When you tell most people that you are a “real estate investor”, they probably reply something to the effect of “oh, you flip houses?”. Whether or not this assumption is true in your case, the fact remains that one of the most popular forms of real estate investment is house “flipping”. Flipping is a term used to describe the process of purchasing a property, putting some money, or some work into it, and quickly turning around and selling the house or the land for a premium. The term “flip” is used to describe the fast turnaround time of repairing and selling right away.
As we discussed above, “Flipping” is a term used to describe the process of purchasing a real estate investment with the goal of turning it around quickly and selling it for a profit. Typically, this process involves investing some money, and work into the property to help increase its value and the chance that it sells for a profit quickly. This style of investing is attractive for many reasons, these projects can be very enjoyable for those who are interested in the work of fixing up or making a property more aesthetically pleasing. The most common motivation for flipping a property is profit, and how quickly profits can add up. A seasoned investor with resources on hand can routinely clear tens of thousands or more per “deal” done. (A “deal” is a slang term for a property investment project). The name of the game in flipping is speed, and so profits can be realized very quickly. Like anything else, high potential reward can also mean a high potential loss if something goes wrong on your project. The purpose of this guide is to help clear some of those hurdles out of the way by highlighting key terminology, common pitfalls, and what to look for when getting into flipping.
So why flipping? Of all the different ways that investors can leverage real estate as an investment tool, why do investors select flipping over more common buy and rent or commercial property deals? The answer is simple, flipping is fast paced and offers a high potential of profits. Rather than owning a large portfolio of properties, each requiring a manager as well as a list of services and maintenance requirements, flipping allows investors to turn over their portfolio quickly and leave the ongoing maintenance to someone else. A flipper can purchase a home, fix it up for a month and immediately sell.
There are many advantageous aspects of this quick turnover flipping strategy, at the top of the list is low ongoing costs, as well as maintenance requirements, but flipping also allows investors to do many more deals in any period of time than other types of investing. Flippers also enjoy immediate lump sum profits. Where a landlord has ongoing payments and therefore small, steady profits over time, a flipper makes all his or her money all at once. They can purchase a property in the beginning of the summer for fifty thousand dollars and sell in august for seventy-five. When everything is said and done, our investor keeps whatever is left over after all closing and administrative costs. This results in tens of thousands, sometimes hundreds of thousands of dollars in profit being made all in one swing.
This allows an investor to quickly turn one hundred thousand dollars into much more money very quickly assuming everything goes well. Of course, that is not an assumption that investors can always make. As mentioned, any time there are potential high rewards, investors should expect an equal chance for financial loss. There are many factors that can quickly turn a great investment flip project into a drawn out and costly mistake.
One of the highest risks that a flip investor faces is the inability to sell a property for a profit after investing money in rehabilitating the property. Remember that each month an investor fails to sell, he or she is responsible for paying all costs of upkeeping and maintaining both the property, and the debt service on that property. Three months of interest, electricity, gas, other utilities, on top of any other cosmetic or structural work that an investor is paying for can really add up and chip away at any profit an investor may see. This market risk is one that should not be overlooked and can be very difficult to quantify and get down on paper.
For example, imagine an investor who purchases a townhome in a city that’s home to a large employer that brings many people to the community. A flipper identifies a property near the company’s headquarters, that will require just a few thousand dollars to fix up and get ready to sell. The investor, after looking into the numbers, identifies an opportunity to make around fifteen or twenty thousand dollars by selling the renovated property to an employee of this large firm.
The flip goes well, and after closing the needed work is done quickly and effectively, the property is in great shape and should sell quickly. Two weeks before the house is on the market, this large company announces layoffs at the local headquarters, and will be shifting its operations to other parts of the country. Nearly overnight, the value of this home has plummeted. With less and less employees in the area, demand for the home falls and what once was a property worth one hundred thousand dollars, an investor may have to settle for seventy. Instead of netting a cool fifteen thousand, our investor takes a multi-thousand-dollar bath for all the hard work they put into the project.
In this example, the investor did everything correctly and saw their investment derailed by something totally outside of their control. This market risk is built into flip investing and should give investors pause. It is critical to understand the economy and unique qualities of any area where a flip is being considered. While a buy, hold, and rent investor can stand to watch their properties value fluctuate over time, a flip investor is beholden to the local market as well as the timing that can come into play in relation to home prices in the area. For this reason, many flippers elect to invest close to home, or at least in an area where they understand local economic trends in real estate pricing.
One of the other disadvantages of this strategy is the capital that is required to flip. An investor looking to flip will need to have cash on hand, or an ability to secure financing frequently throughout the year. While they plan to have all their cash back sooner rather than later, putting in multiple offers requires an investor to have an ability to drum up funding at a moment’s notice.
When it comes to selecting flip properties, there are many schools of thought. It’s best for new investors to spend time reading and educating themselves on investing and the different strategies involved with investing in certain property types. An investor who understands small single-family properties in one area will have a very different process for screening potential deals than an investor who specializes in commercial buildings. Very simply, an investor should be on the lookout for properties available in up and coming areas, understanding the local market.
In the example above the investor was seeking to invest in property near a large employer in the area. In this scenario, an investor will want to understand what do employees of this firm do for fun? Where do they shop? Are they family-oriented buyers or are they young professionals? Understanding who and how you plan to target your investment will allow you to narrow down potential properties. Families will be looking for larger homes with good schools and access to recreational events. Young professionals might like smaller more urban properties walking distance from local entertainment or nightlife.
When selecting property types, or locations, this is where investors get to have some autonomy. What do you enjoy? What are you good at? Do you enjoy skiing? Maybe condos near mountains in the northeast is your target? As someone who understands the culture of skiing, you will be in a much better position to understand what buyers will be looking for when it comes to buying a ski condo. So, find what works for you, it will make investing more fun and enjoyable, and will help you in sifting through all the available deals in your area.
When it comes to searching for homes, many online sites such as Zillow will provide you with a comprehensive database of properties available in a specific area. This will give you a starting point for your research and will give you a general idea of local pricing, competition, and what buyers in an area are looking for. Keep in mind that while these tools do come with lots of information available, the information is not always completely accurate and so it is best to use these sites as a research tool in tandem with many other methods of evaluating your deal. Go see the property in person and bring a friend in real estate or who is a home inspector.
Look for structural damage, look for water, and keep an eye on the age of certain features on the home. Hot water heaters, roofs, plumbing, and mostly any other component in your property have a shelf life. Be careful not to buy into a property that will need to be completely updated to get ready to sell. A tip for investors looking to own in certain parts of the country, buy in the spring. When snow is melting and everything is wet, you’ll get a better idea of how the property responds to water and other natural elements. Make sure you understand how the utilities on the property work. Is the heating electric? Gas? Do you have baseboard heat? Maybe the home has central air?
All these factors should align with your ideal buyer and should match up with what that type of buyer is looking for. Once you have a solid idea of the tangible aspects of the property and have discussed them with a professional, you can begin to look at financial modeling. This step of the process is more complex and probably could have an entire guide dedicated to it. There are many free resources available online offering templates for excel worksheets designed to evaluate potential deals based on the numbers.
At this stage, you will compile all your research into the location, market, timing, features of the home, and psychology of local buyers and start to assign numerical values to these things. You will never be able to perfectly map out how cash flow will work within a real estate deal, but you can get surprisingly close. You should have an idea of cost of the property, and the kinds of work, if any, that needs to be done. Get quotes from local builders and add those into your financial model. In creating the best possible chances for success, it is important to build in unforeseen costs. Plan for the sale to take 20% longer than you anticipate. Plan for a drop-in market value, the more fail safes you build into your numbers, the more likely your chance of either experiencing a positive outcome or identifying a possible landmine before you buy.
Once you have looked at both the tangible and intangible aspects of your potential deal, bring it to a professional. Many real estate professionals would be more than happy to help you identify anything you may have overlooked, and you’ll need to find a real estate agent anyways to complete a successful sale. Contact a mortgage underwriter and get an idea of how you will be financing the property. Once you have your research, the backing of a few professionals, and with a little luck, you should be on your way to a successful flip.
