risks and rewards.
If this sounds familiar, let me reassure you: real estate investing is not rocket science. Anyone can be a real estate investor. All you need to take the plunge is a little savings and a little know-how. The $40,000 or $60,000 you save for a 20% down payment will become the foundation for long-term real estate investing and wealth building. Start saving your real estate investment income from Day 1, growing it in a separate account, and soon youll be ready to buy your second, third or tenth property.
Lets explore four of the best property types for beginning investors and the pros and cons of each.
1. Single-Family Homes Near An Elementary School
I recommend most first-time investors start here: buy a single-family home in a suburban neighborhood that has a highly rated public elementary school. Search on a website like GreatSchools.org for schools that score at least 7 out of 10, and base your property search within those neighborhoods.
Pros And Cons:
2. Condos Near Universities
Pros And Cons:
3. REITs
Pros And Cons:
4. Properties With Two Separate Entrances
Pros And Cons:
Investing In Rental Properties For Beginners
Real estate investing covers a much broader spectrum of investment vehicles than most people realize. This spectrum ranges from the very passive strategy of buying real estate-related stocks on a public exchange, investing in Real Estate Investment Trusts or even investing in deals through a real estate crowdfunding platform, to the more active approach of purchasing individual properties directly either to resell them for profit, or to rent them out for ongoing income.
Contrary to much of the conventional wisdom and many real estate books and courses, investing in rental properties is not a strategy for earning passive income. In fact, it is among the most active and time-consuming forms of real estate investing in which you can engage.
In the sections that follow, we will discuss the basics of investing in rental properties, including an overview of how to find a viable rental property and obtain financing for it, what may be involved in operating and maintaining the property, and the basic pros and cons of such investments. We also suggest a real estate investment approach that can serve as a possible alternative, should you find that direct investing in rental properties process is not right for you.
If you would like to learn more about investing in rental properties, as well as other real estate investing opportunities, visit the RealtyMogul Resource Center.
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What Does Property Management Mean
Property management means overseeing the management of a property. Usually, property management is provided as a service where a property manager runs certain day-to-day tasks on behalf of the investor.
Property managers can help with the following:
- Finding tenants and conducting tenant checks/screenings.
- Managing rental payments made by tenants.
- Responding to tenant queries and dealing with any issues.
- Any general management tasks needed.
How To Determine A Good Rental Property
There are many criteria youll need to consider in your search for a good rental property in which to invest. If youre looking for a residential rental property such as a single-family residence or a small apartment complex you may want to focus your search within neighborhoods with homes appreciating in value, low crime rates, strong employment figures and well-rated schools.
But assuming you have narrowed your search for rental investments to a given area or even to a few specific properties, you should then run some basic calculations to get a better sense of how well those properties might be able to generate income for you.
Your goal, of course, will most likely be to find a rental property that generates positive cash-flow where the rents and any other income you earn on the property is greater than all expenses, including your mortgage payment, property management fee, property taxes , repairs, insurance, etc.
Imagine you were to purchase a four-unit apartment complex for $300,000, and you took on a $1,900 mortgage payment . You then hired a property management company for $150 to handle screening tenants and managing repair and maintenance issues. Further assume that ongoing maintenance work like landscaping for the apartment runs you another $200 and that for expenses you are responsible for on the property, such as some of the utilities and property insurance, cost an additional $500. Your total costs, then, come to $2,750 per month.
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Why Does It Take So Long To Buy An Investment
My career is real estate and I was in the business ten years before I bought my first rental property. I knew I should invest in rentals, because of the great returns, tax advantages and other benefits of rental properties. It took me a long time to educate myself about rental properties because they dont teach you about rentals when you become a real estate agent. I read a lot of books, researched my market, determined market rents and found the best neighborhoods to invest in. I wanted to make sure I knew exactly what I was doing before I bought my first rental property and what the positives and negatives were. It took me a long time to save up the money to buy a rental property and I did not want to screw up and lose it all.
Should You Fix Up The Properties Yourself
A lot of people feel the need to fix up their rentals but dont want to buy real estate because they are not handy. I fixed up a house completely on my own in 2006. It was the worst mistake I ever made! It helped teach me that my time is better-used managing, planning, and looking at the big picture, not fixing things up.
If you are a contractor, maybe it makes sense to fix up the properties yourself. Otherwise, dont worry about having to be handy. It takes some time and experience to find good contractors and people to work in your houses, but you do not have to do it yourself. Hire those repairs out, and if you buy the right properties, you should be able to afford it and have less on your plate.
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Real Estate Investing For Beginners: Getting Started
This post contains some affiliate links from brands we use & love that help us grow Clever Girl Finance! Please see our disclosures for more information.
A lot of modern investing is relatively hands-off. You buy a share of a stock or an index fund, then just hold it and let it grow for years or even decades. And while this is certainly a smart and simple way to invest, its not the only way.
For would-be investors who are attracted to a more tangible and hands-on method of investing, real estate is a popular option. Granted, its not the easiest method and there can be a steep learning curve as you begin.
But the payoffs are potentially quite lucrative, and if becoming a real estate mogul is on your bucket list, you have to start somewhere!
Lets go over some of the key things to know as you consider real estate investing for beginners.
