“Be fearful when others are greedy and greedy only when others are fearful.”
Property investment has become a taboo topic in some corners of the investment horizon. This does not mean that investing in real estate is a bad option; it may merely mean that at the moment, the media swing is not in favor of this investment arena.
The most important step for any individual that may be looking to get started in this niche market is proper preparation. This avenue of investing is not like buying a CD or a bond and putting it in your bottom drawer. If you buy a home and check on it a year later it will not provide you with a small return and no headaches. On the other hand if you tend to it and can play an active role in nurturing the home it does stand to provide far greater returns on your money and opens a lot of doors to access tax benefits. Real estate investing is not for everybody, but before you decide to turn your back on it just remember that statistics show that 80% of the millionaires in the US made their money in real estate, and the best time to get in is when everyone else is heading for the exit.
Why Do You Want To Invest?
Each stage of real estate investing needs to be carefully scrutinized and the first step to building a successful, sustainable business is deciding what your goals are. The reason for deciding to invest in property can vary enormously from person to person. The objective of most investors is usually one of the two following:
Renting out property is a proven method of generating a passive income. Rental properties can provide positive cash flow, which can be defined as a return above the PITI (principal, interest, taxes and insurance) payment. The goals of this style of property investment are to create a revenue stream monthly, to receive tax breaks as is applicable to each individual (having a good real estate accountant is important), to pay down the mortgage through the life of the loan, and to capture the appreciation of the property over the length of the note until the property is eventually owned free and clear. The benefits of this are realized over a long term and while this approach is more passive than the second style of real estate investing, it is still going to require attention. The cash flow approach can normally be associated with a part-time investor as there are no strict time frames relating to it. It will not involve the same time commitment and resources as a resell goal will.
For this approach, a good property manager is something that can be a great tool to have in your work belt. Locating an experienced company that has a proven method of qualifying long term and credit worthy tenants can dissipate the common headaches associated with being a landlord such as maintenance issues and evictions.
Here’s a good example of an investment goal for building a rental portfolio to provide net worth and income for future retirement.
Example of How To a Build Rental Portfolio:
- 10 year Goal Plan
Acquire, rehab, and rent 40 distressed properties
- Action Plan
- Acquire 1 property every 3 months, total 4 per year for 10 years
- Finance with hard money loan. Repair, rent, and re-finance properties at or below an 80% LTV (Loan to Value)
- Refinance at 7% interest, 15 year fixed term
- Reinvest as much cashflow as possible in the form of extra payments to accelerate loan pay-offs.
After only ten years the investor would have captured $2,368,983.20 in equity while maintaining approximately $13,000 in positive cashflow per month. On the 11th year the first 4 houses the investor purchased would be owned free and clear and cash flow would begin to increase substantially. After twenty years the entire portfolio would be paid off and would increase the investor’s net worth in real estate to $5,445,840.51 with monthly cashflow of over $54,000! Not to mention enormous tax advantages!
Formula based on 2% annual appreciation, properties worth $100k purchased with 20% equity, monthly rents equal to 1% of value, and a cashflow reinvestment of $150 per month per house.
This is a more labor intensive method of investing in Real estate and the returns are immediate. The investor in this example will buy a property that is discounted at a price point which will allow the buyer to purchase, repair and resell the property in the shortest amount of time possible for a profit.
The decision to take this approach is usually based around a lifestyle change and this will become a full time occupation for the individual due to the heavy time investment that is required to make this approach successful.
The success of this technique hinges on several factors and the first process involved is always going to be locating the right property at the right price. If the property does not have enough equity at the time of purchase the success of the transaction will likely be limited to providing a return of only education and experience.
The next major obstacle is funding. Most lenders will not deal with these types of transactions. Conventional lenders will frown on these deals and the loan will rarely pass underwriting. Houses that need repair are not considered good investments by banks and with recent conditions that have occurred in the marketplace they do not accept loans on homes in disrepair. Finding a good funding source is essential in closing on the deal and without a reliable funding partner deals are lost and relationships are destroyed.
Once the property has been purchased it is imperative to conduct the repairs properly and keep to the budget. It is all too common to see the budget increase as build-outs are underestimated due to inexperience or oversight. Once the property repair is finished selling the home is the final task. Marketing for a buyer yourself or using a realtor to sell the finished article is a personal decision but it is one that needs to be carefully thought out and researched to assure the best return.