While this is an exiting step for many investors, it is important to restate the risks associated with the flip strategy. You absolutely could potentially lose thousands of dollars, when a deal goes south, you as the investor are squarely responsible and you can lose out. There are few guarantees in investing and real estate is no exception. Exiting and high reward strategies have an equal ability to lose out. Being cautious and doing your due diligence is key to shielding yourself from these losses.
Potential for loss aside, most investors who do their homework should find a decently straight forward path to profits. As you become more comfortable with your specific process and become more adept at identifying “good” deals, you should see a commensurate rise in the profitability of your projects. This is the goal of flip investors, work on your own schedule, on something your passionate about, and make a lot while doing it! If that all sounds good to you, then you may be a flipper! Just make sure to do your research before diving in. To learn more about investing in real estate, and to get into more detailed guides, click here to subscribe to our monthly newsletter.
Charles Carillo is the founder and managing partner of Harborside Partners. He has extensive knowledge in renovating and repositioning multifamily and mixed-use commercial real estate. Prior to launching Harborside Partners, Charles founded an online payment processing company with partners and clients in 4 continents across the globe. Charles holds a BS from the Connecticut State University.
How many times have you seen a late-night commercial featuring some real estate guru promising to get rich quick returns with “no money down”? While most of us are smart enough to identify these ads as too good to be true, the excitement surrounding investing in real estate, specifically in multifamily investing, is well deserved. For many people, investing in multifamily properties is a pathway to create passive income and financial independence for themselves and their families.
When done properly, this unique corner of the real estate market can serve as a second career, and for the savvy investor could make them enough money to retire comfortably at a young age, kicking back and collecting checks. As with most things in investing however, winning big requires taking risks and doing your homework, so over the course of this article we will dive into the basics of apartment and multi-family investing to give you an entry point into this incredible opportunity.
Multifamily investing is exactly what it sounds like. An investor purchases an apartment building, a duplex, triplex, or quadruplex, and then rents these spaces to multiple different tenants to profit from the income.
For example, there are many kinds of properties that an investor can choose from when deciding on real estate investments. The most common types being apartments, townhomes, condos, duplex, triplex, and quadruplex units. Each of these is described briefly below.
So, what is the purpose of multi-family investing. Why would someone want to buy one of these multi-unit properties? As you may have guessed, the primary reason is to make money! As a brief example, a successful multi-family investor would seek to buy a duplex that cost him $1,500 per month to purchase, and then rent each unit out for $1,000 per month. This generates $2,000 in income from renting that not only covers the cost of the mortgage, but it also puts an additional $500 per month into the owner’s pocket. It sounds simple enough, but there is a lot that goes into a successful real estate “deal”.
Aside from simple income, renting out a multi-family property allows an owner to capitalize on his property. Rather than simply owning the building, why not have it generating some income? Each month that you are collecting rent and paying yourself whatever you collect above the monthly cost to you, you are also having an asset purchased in your name that has real value and should appreciate in value over time. This double barrel effect of adding cash to your pocket AND “equity”, or ownership in a property, to your personal assets column has a powerful positive impact on net worth and greatly accelerates a person’s pathway to retirement if that’s something they desire to do. Renting a property, when done successfully, should contribute to your personal net worth in two different ways.
So, if all that sounds good to you, your probably curious as to how someone gets started in real estate investment. You’ve already taken the first step in reading this guide, as the more information you have, the higher your chances of making a successful investment decision. So, step one is to read as much as you can regarding the type of multi-family investing that you’d like to do. The internet is a powerful thing and you can save yourself lots of trouble simply by gathering others experiences and using them to inform your decision making.
Once you feel comfortable, and potentially have consulted with a professional or two, you need to start looking into the methods that you can use to acquire a property. There are many ways that one can go about doing this aside from simply putting down a bunch of cash to purchase a building or a complex. Let’s face it, most of us don’t have hundreds of thousands of dollars in liquid assets that we can sink into a house right now. This is where the concept of financing comes in. Just like you finance a car or take out a student loan to spread large costs out over time, using a mortgage allows you to put a small portion of the purchase price down today, and to pay in installments moving forwards.
The most common method of financing a mortgage is with a 30 year note in which you work with a bank who lends you the funds that you’ll need to complete the purchase. From there you will work with the bank to pay off the loan over time. It is critical to understand this part of the process, because your monthly payment will have a direct impact on your ability to “cash flow” a property. “Cash flowing” a property is real estate jargon for a successful deal. A property that is “cash flowing” is a property that produces an income to the owner above all the costs associate with the mortgage, renovation, and upkeep on the property.
Lets now take a more in depth look at the different methods that an investor can use to secure funding and move forward with a purchase. Aside from a simple bank loan or traditional mortgage, the government has many attractive programs for investors who are purchasing for the first time as well as for investors who are seeking to renovate properties. While this guide is not long enough to cover a comprehensive list of all the financing methods which exist, we will look at the most common and explain the costs and benefits associated with each.
While some real estate transactions are completed in full at the time of purchase, this is very rare. Obviously if someone has enough money sitting in their bank account to purchase their desired property, they are perfectly able to do so. Investors who are looking for true no money down strategies could approach what is known as a “hard money lender” someone with lots of cash who can buy a property outright. They will usually require their own method of repayment and will take a portion of the profit from your deal. This strategy is good for beginners who can find a passive partner. They put up the money, you find the deal and work out all its moving parts.
While this strategy is not totally uncommon, most of the time some sort of long-term payment is arranged at the time of sale. Most transactions involve an upfront payment of funds called the “down payment” followed by a series of monthly payments made up of some principal (the actual loan amount) as well as interest (the fee that you pay for borrowing the money).
Securing a loan will require a check of your credit history, an evaluation of your income, and your ability to make payments moving forward. If you are not able to put 20% down at the time of purchase, many institutions will require an additional monthly fee for “PMI” or mortgage insurance due to the increased risk of the loan for the bank.
For first time borrowers who may have less credit history or income, an FHA loan, short for Federal Housing Authority, can be helpful. This is very common tool used for first time buyers looking to break into investing as well. This is a special type of loan offered to first time home purchasers through the federal government that allows them to put as little as 3.5% down on a property. FHA loan standards are also lower due to the backing of the federal government, meaning lower credit scores and incomes may be eligible to receive the loan.
Once you have researched your preferred financing method and have started working with a mortgage broker to see what you qualify for its time to begin looking at properties. The research done on the front end of your real estate deal could make or break you. The more time you spend analyzing and understanding the features of the piece of property you are purchasing, the more likely you are to be successful in your first venture. Typically, investors look for a few qualities of property, although like many things in investing broadly, this comes with some risks.
Look for properties in good locations, with good schools nearby or near a downtown commercial hub. When selecting a multi-family investment property, you must put yourself in the shoes of your future tenants. When evaluating a home, imagine who might live there, this will give you a better idea of the potential challenges you might face in renting. Will you be marketing to college students each summer and trying to fill your property? Or will you be renting to families with young children. Will you be renting to long term elderly tenants? Study the demographics and behaviors in your area and use this information to inform your purchasing decision, especially if you’re a first-time buyer.
For the true rookie to real estate investing, one of the most common methods of getting started is referred to as “house hacking”. This strategy involves purchasing a duplex or other multi-family property, living in one of your units, and using the other units as rental income to offset your monthly rent costs. Many house hackers can live for next to nothing each month while having a lifetime asset purchased for them. This strategy is a great starting point as you will be able to be on site 24/7 to learn about upkeep, maintenance, and to keep an eye on tenants.
Aside from the intangible aspects of a property like location and local culture, many spreadsheets and applications are available for free online to do more concrete analysis of a property. Find one that works for you and evaluate your potential investment from a number’s perspective. How much are similar units renting for? Will you have to account for vacancy throughout the year? What about a savings fund for potential repairs? Try to factor in things like cost of garbage removal, cable, and internet. At this point you will be able to decide if you offer these services as a package with your property or if you should leave those to tenants to pay.