Strategies For Wealth Stage #3 Saver
Strategy Goal: Dramatically increase your savings rate by reducing expenses and/or increasing income
- Any of the options in stage #1
- Hack your housing in order to reduce or eliminate your housing payment
- Do a Live-In Flip in order to build big, tax-free savings
- Do a Live-In-Then-Rent by living in an affordable house for 1-2 years and then keeping it as a rental
- Start wholesaling real estate for quicker, smaller chunks of cash
- Start a non-real estate side-hustle that matches your skills and passions with a need in the marketplace
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Traditional Real Estate Investing
The first option is in traditional real estate investing, which involves buying rental properties and renting them out to tenants.
Traditional real estate investing is a popular way to grow your wealth, but it also comes with some cons that you should look at before you make the leap.
Traditional real estate investing requires searching dozens of listings and visiting several properties before you decide on the right property suitable for rental purposes.
Aside from that, you will also spend a considerable amount of time searching for tenants, showing the property to tenants, and staging the home when showing the properties to tenants. Maintenance and property management are often overlooked duties that are vital to successful rental real estate investments.
If you decide to purchase the home as an owner occupied home, there is an additional risk where you are responsible for a large mortgage loan on the property with a substantial risk in the event of a decline in the housing market.
While these risks are not enough to turn someone off entirely from traditional real estate investments, you have to know what you are getting yourself into before you make the decision.
A newer option to get started down the traditional real estate path is Roofstock. Roofstock allows you to buy cash-flowing single family homes across the United States. You can fully purchase your rental properties online, and they have tools to help you manage them as well.
Financing Your Rental Property
The path to obtaining a rental property loan is the same as a primary residence mortgage, with key differences. With higher rates of default on rental property loans, the added risk means lenders typically charge higher interest rates on rental properties. An investor may choose a traditional mortgage loan or may qualify for an FHA loan or a VA loan.
Underwriting standards can be stricter for rental property applicants. Mortgage lenders focus on credit score, down payment, and debt-to-income ratio and though the same factors apply to rental property mortgages, the borrower will likely be held to a more stringent credit score, DTI thresholds, and a higher minimum down payment:
- A minimum score of 620, with better rates and terms offered with scores of 740 and higher.
- Down payment: 0-3% may be acceptable on a conventional mortgage for a primary residence, but borrowers for investment real estate generally have to plan on 15% to 25% down.
- Debt-to-income ratio :DTI represents the percentage of the borrower’s monthly income that goes toward debt. Lenders will generally allow you to count up to 75% of your expected rental income toward your DTI.
- Savings: Borrowers should have cash available to cover three to six months of mortgage payments, including principal, interest, taxes, and insurance.
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Is Property A Good Investment
Firstly, its important to establish the fundamental reasons why property is a trusted investment asset.
Unlike other popular investments, such as equities, property is a physical asset. You can touch a property, visit it, and live in it. Being able to do these things makes it much more tangible than owning a non-physical asset.
Crucially though, unlike these other investments, propertys performance is determined by supply and demand. It is much less exposed to wider economic fluctuations and events. Quite simply, people will always need a place to live.
So, provided you invest in property in an area with a high level of demand and comparatively low level of supply, your investment should help you to deliver strong growth over the long-term.
Finally, property is considered to be an important asset in any diverse portfolio. This is not only due to its ability to deliver stable, long-term growth, but also because property can deliver regular revenue in the form of rental yields.
For example, an investor with several equity investments may look to property as a hedge against exposure their shares might have to changing economic conditions. Should wider market conditions stunt return levels from their equities, rental income from a tenant in their property can continue to bring in a regular income.
Tip 4 Decide On A Property Investment Strategy
Many different strategies are available to those who wish to invest in property.
For many people, the decision is made early on as to which type of investment they want to make.
Some people will know that they want to invest in buy to let property from the beginning, so this is the strategy theyll lead with.
However, if youre new to the property world, you may not know which strategy is right for you.
To help give you some context, weve provided a breakdown in this section of our guide with some of the most popular property investment strategies that every soon-to-be investor needs to know.
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The Power Of Leverage
With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. Leverage means to use debt to finance a larger purchase than you have the available cash for. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy orderunless you are buying on . And even then, the percentage you can borrow is still much less than with real estate, thanks to that magical financing method, the mortgage.
Most conventional mortgages require a 20% down payment. However, depending on where you live, you might find a mortgage that requires as little as 5%. This means that you can control the whole property and the equity it holds by only paying a fraction of the total value. Of course, the size of your mortgage affects the amount of ownership you actually have in the property, but you control it the minute the papers are signed.
This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage, or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value.
Renting To Young Professionals
Most residential buy to let property investment opportunities are targeted at young professional tenants.
This is because the rental market in the UK is primarily dominated by young people living and working in UK cities.
This tenant group may not yet be ready to join the property ladder and buy a house of their own to become homeowners.
Also, despite Government schemes like Help to Buy, young people struggle to afford homes due to rising house prices.
Either way, the UKs high number of young professional renters has massively contributed to high tenant demand rates.
How Can I Make My Property Appeal to Young Professionals?
- Choose city centre flats in locations or areas with good transport links and local amenities.
- Fit your property with a modern kitchen and bathroom, and focus on stylish design features.
- Ensure a good internet connection and space for a desk area or home office to facilitate remote working.
- Provide onsite amenities such as an onsite gym or laundrette.
- Provide outdoor space such as a balcony, terrace, or communal garden area.
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