Getting Started in Real Estate Investing
If you’re like me, you’ve always heard of investing in Real Estate. After all, according to Forbes Magazine real estate has made more millionaires than any other business or job. We all have a limited time here on earth and by leveraging smart tactics anyone can reach financial independence. To do that, you’ll need to create some source of passive income. Being a smart real estate investor may not get you to Warren Buffets level, but it can set you up for a life of financial freedom.
No matter what happens in the economy, real estate is a tangible asset and here to stay. Unlike the stock market, where businesses or stock can just disappear off the market. For that reason, I am sure real estate investing has crossed your mind at some point or another. It may have also crossed your mind that you have no idea where to start. Unlike the stock market, for real estate, there are no real estate investment advisors on every corner.
To successfully pursue investment opportunities in the real estate market, you must first do your due diligence to ensure you properly educate yourself. Just like any other investment, there’s a wealth of knowledge that must be obtained to make educated and smart moves. You’ll need to understand the intricacies of your local market, and how you’ll maximize profitability for yourself.
Today we will explore a broad view of what you need to know as a beginner. There is so much more information you’ll need to get started. However, I’ve had a ton of people ask me where to start. Maybe this can be that place to get your brain spinning and hooked on investing like I am.
A quick overview of REI (Real Estate Investing)
One the most basic level, real estate investing is a way of making money by renting, flipping, or owning commercial, residential, industrial, or land parcels. Many investors find these properties by leveraging marketing, relationships, and referrals. Additionally, you can use services that have been created online like Zillow, Roofstock, or other online marketplaces.
The most common, residential real estate investing includes single family homes, condos, or townhomes that can be flipped and resold, or rented for profit. For example, you buy a low-end property in a decent area, fix it up and rent it out for $800/month. You may think off the bat that you don’t have the money to purchase another house. This is not true. There are many many different ways to get financing for properties like this, we will go into that in another post. Just don’t be scared off based on the fact that you “think” you don’t have any money. All you really need is hustle.
Multifamily or larger spaces that are leased out to businesses are considered commercial real estate. Owners can make money from renting out apartments or leasing spaces to businesses.
As a basic rule of thumb, any property with more than 4-doors under one roof or that is leased to a business is considered a commercial property. These properties also qualify for different types of lending. So watch out for that.
Regardless of the type of properties you’re considering investing in, you’ll stand to benefit by profiting from an investment property in four key ways: Interest earned, rents, tax benefits, and appreciation.
Maybe the most common form of investing and one that most people are familiar with is when the owner of a single-family home, condo, townhome, multi-family, commercial, or any other type of building generates income by renting or leasing out the property to a tenant. Many people investing in real estate choose to rent space to tenants because of the stability and consistency in the revenue stream it creates.
When considering getting into the rental business, you may want to take into consideration a few factors in your market like local vacancy rates on current inventory similar to the type of investment you are considering.
The next thing you will need to consider is whether you’ll manage the property yourself or hire a property management company. Each has their own set of pros and cons. If you are self-managing you’ll have to worry about maintenance calls, non-paying tenants, and a plethora of other issues that can and will inevitably arise. If you hire a property management company they’ll take away much of the burden of self-managing, but at an added cost of course. Typical management fees in our market run about 10-12% or total rent on the property.
One of the most important considerations for real estate and one of my favorite is the tax benefits you’ll receive as an investor. As an investor, you’re a business owner. Business owners by tax law are eligible for tax deductions.
Some of the tax deductions you can expect to enjoy are any upgrades to the property, your cost of traveling back and forth between any properties you own, cleaning, maintenance, and the list goes on and on….
Last but by far not the least is Depreciation. Some tend to think that depreciation is the sexy sauce in real estate investing. You’ll see what I mean after your first year’s tax return.
The price of existing homes increased by 5.4% annually from 1968 to 2009, on average. (Natl. Assoc. of Realtors, p.1, p.2) Notice that this is the same figure as new homes by the Census Bureau for a similar period. Once we adjust for the fact that homes get bigger over time, the annual rate is 3.7%.
The above-stated data was gathered from the National Association of Realtors. This is amazing news for property owners when they decided to sell, right? This method of profit is ideal for people who are looking for a long-term investment in a market where property prices are steadily increasing. A long-term buy-and-hold strategy is almost always a good choice, given that over the long-term real estate prices have almost always appreciated.
Some people choose a more hands-off approach to real estate investing and opt to be a private money lender. We have relationships like this at Irby, and this is much more common many people think.
This is the process of lending money on an investment opportunity to a flipper or another real estate investor. Our firm has paid anywhere from 4-15% for private money. Many people ask when first introduced to this concept, why not just use a bank… Well, that’s an option. But a slow one. In many cases, fantastic deals go quick. We need to have relationships that can act fast. Bank approvals can take north of 30-days. The deal will be long gone by then. Our private money partners can get us the money in a matter of days, not weeks. For us, the added cost of borrowing from a private money lender makes more sense.
If you have an interest in hearing more stories of how our partners have made great returns in this type of scenario, reach out. Maybe this is an option for you. You’ll receive great returns without being in the trenches every day.
So you think investing in real estate is for you?
The overall concept of investing in real estate seems super appealing, right? Everyone is looking to make more money a diversify their income.
But the truth is, this isn’t for everyone. To have success over a sustained period of time you’re going to have to educate yourself, hustle and negotiate for amazing deals, and maybe even get your hands dirty every once in a while. That’s not always attractive for everyone.
However, as you’ll see in the chart below, those who dare to take on the challenge can reap the rewards of much higher and more stable returns than that of the stock market.