At this stage you can also evaluate the cost per square foot and some other metrics of your investment to see what kind of deal you may or may not be getting. While in the research stage it is important to ask lots of questions and seek guidance from others who have more experience. At the end of the day more people putting their heads together usually leads to a better result.
Done properly, multi-family investing can allow someone, with relatively little money down, to create a passive stream of income for themselves, all the while purchasing real estate that will most likely increase in value indefinitely over time if its kept up and monitored. Given the potential rewards, the risks are great. Before jumping into anything its important to understand that a bad real estate transaction can permanently hobble you financially. A purchase involving a house that needs thousands more in repairs than anticipated, or one that goes unrented for extended periods of time can send investors into bankruptcy and completely derail your financial plans. Investors should steer clear of complicated transactions their first time around and should only proceed after consulting with several professionals.
One of the most difficult aspects of multi-family investing is the family part. You occasionally will deal with tenants who do not pay on time, who destroy your property, and who can make managing your property a nightmare. Forums across the internet are full of stories of “tenants from hell” who appeared to be perfectly normal before destroying their units and worse. Carefully vet any tenants who you agree to rent to, its difficult to get someone out of their unit once an agreement has been signed, once again, careful research on the front end could save you lots of headaches. Ultimately your name is on the deed and anything your renters do while on the property will come back on you if not dealt with properly.
To summarize the article in a few lines, multi-family investing is a challenging and potentially risky endeavor. It requires time and patience to find good deals and executing them is even more challenging. For those who can navigate these challenges however, a potential life changing income source, and long-term wealth building can be attained. To learn more about investing in real estate, and to get into more detailed guides, click here for our FAQ page, or here to subscribe to our monthly newsletter.
Charles Carillo is the founder and managing partner of Harborside Partners. He has extensive knowledge in renovating and repositioning multifamily and mixed-use commercial real estate. Prior to launching Harborside Partners, Charles founded an online payment processing company with partners and clients in 4 continents across the globe. Charles holds a BS from the Connecticut State University.
As a real estate investor, you have a wealth of knowledge available at your fingertips. Whether you’re just starting out or have years of experience, there’s always more to learn. In today’s digital age, you can easily access an incredible depth and breadth of subject matter related to the real estate industry. You should make it a top priority to always be a student of your craft, in this case, real estate investing. The more you know, the more you grow.
Let’s explore a few avenues by which you can start or continue learning about the real estate industry.
The most basic form of real estate knowledge are traditional textbooks on the subject, most typically produced for high school and college students. While you could make the argument that, given the publishing cycle for academic textbook purposes, this information could be a bit outdated by the time you read the book. This is true to a degree, but the real benefit lays in the fundamental real estate knowledge you can glean from these sources. Textbooks produced for real estate courses are meant to follow a strict structure for the purpose of adhering to an academic curriculum. This gives you the benefit of learning against a logical flow of information as opposed to the somewhat standalone nature of real estate articles that you can find on the Internet.
Despite the fact that they may be outdated in terms of publishing, the basic real estate knowledge you can find in real estate textbooks and books is ultimately timeless. In this way, you can build a foundation of general real estate knowledge upon which you can build with additional specialized knowledge you gain from other sources.
As a real estate investor, you have the benefit of a huge community of people just like you, no matter where you live. There are hundreds if not thousands of international, regional, and local professional organizations related to real estate and real estate investing that you can join. These organizations often convey numerous benefits, including offering thought-provoking articles and forums where you can communicate with industry experts and like-minded individuals. In these forums, you can also post questions and receive responses from people within the organization.
Professional organizations often host periodic events for their members to get together in person, provide trainings and best practice presentations from leaders in the field, and provide a network of individuals related to your industry. For example, professional real estate investment organizations can establish a network of mortgage bankers, property management companies, real estate developers, and many others that you can interact and communicate with. These contacts are often invaluable, and it’s unlikely that you’d be able to build up such a large network outside of this professional organization.
Some professional organizations may require an annual membership fee be paid, while others can be provided free of charge. Evaluate the costs of joining a professional organization against the predicted benefits – it may be worth it tens time over if you make the right contact or build the right professional partnership because of the organization.
One of the most well-known professional organizations related to the real estate industry is the National Association of Realtors, or NAR. You can only join NAR if you’re a licensed real estate agent or broker, but if you’re an active real estate investor it may make sense for you to become a licensed real estate agent as well. Not only can you earn commission on your own transactions (though you would have to pay a percentage to your broker), but you can avoid the hassle of working with a middleman (i.e. another real estate agent) and work directly with the buyer’s agent or seller’s agent in your real estate investment transactions.
If you decide to become a licensed real estate agent or broker and, thus, gain access to the NAR, you’ll find that this is one of the most useful professional organizations to be part of as a real estate investor. Not only will you have access to the top-rated tools and software in the trade, but you’ll gain access to a wealth of industry-specific content and knowledge. More specifically, you’ll receive an email newsletter or magazine with real estate articles and statistics catered to your local market. NAR is a leader in the real estate industry and provides dozens of benefits to real estate industry participants, including annual conferences, marketing resources, in-person member meet-ups, content and news articles, and so much more.
Word of Mouth
You can learn a lot by speaking to and working with people that are more experienced that you are in the real estate investing business. Try to cultivate a mentoring relationship with someone you trust and respect, but most importantly, who has plenty more real-life experience than you do. You can garner gems of knowledge by listening to their horror stories about the landlord-tenant relationship, the intricacies of financing, and much more. It’s important to remember, though, to take all advice with a grain of salt. It’s easy to think that just because someone is a successful real estate investor now, they were always that way. More often than not, they had to endure the same struggles and challenges that you’ll have to face, in order to get to where they are today.
One benefit of having strong mentoring relationships when it comes to your real estate investing business is that you can bounce ideas and concepts off of a seasoned investor. It’s far too common for laypeople to speculate on the ups and downs of the real estate market, including when it’s a good time to buy or not, without having any firsthand experience in the industry! There’s an old saying that goes “when your barber tells you it’s a good time to buy real estate, you’re already too late.” This means that by the time good real estate advice becomes common knowledge among people that are not in the actual industry on a day-to-day basis, it’s already outdated advice. Don’t trust everything you hear from strangers, especially when it comes to making business decisions. Take a quick sanity check against someone you know and trust, and preferably someone who’s made a real estate deal or two.
The Importance of Statistics
On a related note, while it’s tempting to take advice from your friends and family and even established real estate investors, it’s crucial to stress the importance of statistics and data. Real estate investing is a business – so at the end of the day, you should be able to fact-check your speculation against a little bit of calculation. If a deal seems too good to be true, it probably is. Don’t let charming talk sway your decisions – always turn to the numbers to back up the facts.
This also rings true to news articles and social media posts on the Internet. Many of these articles are determined to cause you to act in one way or another. You should always question what the author’s intentions are, and who stands to profit from such an action. Take every news article with a grain of salt and do some more research to better determine whether the information presented is true or a blatant exaggeration, or somewhere in between.
When you do find that the articles you read have statistical evidence to back up their claims, make sure you confirm the timing of the data. It does you absolutely no good to read an article from three years ago telling you the real estate market in your county is about to boom – imagine if you went and purchased three new rental properties in response to this outdated piece of news, only to find that the true market in your area is already at an all-time high. In today’s day in age when data is overwhelmingly available, it has become more crucial than ever to confirm that the data is both timely and accurate.
Facebook and Other Social Media Sources
One of the dangers of social media platforms like Facebook is that it gives regular people the opportunity to pose as experts on a subject they may or may not be experts in. For example, let’s say you follow an old friend from high school on Facebook and have been a passive observer of their career in the real estate industry. You understand on a basic level that they mainly use their social media platform as a marketing platform in order to drum up new business, but nonetheless you receive a steady stream of their posts showing glamorous properties all over town at ridiculously low prices. As a real estate investor yourself, you start to think this person could be a good partner for your business. After all, you buy properties and this person seems to always have properties for sale.
This could go one of two ways. Either this real estate agent friend of yours truly has great deals available and you purchase investment properties at fair rates which result in a healthy profit to you, or you find that their Facebook profile was truly just a marketing ploy and you end up wasting your time. The lesson in this is to use Facebook and other social media platforms carefully when it comes to your real estate investment business. Understand that the articles posted on these sites typically don’t undergo a thorough fact-checking process and are rarely connected to reliable sources. Oftentimes, it just provides people a platform to speak about things in whatever manner they choose, no matter how legitimate the article seems.
The same advice holds true for other social media platforms including Instagram, Snapchat, Twitter, and many more. These platforms are primarily for entertainment, and secondarily for information transfer. Always verify the facts you read with trusted sources on the Internet before you take any action related to real estate investment. It may take you a few more minutes (or even a few more hours) to research a topic you’re unsure about, but it will save you plenty of money in the long run if you can avoid doing a bad deal based on faulty advice.
Seeing is Believing
Despite the fact that a tremendous amount of knowledge is available in a number of sources, nothing can compete with on-the-job learning. You can read all the textbooks, articles, newsletters, and editorials you want about the real estate investing industry, but it won’t compare to the first deal you do in real life. The amount of knowledge you gain from purchasing your first real estate investment property is priceless, and the experience of your first deal is something that is not easily replicated on paper. You can read about the pressures of negotiation, the stress of comparing mortgages, and the despair of having a bad tenant in your property, but you won’t truly understand them until it happens directly to you. You’ll learn more about the real estate industry (and about yourself) than you ever thought possible, only through real-life experience.
You should continue to balance your actual experiences in the real estate investment industry with a healthy dose of continuous learning. In this way, you’ll stay on top of your game and truly know all there is to know about real estate investing. Gather knowledge and advice from a variety of sources, including real estate textbooks to learn the fundamentals, in-person mentoring to learn the intricacies, and trustworthy news articles to learn the ins and outs of your local real estate market. Join a professional organization to become part of a community centered around your collective success. Use social media networks wisely and fact-check yourself as you come across dozens of statistics and figures every hour. Most importantly, never stop learning as the real estate investment industry is constantly on the go. As a real estate investor in today’s ever-changing world, you will find that you constantly rely on many different tools in order to stay abreast in all topics relevant to your world.
Charles Carillo is the founder and managing partner of Harborside Partners. He has extensive knowledge in renovating and repositioning multifamily and mixed-use commercial real estate. Prior to launching Harborside Partners, Charles founded an online payment processing company with partners and clients in 4 continents across the globe. Charles holds a BS from the Connecticut State University.
As a real estate investor, you will analyze dozens of properties a day at least. It’s going to be crucial for you to establish a system of organization to track your leads and the progress you make on each lead. One way to maintain a high level of structure is to invest in real estate CRM software.
CRM stands for customer relationship management. CRM software is a helpful tool for many different types of businesses, including real estate investing, to keep track of their contacts, leads, and other important information related to their everyday tasks. It helps keep a team on track and aligned with their goals, and it provides a visual workflow of your work. For real estate investors specifically, the CRM software could follow a lead from the point of first contact all the way through deal closing, and even further along to leasing or resale.
CRM software also stores a wealth of information related to each lead. For real estate investing, this could mean any of the following fields related to a specific deal: agent contact information, property location, property details, purchase price, resale value, appraisal value, inspection results, contracts and addendums, tenant screening documentation, rental lease agreements, title company information, mortgage details, property management fees, offers and counter-offers, and much more.
A quick web search will provide you with a multitude of CRM options related to real estate that you can customize and build to your specific business needs. Some of the better-known CRMs for real estate include Top Producer, Lion Desk, and Follow Up Boss. Each of these CRMs have unique features that could serve different aspects of your real estate investment business.
For example, as a real estate investor, you scour through dozens of properties a day at least. You analyze the property, the neighborhood, and the financial aspects of each new lead, and you need somewhere to track all of this information. You need to be able to pull up these details at a moment’s notice, and they need to be accessible from anywhere since you’re often on the go. You’re also constantly looking for tenants, contractors, title companies, and other professionals near the property in question, so it would be helpful to have a tool where you can set up drip campaigns – scheduled email communications that have customizable messages and parameters. You come across dozens of people a week that could be helpful contacts for any aspect of your real estate investing business – fellow investors, business leaders, property developers, lawmakers, and mortgage brokers. You need a solid address book to maintain their contact details and specific notes – and maybe even a picture so that you can better remember your contacts before an in-person meeting. A quality CRM software can do all of these things and more!
Alternatives to a CRM
If you feel that your volume of business doesn’t substantiate the cost of a CRM or the time it will take you to train yourself on the CRM, there are a few notable alternatives.
The first, of course, is good old pen and paper. There are surely many real estate investors who prefer to maintain their business on notepads and index cards. The drawbacks to this method are obvious, in that it can be difficult to stay organized and you are limited as to how much information you can reliably maintain. You also lose the technological capability of automated reminders and the mobility of the product. Sure, you can carry your notes around wherever you go, but what happens when you spill coffee on the only version of meeting notes you took when you met with that important real estate developer? You don’t have the benefit of automated backups that you have with electronic record-keeping. On top of that, you severely limit yourself as to how much business you can take on, as you have to maintain all records by hand. This method can lead to unreliable record-keeping, not to mention the fact that if you were ever audited by the IRS or any other governmental organization, it would be very difficult to prove the legitimacy of your business if all records are kept on paper.
A more advanced, but still imperfect, method of record keeping is to use a software like Microsoft Excel to track your leads and deals. You can use a calendar software like Microsoft Outlook to set appointments and schedule reminders. You can also use products like Microsoft Word and Microsoft PowerPoint to draft marketing materials and include them in your scheduled drip campaigns. Of course, managing your real estate investment business across a number of different software products could prove to be difficult and cumbersome. You, again, rely on your manual entries and updates and forego the benefit of having an automated system that remembers to take certain actions on all of your leads, instead of just those that you remember to update.
Another alternative to purchasing a CRM is to utilize their free trial version. Many CRM software companies offer a free trial of their product on their website in order to market their service and generate interest among a wider group of people. This could be a great way for you to have a “test run” of multiple products in order to decide which one suits your needs best. It’s also an opportunity to test out the support services of the company to answer your questions, give you tutorials, and just provide overall support to you and your team if needed. The drawback to this method is that you may be limited as to the range of services the company provides for their free trial product. It may suit your current needs, but as you grow your real estate investment business you may require greater functionality and/or storage space. These are just a few of the considerations you will encounter if you use free trial CRM software products.
Benefits to a CRM
There are numerous benefits to utilizing a CRM for your real estate investment business. For one, it provides a centralized location for you to track the data and extraneous information for your potential deals. At any one time, a prudent real estate investor may have a dozen or more properties on their radar. A CRM software helps keep you organized and structured as you navigate the waters of the real estate industry.
Real estate contracts have deadlines and lifecycles and missing one of these important dates could be deadly to your deal – and your wallet. By tracking each of these dates in your CRM, you’ll be reminded before every major deadline which greatly reduces your chances of letting one of these meetings fly by unnoticed. You can schedule automated emails to be sent to follow up with your title company, for instance, just to get a timely update. You can set up a marketing campaign to be sent to potential tenants when you buy a new rental property. You can track the dates of rent payments against the dates they were due to better understand your collections lifecycle. The tools available in any CRM software are far greater than the functionality you could maintain if you were handling your business by hand.