Having the skills
As they say, “skills pay the bills” – this holds true more than ever in the real estate investing world. Unlike certain other investments, investing in real estate requires a lot of careful calculations and continuously keeping an eye on markets and their conditions. You’ll also have to or possess a trunk load of other skills including but not limited to: Price negotiations, accounting, tax law, rehab estimations, sourcing materials, and you may even have to learn to swing a hammer in the early stages… All of which can be time-consuming and sometimes labor intensive.
Oh, wait! I almost forgot about sketchy tenants. So you’ll have to ask yourself do you have, or are you willing to obtain, market knowledge, organizational skills, negotiation skills, and the motivation to invest in real estate.
What’s your market like?
Some folks may have the right skill set to start investing. However, that may not mean it’s the best idea at the time. If you live in a hot or sometimes called a bull market, you’ll be hard-pressed to secure assets that will show positive returns.
The good news is we live in American and you can still pursue deals anywhere you choose. Many people in these hot markets like California or New York find ways to source deals from softer, more attractive markets like right here in Alabama where we are based.
Are you in the position to make an investment?
Take it from me. If you do not have the “money” to make an “investment” do not spend your last dime on the down-payment for a property. Overall, this is a bad business. There can be a ton of unforeseen expenses that pop up.
Expect a commitment to come with an investment property.
If you’re planning on investing in a rental property, you’ll need to plan for a few things: property insurance, yearly property taxes, property maintenance and repairs, rent collection and a way to streamline it, effective tenant screenings, and much more.
It’s certainly not a set it and forget it type of investment like stocks or other investments can be. Real Estate is a little more hands on. However, the returns and the wealth you have the potential to build make it all worth it!
Buying a rental property
So you’ve decided that REI is right for you and you are ready to make the jump! Awesome. Let’s talk about finding your first investment property.
You’ll need to start by what type of property you’ll be investing in. Above we laid out all the types of investment properties from single-family rentals to commercial deals. Most people who are new to investing select single-family residential homes as a first option. This is for many reasons, but most of all typical this property type has the lowest point of entry with the least amount of upkeep.
Consider the following list of important factors when you are looking for your first deal:
Location is everything when seeking to find your first deal. The location of the property will determine everything from the type of tenant you attract to the amount of rent you can demand, all the way down to the resale value if you ever choose to exit the property.
When you first identify a property that seems to be a good fit for you, do some research and check out the nearby listing online. From here you’ll do your best to assess the comparable properties (comps) in the area. The number you get for the ARV (after repair value) is extremely important. This will let you know what you have the potential to resell the property for once you choose to exit.
Look for properties that are located near good schools, shopping centers, vibrant areas that people want to be in, and anything else that will attract people.
Obviously, the deciding factor on whether you buy the property or not is the price. We at Irby always look for deeply discounted properties. Most of the time these are distressed assets that need a lot of work. However, once the work has been completed you can 2, 3, or even 4x your ROI. The trick is to find undervalued properties.
It’s not always best to pay cash for your investments. Sometime, leveraging a private money loan or a bank loan will make more sense. You may need your cash for the repairs. Partnering with someone else who has the same interest in REI as you could be beneficial.
Why put $100,000 into a property when you could put $20,000 down on 5 properties? Makes sense? As long as you can cash flow each property monthly you are in the black.
One of the most important things you must always do is to visit the property in person. Once there be sure to thoroughly asses all damages. You’ll need to be able to accurately determine your cost of repairs to see if this investment will turn out to be profitable.
Experienced flippers are looking for properties that need major renovations. This is where they can get higher returns and maximize the ROI they are expecting to get on the investment. I highly encourage you to step slowly into this space. Many times a novice investor can bite off more than they chew. Ultimately going upside down in a property and seeing negative returns. This could really deflate you on your first deal. It’s super important you safeguard yourself from an event like this!
If you can start with a property that isn’t in need of a ton of work, you can ease in and see if real estate investing is a good fit for your goals.
Now that you’ve identified a property and are thinking of pulling the trigger, sit down and dial in all the cost associated and let’s determine how profitable you may, or may not be. It’s extremely important to understand all the numbers and what your balance sheet will look like once the dust settles at the end of the year. While you cannot account for 100% of expenses, you can get close.
A deal that may look good during the initial due diligence period, may not be all it’s cracked up to be at the end of the day. That’s why it’s so critically important to understand your numbers.
A cap rate (or capitalization rate) is a calculation used to determine the profitability of a real estate investment. By definition, the cap rate is the NOI (net operating income) of a property in relation to the property’s asset value.
At first glance you’ll be super excited to think because there’s a high rent, you’ll be seeing high returns. This isn’t always the case. You must also account for the mortgage payment (if you borrowed on the property) and any utilities, taxes, homeowners insurance, HOA dues, repairs, and maintenance that you will be paying on a monthly or annual basis.
Once you’ve fully combed through the number to understand your cap rate, you’ll then be able to intelligently decided if the investment is worth the risk.
Are you ready?
Above is a pretty good starting point to get you interested. The final advice I’d like to lend would be to surround yourself with people that are doing what you want to do. I am guessing there’s a community of people close to where you live that are currently active in some form of investing. Reach out to these people, become their friends. Ask them to coffee, and pick their brains for information to help build your knowledge bank.
When it comes to real estate investing you do not have to go at it alone. There are people out there willing and ready to share their experiences with you. You just have to go find. Them. Make sure to check out resources like biggerpockets.com and listen to tons of podcasts.
Leverage all resources that are available to you. Seek out the help of professionals in and related to the industry. And always, always do your homework and know your numbers.
Last but not least, you can always reach out to me or anyone at Irby Homebuyers. We are always willing to answer any questions you have in and around the REI space.