Another benefit of using a real estate investment CRM is that you improve your records retention for purposes of resurrecting old leads and for audit purposes. If you come across a property that seems to be a great investment opportunity, but the price is just a bit too high, you could schedule a reminder within your CRM to follow back up on this lead 6 months down the road when the market may have taken a downturn. If you were managing your leads on paper or in a spreadsheet, you wouldn’t have the benefit of automated reminders. You probably also wouldn’t have kept all of your notes related to that property in one central, easily accessible place. Moreover, if you were ever audited by the government or needed to provide business records to a bank or any other authority, having all of your records maintained in a CRM greatly reduces the hassle needed to gather the pertinent information.
Drawbacks to a CRM
One common drawback to a CRM software is that you might find yourself in what investors commonly refer to as “analysis paralysis” – this is what happens when you are presented with so much information that you cannot determine what is important and what isn’t, and you end up taking no action at all. This is common with real estate investors who are just starting out, because investing can be incredibly risky and confusing if you are not properly educated. Much of real estate investing is predicated on your inherent understanding of a property’s location and ultimate potential, so if you are overwhelmed by the details in your CRM specifically related to financials, you may overlook some promising opportunities.
Another drawback is the fact that, in order for a CRM to be most useful to you and your real estate investment team, it needs to be utilized consistently and accurately. This requires you and your team to be diligent about recording information about your leads, ongoing deals, and long-term opportunities. It requires fact-checking and it means that you need to trust yourself and your team to enter accurate, timely information on a regular basis. It also means that they need to update this information in real-time should things change, as things tend to do very often in the real estate world.
The final major drawback to using a CRM software could be the cost. It’s important for you to shop around to understand which product features are a necessity and which are a luxury that might not warrant the extra cost. For example, if you operate as a solo real estate investor without a team, it probably does not make sense for you to pay for the extra support package that offers unlimited support members to serve your team. You could probably get by with using the free help center, or at the very worst, paying per instance to the company’s in-person support team. It all depends on what the company offers but be sure to analyze the price of the software against all other expenses you incur as a real estate investor. The real estate CRM should be a tool that enhances your productivity and expands your reach, not a tool that costs a fortune but barely gets used.
Tips and Tricks
The first trick to having a CRM software for your real estate investment business is to actually use it! This will take time and, of course, discipline, but your business will reap the rewards. If you are consistent, you’ll find that the CRM soon becomes irreplaceable, a treasure trove of information for your real estate investment business that you can’t imagine working without. It will become a crucial part of your business, but only with time and practice. It will naturally take time to uncover all of the great functionality that is offered with your CRM software, but these features will become integral parts of your day-to-day functionality. Each software is different, so be sure to check out all of the unique features that yours provides.
The second trick to having CRM software for your real estate investment business is to take advantage of the CRM’s support center. Many CRM software products offer a support center full of virtual trainings, webinars, how-to articles, and tutorials. These can be invaluable when it comes to learning how to use your new CRM software, and this section of the software should not be overlooked.
If the scale of your real estate investment business is large enough to warrant having a team or partners, the third trick to having a CRM software is to train your team to use it. Their knowledge is likely just as relevant and important as your own, and you should aim to get as much of their knowledge out of their heads and into the software. This will come in handy when deals are being transferred from one hand to another in that the person working on the deal at the current moment has the benefit of reading the deal history in the CRM.
Now that you understand the importance of maintaining a system that works for you and helps keep you on track, it’s imperative that you choose a method you are comfortable with and implement that system in your everyday life. It is very easy to get wrapped up in the excitement of new software, with all of its bells and whistles, only to find months later that you aren’t using the product as intended. It will take discipline and time, but over time you will find the benefits of using a real estate CRM software far outweigh the drawbacks. Take advantage of your newfound organization and scale your business up today!
Real estate investing is one of the most powerful mechanisms to achieve financial independence. Financial independence, or financial freedom, is the concept whereby a person does not need to work a typical day job in order to survive; they instead make money in a passive manner and are able to support themselves solely through passive means. Financial freedom equates to the ability to support your lifestyle (which includes your living space, car payments, tuition payments, food, healthcare, and all other daily expenses) without having to go to work every day, and this is done by securing an investment which earns you money on a periodic basis. So, in the same way that many people earn a paycheck every two weeks, a person can own an investment that pays out quarterly dividends, annuity lump sums, or monthly profits – any periodic sum of money which completely supports a person’s financial needs.
There are multiple ways to achieve financial freedom, and real estate investing is just one of them. Many people choose to invest in the stock or bond market, or to work hard at building a company which eventually gains so much success that they are able to live off of the company’s proceeds. Recently, many people have tried their luck in the “bitcoin” or electronic currency markets. These are all means to obtain a steady stream of money on a periodic basis. However, the main concern with these methods of investment is the volatility – it is somewhat difficult for a person to predict how much money they will earn, or whether they will one day lose it all. Real estate investing provides a method to achieve financial freedom that is structured and conducive to long-term financial planning.
Investing in real estate is a broad concept, and there are multiple avenues that you may choose to go down. Buying a property “wholesale” requires a bit of start-up capital and a healthy understanding of a property’s resale value, but this is meant for investors who are looking to turn a quick profit. Similarly, “rehabbing” a property, or fixing and flipping a home, involves buying a property that needs a fair amount of repair or replacement. Once the property is “flipped” into a marketable living space, the investor sells the property at a profit, over and above what he or she paid to purchase the property as well all the expenses associated with renovating a rundown property. Once you get into the realm of renting a property out for an extended period of time, you’ll begin to build financial independence. This can be done through the buy-and-hold strategy of both residential and commercial real estate. Let’s explore each of these.
Passive Income from a Residential Property
The buy-and-hold strategy of real estate investing involves buying a property and holding it for the long-term. One example of this is a real estate investor purchasing a single-family home and renting it out to a family for fair market value. The savvy real estate investor understands the amount of rent that he or she can charge based on comparable market analyses and understanding the level of demand at play in the real estate market for that area. When an investor builds out a financial plan, he or she understands how much needs to be paid towards the mortgage (if there is one), property insurance, real estate taxes, and the homeowner association (if there is one). The total amount of expenses is subtracted from the fair market value of rent that the investor can charge for a home of that size and stature, and with any luck, the investor will have a healthy chunk of profit left over.
Once this investor secures a tenant, the tenant will likely sign a one-year lease. This secures 12 months of profit for the investor, which is helpful for him or her to financially plan and budget for additional investments. This investor may also work a day job, earning a paycheck every two weeks. But their rental property is now bringing in a monthly check – this is the equivalent of earning an extra paycheck a month, who wouldn’t want that? Sure, it will take some initial capital to secure the property, but a quick financial calculation will help determine how much time it will take for the investor to recuperate those funds. Plus, buying a property and holding it for the long-term has the added bonus of potentially selling the home for a healthy capital gain several years down the road. So, not only does the rental property provide a healthy flow of money each month, but it can be sold later on for a lump sum. Another benefit to the buy-and-hold strategy is that the tenant is paying down your mortgage for you and building equity for you in your house. You’re essentially earning equity each month without having to use your own money, and you’re providing your tenant with a lovely place to live. It’s a win-win!
Passive Income from a Commercial Property
There are several differences between investing in residential rental properties and dealing with commercial rentals. For one, the requirements of a residential tenant are quite straightforward. Ideally, you’d secure a tenant with a healthy credit score, enough income to cover the rent each month, and a clean background check. These are the baseline requirements for most landlords of residential rentals. On the other hand, the tenant in a commercial transaction is a business, not a person. Evaluating a commercial tenant entails reviewing a company’s financial statements, bank statements, and even tax returns. There are many more metrics that go into determining a business’ profitability and, therefore, ability to pay their rent that a commercial landlord needs to consider than for a residential tenant.
Another major difference between residential and commercial tenants is that commercial tenants typically have a longer time horizon and often sign multi-year leases. In addition, commercial rents are almost always higher than residential rents, given the many facets that go into determining market rent compared to neighboring tenants and competitors. Both of these factors are appealing to the investor who owns the commercial property, as a higher rent equals a higher profit and a longer time period to collect this profit. This is a solid way to build financial independence as commercial tenants are often a stable and high-quality tenant.
The Math Behind Financial Independence
Let’s conduct a brief thought experiment to really drive home the point behind financial independence. For starters, let’s say you work a normal, 9-to-5 job and you earn $39,000 per year after tax. You get paid every two weeks, which equates to 26 paychecks per year. Each paycheck is $1,500 in income.
$39,000 annual salary / 26 paychecks per year = $1,500 per paycheck
Now let’s say you’ve saved up a fair amount of money and you’d like to invest in real estate and start on your path to financial independence. You find a two-bedroom condo in your area that doesn’t need any major repairs or improvements, just a fresh coat of paint. With the help of your mortgage broker, you obtain a loan and within 45 days you close on your first property. Congratulations!
Here’s a breakdown of your monthly costs for this property:
Mortgage payment $600
Property insurance $50
Real estate property taxes $50
Condo association fees $150
Total monthly expenses $850
With the help of your real estate agent, you determine that you can charge $1,350 per month for a two-bedroom condo in your area, and you secure a qualified tenant who agrees to the stated monthly rent.
When the 1st of the month rolls around, you collect a rent check for $1,350. After paying your mortgage and condo association, as well as funding your escrow account for the annual property insurance and real estate property tax payments, you are left with $500 in profit.
$1,350 rental income – ($600 mortgage payment + $50 property insurance + $50 property taxes + $150 condo association fees) = $500 profit
After one year, this amounts to $6,000 profit. This profit figure does not convey the benefit to you, the property owner, of having a tenant pay down the mortgage each month and essentially building your equity in the property at no cost to you.
Remember that, in addition to this rental income of $500 per month, you earn $3,000 per month ($1,500 per paycheck) at your day job. Let’s figure out how many properties you would have to own in order to earn the same amount from rental income that you do at your day job. For the sake of simplicity, let’s assume that you only buy properties with a $500 estimated profit margin.
$3,000 monthly wages / $500 monthly rental income = 6 properties
6 properties * $500 monthly profit each = $3,000 monthly rental income
At this point, owning just six properties would provide you with the same level of income that you earn from working 40 hours a week at your day job. These six properties are essentially replacing your full-time job, and this is the true motivation behind financial independence – achieving a level of income that enables you to live at your current living standard without being tied to a paycheck. This may sound like a massive goal, and it is, but it’s by all means achievable with the proper planning and dedication. Even if it takes you 10 years to amass six properties which all achieve the desired level of profit, that’s ten years until you gain financial independence.
One of the luxuries of starting to amass real estate investments while you’re young is that there isn’t any rush for you to gain financial independence for the purpose of retiring early. You can choose to continue working as long as you want to, earning additional money from your properties on the side and funneling that money back into your investment business by buying even more properties. In this way, you’re not dependent on the income from your properties but instead can support yourself with your day job. On the other hand, if you’re a bit older and have your sights on retirement in the next few years, real estate investing is still a viable option to achieve financial independence. You’d likely have some money put away in a retirement fund which would supplement any additional income from real estate.
Financial independence is an empowering concept that is within everyone’s grasp with the proper planning and, most importantly, execution. Real estate investment is just one of the many possible vehicles to achieving financial independence, and it has many benefits in addition to the financial aspects. When you amass properties that provide you passive income over the course of your life, you also have the opportunity to pass these properties on to your heirs. In this way, you can instill the concept of financial independence in your loved ones at a very early age and facilitate this for them to an extent until they can manage their finances on their own. The key to achieving financial independence is to find a means of earning passive income. This money will flow to your bank account whether you’re working or lounging on a beach on a remote island – and then you’ll truly feel financially free!
A real estate investor’s ability to network and build relationships will be crucial to his or her success. This is a skill that can be developed over time, but it’s something that should be focused on as an irreplaceable part of the investment business. Oftentimes, you will find the best deals through your network instead of just falling upon a great investment by chance or even through hours of research. Moreover, you can rely upon your network for a wealth of advice, support, and a second set of eyes.
Let’s dive into the different realms of your network and how you can cultivate a deeper relationship within each. Your network can be a source of business advice, investment opportunities, partnerships, and even friendships. Your experience as a real estate investor is greatly enhanced with the help of a powerful network, and there are several ways you can cultivate your network and build business relationships.
Friends and Family
For the beginning investor and seasoned investors alike, your friends and family are some of the most crucial aspects of your network. Oftentimes, people get into the world of real estate investment through family relationships or family-owned properties, and it’s a great introduction into a complex area of business. You likely spend a significant amount of time with your friends and family, and as a normal course of spending time with loved ones you may discuss business, investments, and your longer-term goals. Friends and family can be a great source of information for potential properties, tenants, and can even provide financial help.
As a beginning investor, it may seem difficult to save a significant amount of money for your first several investments. You may recall that investment mortgages typically require 25% of the purchase price of the property as a down payment, and if you think that sounds like a lot of money, then you probably aren’t in a good condition to pay all cash. This is where your friends and family can come in handy.
If you can get your loved ones to look past the hundreds of memories they may have of you as a child and immature teenager, they may actually be able to see you as a full-fledged professional. In fact, they may even be willing to lend or give you money towards the down payment of your investment. Be prepared for the fact that they may want an explanation or even demonstration of how your investment will pan out before they feel comfortable putting some skin in the game.
One of the most important things to remember when it comes to friends and family is that you should never make them feel pressured or obligated to partake in your investing habits. If they are willing to give you money towards your first few investments, be thankful and gracious. If they choose to lend you money with the expectation that they’ll eventually be repaid, set some guidelines. Decide on a timeline to pay them back and stick to it. Don’t ruin the potential for future help by taking forever to pay them back the first time around. Lastly, if they don’t choose to participate financially in your investments – that’s perfectly fine, too. These are your investments, and your risk. You can’t, and really shouldn’t, force others to take on risk that they’re not comfortable with themselves. Friends and family are no exception to this rule.
One final word on friends and family. As a real estate investor, you likely spend hours each week on learning and development. There is a lot to learn, and once you begin investing you continue to learn on the job. You probably spend hours analyzing each potential investment before you find one that’s profitable and feasible. You then spend weeks, if not months, pursuing the property and making your way to the closing table. You are slowly but surely becoming an expert in your field. Family and friends are more than eager to offer you advice and anecdotes that could easily deter your vision or, even worse, make you question your abilities to perform as an investor. Remain confident and use it as an opportunity to educate the people you care about, if you so choose. It’s also completely acceptable to tell them that, while you appreciate their advice and concern, you’re doing everything in your power to take calculated risks and pursue your investment goals.
Networking Events and Professional Associations
While networking with your friends and family may seem a bit forced or unnatural, there do exist many organizations whose sole purpose is to foster networking and business relationships. As a real estate investor, you may have a real estate license and belong to your local Realtor association. The National Association of Realtors™ as well as local associations often host periodic networking events for their licensed professionals for the sole purpose of gathering together like-minded individuals. If you don’t have your real estate license, you can still join a national or local real estate investment association. These events are specific to the investment realm in that they connect you with people who are interested in financing investments, people who have properties to sell, people who advise investors, people who manage properties, and many others who could benefit you in your investment goals.
The greatest benefit of a professional association dedicated to real estate investment is that the intention is very clear – it is meant for real estate investors just like you. Sometimes networking with individuals in other social circles can be uncomfortable because you feel like you are delivering a pitch, whereas when you meet with local real estate investment club members, the intention is very clear. Everyone is there for a common purpose and you can take advantage of the wealth of knowledge among your circle. Networking events are often free, or they may charge an entry fee or membership fee. You should weigh the benefits and costs for each association and determine where you can realize the most value.
Social Media Networking
One of the newest forms of networking occurs via social media. This is a new phenomenon given that the Internet is less than 50 years old, and mainstream social media is hardly more than a decade old. Nowadays, people advertise their homes for sale on Facebook and Twitter, a practice that was never seen before the advent of social media. Through these mediums, real estate becomes a more accessible concept to a larger audience. You can “follow” real estate investors and advisors on social media platforms like Instagram, and you’ll receive updates when they post new content. This is especially beneficial if you follow influential people that are truly successful in real estate investing, as they may divulge their knowledge and trade secrets through these informal platforms.
Social media networking is more informal than networking as part of an in-person association, but it also allows you to reach a wider array of people. Now you can easily connect with real estate investment professionals and potential business partners across the world and access a wealth of knowledge that would otherwise be completely unavailable to you. The informal nature of social media makes it more conducive for you to reach across the imaginary lines between you, an amateur real estate investor, and a more seasoned investor or business advisor. Using social media platforms, you can also build virtual networks of people who share advice, provide tools that are useful to real estate investors, and develop educational content to pass on their knowledge to others.
On the flip side, you can network yourself by posting to your social media platforms about your real estate investment successes and experiences. This will invite commentary and discussions from your group of followers, which can also lead to new and beneficial business relationships. Putting relevant content out to your social circle ensures that people are aware of your role as a real estate investor. This greatly increases the chances that someone will immediately think of you should a real estate investment opportunity arise. The more you network yourself on social media platforms and among online communities, the greater your network can grow.
The Art of Cold Calling
One of the most tried and true methods of building your network is the age-old practice of cold calling. Cold calling is the practice of calling a person without any prior communication, and it can apply to people who wish to buy or sell properties as well as professionals that are in some way related to the real estate investment sector. Seasoned professionals often enjoy spreading their knowledge and cultivating relationships with those who are new to their field. It’s not uncommon for new real estate investors to reach out to more experienced investors and ask for advice or guidance.
Find an established investor in your community and cold call them – offer to take them to lunch or for a coffee and pick their brain. Keep in mind that the best long-term mentoring relationships are mutually beneficial. That is, they have benefits for both parties in the relationship. Find a way to offer your services and expertise to your new mentor, and you’ll ensure that you both will find the relationship to be positive and rewarding.
As you build your team, you’ll likely find yourself cold calling professionals that you’ll need for each of your transactions, like inspectors, attorneys, title companies, and mortgage professionals. It’s a good idea to develop a “script” for your cold calling, or a set of questions that you’ll use to conduct a brief interview of professionals in your field to determine whether you would work well with that individual and develop a longer-term relationship.
Some of the best relationships can come out of a simple cold call, and it’s one of the simplest ways to start building new relationships in your field. Identify yourself as a new or emerging real estate investor who is working on building a team and identifying opportunities to serve others. Feel the other person out to determine whether or not you would work well with him or her. Does this professional seem to understand your goals? What can they do for you? Conversely, and perhaps more importantly, what can you do for them? These are just some of the questions you should explore as you dive into cold calling.
Building Relationships in Everyday Life
The final way to develop your network and build relationships is to engage in communication with everyone you encounter in your everyday life. This involves a mental shift to constantly identify opportunities and to have an open mind and heart. You never know how someone may help you with your investment goals or whether they turn out to be a business partner or advisor. When you’re standing in line at the grocery store, sitting at the airport gate waiting to board, or having a meal at the restaurant’s bar next to another person that you normally wouldn’t engage with, take a moment to introduce yourself and build a relationship.
Keep in mind that most people don’t like to feel like they are being “sold” on something, and they clam up if they feel you are delivering them a sales pitch. Instead, focus on just being present and having a nice conversation. If real estate investing happens to flow into the conversation naturally, use it to your advantage without being pushy. You’ll begin to see every interaction as an opportunity to build a relationship and potentially form beneficial business connections.
Now that you understand the importance of developing a network and building relationships, use this knowledge as you interact with others in your day-to-day happenings. Understand the benefits of a mentoring relationship, the potential that may lie amongst your friends and family, and the incredible resources that social media and internet marketing offer. Your network is your lifeblood and, as a successful real estate investor, it’s truly the foundation of your entire business. Foster it, and you’ll reap the benefits for years to come.
As with any long-term goal, real estate investing can be tedious, difficult, and time-consuming. Here we’ll discuss ten habits for success as a real estate investor. Keep these tips and tricks in mind when you feel discouraged or uncertain. If you implement these habits in your everyday work, you will find that you are more productive and better positioned to achieve your goals.
Habit 1: Write things down
If you’re like most other real estate investors, much of your business is conducted over the phone or in person. You connect with dozens of people throughout each transaction, and even more over the life of holding a property. Sometimes you’re at your desk working, and other times you get calls while you’re driving or out with family. In any event, you’re probably contacted multiple times per day. It’s close to impossible to expect yourself to remember every detail of your business that you discuss over the phone. That is why it’s so crucial to write things down. Keep a notebook handy at all times, use the Notes app on your smartphone, or send yourself text messages and emails – whatever you need to do in order to capture the thoughts and information you’re confronted with on a daily basis.
Let’s say you own a handful of rental properties and you don’t utilize a property management service, so you handle everything on your own. You’re driving to the supermarket and you get a call from one of your tenants that the toilet is leaking, and you promise them you’ll call a plumber to go service the toilet right away. You hang up and see a text message come in from your spouse to remind you that your condo downtown needs new air filters. This reminds you that you need to make your HOA payment on that single-family home by the beach. You pull up at the supermarket and now you’re racking your brain to recall your grocery list – you needed coffee and paper towels, right? No matter – you’ll walk through the store and figure out what you need by scanning the shelves. By the time you get home an hour later, you can’t remember which action item belongs to which home, and you’re overwhelmed with everything you need to do. If you utilized a paper to-do list, an app with the same functionality, or any other method to get ideas out of your head and onto paper (or into your phone), you minimize forgetting important tasks.
Habit 2: Utilize tools
On a related note to Habit #1, it’s a good habit for you to utilize some of the many tools at your disposal. If you don’t already use a software program to manage your investments, it wouldn’t hurt to consider purchasing one. Nowadays, there are hundreds of programs available for purchase online ranging from the modestly-priced to the super-advanced and extremely costly. On the other hand, you could build spreadsheets in Microsoft Excel or similar applications yourself. The main benefit of utilizing a tool of any kind is to be able to have a dashboard of your investments, as well as the ability to delve into property-specific details.
Real estate investment tools and spreadsheets can give you a picture of your overall profitability across all properties you own. For residential investments, these tools calculate important metrics like your return on investment (ROI), tenant turnover, time to collect rent, and many others. Commercial investment tools are generally more advanced and provide insight into annual returns and forecasting into future years, cash-on-cash return, vacancy rates, and expense breakdowns, among other metrics. Any real estate investor should get into the good habit of having a clear picture of his or her investment portfolio. This will help you determine how potential investments in the future would impact your overall portfolio. It can also help you present your investment capabilities to potential partners, investors, and lenders.
Habit 3: Rely on your team
As a real estate investor, you likely work with a multitude of individuals during the course of your business. Most investors build a team comprised of realtors, mortgage brokers, inspectors, contractors, property managers, lawyers, and tax accountants. When you have such a diversified team of highly-specialized people, it’s a luxury to be able to rely on them to handle their aspects of the transaction. Take advantage of the breadth of knowledge available at your disposal and use your team the way you would in sports. It’s nearly impossible to do this all on your own, and your team is in place to help you act effectively.
It is easy to feel overwhelmed when contemplating a potential investment. The upside is so high, and yet the risk is ever-present. This is the time to rely on your team to help you understand all aspects of the transaction at hand. If you have questions, ask them until you are comfortable with the subject under question. Bounce ideas off of your team. Remember that two heads are better than one, and don’t let your pride get in the way of asking for help. It’s crucial for real estate investors to have a team built of experts in their field. That way, you can focus on being an expert in your field – investing.
Habit 4: Trust your judgment
In the era of Big Data and Google, we live in a constant state of access to the world’s information. There is such a thing, however, as analysis paralysis. When you’re constantly presented with so many viable options, it’s hard to take action on any one investment. Don’t let the expanse of knowledge interfere with your own personal judgment. It takes a few years to get a feel for the business, but your confidence as a real estate investor will naturally come with time. Once you develop your sense of self in this industry, you will feel more comfortable relying on judgment to make better business decisions.
There is something to be said for trusting your gut. Let’s say you’re evaluating a potential rental property. The numbers work, but they’re not anything spectacular. They meet your investing thresholds but do little else in the realm of financial benefit. Your licensed real estate agent takes you to see the property in person, and you don’t get a great “vibe” from the neighborhood or the property itself. You can’t quite put a finger on it, but there’s something about the property that’s holding you back from seeing it as a viable investment option. Keep in mind that investment properties stick with you for quite some time. You want to have a baseline level of comfort with any one of your investments. It’s okay to trust your judgment and walk away from a property you’re not totally comfortable with, especially when it’s barely meeting your thresholds for financial viability.
Habit 5: Build a schedule
As a real estate investor, your priorities are often pulled in very different directions. If you’re working on multiple transactions at one time, it can be difficult to keep track of your commitments. This highlights the importance of getting into the habit of building and using a schedule. Just as it is crucial to write things down, it’s just as important to use a calendar and stick to it. You’ll need to keep track of showing appointments for numerous properties, offer deadlines, inspection deadlines, loan commitment dates, and other important timelines outlined in most real estate contracts.
While to-do lists and productivity apps are great for writing out items of high importance and action items, they don’t have a built-in functionality to remind you at a specific date and time of what you need to do or where you need to be. When you build out a schedule of all the important dates related to a transaction, it’s easier for you to adhere to timelines and follow a transaction through its entire lifecycle. It also avoids the dreadful missed deadlines that can sometimes result in lost deposits or missed opportunities to back out of a contract.
In addition to helping you stay on top of contract dates and deadlines, a schedule can help map out your investment initiatives. When building your schedule, incorporate time for you to network, research, and explore new investment opportunities. Add time for you to follow up with your contacts in the field. Include time for yourself, like going to the gym, running errands, and spending time with your family. Because you don’t have a normal 9-to-5 job, you also don’t have the structure that comes along with a corporate job. You most likely work from home, or from anywhere with an internet connection, and you probably don’t have a clear separation between work time and personal time. Build that separation! Include it in your schedule and hold yourself accountable. The time you spend outside of work rejuvenating and refreshing your energy will pay you back tenfold during work hours. Your brain needs a break from real estate, and you can get into the habit of building a schedule that accommodates your life and your business.
Habit 6: ABL – Always Be Learning
There’s a phrase in the sales industry that has stood the test of time: ABC – Always Be Closing. It’s a phrase that reinforces the importance of constantly closing the sale. In the real estate investment realm, it’s a great habit for you to ABL – Always Be Learning. With such a fast-changing industry, and the fact that it’s so local in nature, it’s crucial for the successful real estate investor to get into the habit of constantly learning. There are market trends, industry updates, and local newsletters available at your disposal on the internet for virtually any town in the world.
In additional to market-specific knowledge, it’s a great habit to continue learning about investment methods, loan options, and the foundations of real estate mathematics. A good real estate investor will stay up-to-date and knowledgeable on a wide range of topics in order to serve as a better partner to his or her team and to be comfortable with all aspects of investing. There is a wide array of online courses in all things real estate that are offered for free or very low prices. If you get into the habit of learning something new every day, you will never feel uncomfortable in the sometimes-ambiguous world of real estate investing.
Habit 7: Use your resources wisely
Most people have the misconception that becoming a real estate investor requires a whole lot of your own cash. While it may make sense for you to purchase your first several properties with your own money, you should get into the habit early of using your resources wisely. It probably doesn’t make sense for you to always use your own money to purchase investment properties, especially if your goal is to get involved in multi-family units or commercial transactions that require a large sum of money. Once you have a few profitable properties, you should let those profits speak for themselves. Use your successful investments as leverage to convince a bank lender, private lender, or angel investor to give you funds towards your future investments.
Savvy real estate investors are in the habit of using their resources wisely. They don’t sacrifice their own funds for high-risk investments; they are big fans of using OPM (Other People’s Money). OPM allows you to take on higher-value or higher-risk investments that you normally wouldn’t take on if you had to invest your entire life savings. This is a strategy that many real estate investors use once they have developed experience in a certain investment niche and have networked with people who have the willingness and ability to invest their money.
There are plenty of options for real estate investors who don’t want to use their own money. Hard-money lenders offer large sums of money, but often at prohibitively high interest rates. Bank lenders also offer large sums of money but require lots of documentation and proven investment success. Private individuals like angel investors or business-savvy friends and family may also offer their money, but beware of taking money from people with which you have established relationships. Most people don’t have the same risk threshold as a real estate investor, and they are generally unaware of how long it may take for them to recoup their money. Use OPM wisely, but use the resources at your disposal before you decide to dip into your own pocket.
Habit 8: Don’t put all your eggs in one basket
Many real estate investors choose to specialize in one area of the market, whether that’s residential rentals, wholesales, fixer-uppers, or commercial investments. While there’s nothing wrong with specialization, especially if you have a diversified portfolio within each niche area, it’s always a good habit to diversify your overall portfolio across different market segments. Get into the habit of keeping an open mind when it comes to investment opportunities. Don’t turn away a multi-family unit just because you’re used to buying single-family homes. Try to evaluate the opportunities as they come and be open to new ideas.
This is a habit that can be cultivated over time, and it’s an important quality to build. If your team knows that you’re open to discussing investments outside of the realm you’re traditionally used to, you’d be surprised at how many opportunities are thrown your way. Success comes in many shapes and forms, and other investment avenues may be more profitable than others. A good mix of various investment types will help protect you from the ups and downs of the real estate market and the national economy.
Habit 9: Network, Network, Network
Another good habit of a successful real estate investor is to build a network of like-minded individuals. You may notice that as you amass profitable properties, friends and family who questioned the validity of real estate investing in the past become suddenly interested in the prospect. They may want to invest in real estate themselves, and they’ll look to you for guidance. Once you expand past this circle of family and friends, you should create a habit of networking at all times. Be open to discussing your investment experience with others and answering their questions and addressing their concerns. Most people are ill-informed about the intricacies of real estate investing, and you can help expand their perspective.
Building your network opens you up to potential sources of business. Consider a conversation that you strike up with someone at a social event. You may discover that they are thinking about selling their home but that they don’t want to work with a real estate agent. They are concerned that they’ll be talked into a huge price reduction because of the many improvements their home needs. You, a savvy real estate investor, happen to have a good amount of cash available for your next investment. You ask them how much they would care to sell their home for in the event that someone can pay cash, and you strike up a deal. A single conversation can lead to a great investment opportunity for you.
If you get into the habit of networking with everyone you meet, in the sense that you discuss your profession and gauge others’ interest in it, you may discover people that are willing to invest, people that wish to offload their dated properties, people that have friends in high places and can help connect you to a potential business partner, or people that genuinely want to learn more about real estate investment. This is a habit that can lead to more business, more acquaintances, and more opportunities.
Habit 10: Build a long-term plan
If you’re a successful real estate investor, it’s a good idea for you to get in the habit of building a long-term plan for yourself. You should start thinking about your retirement long before you reach the age that you wish to retire. Building a long-term plan may include incorporating your investment business into an LLC or S-corporation. It includes talking to your tax accountant on a regular basis, as he or she can help uncover tax benefits and incentives that are already a normal part of your business expenses. It also includes determining how many properties you want to own at any one time, and what your long-term investment strategies are.
It’s not entirely crucial that you stick to every aspect of your plan. It’s merely a good habit to become forward-thinking and to understand the future implications of your current habits. When you build a habit of thinking ahead, you become a better business person today. You also reduce the chances that you’ll be caught in a rough financial situation or come upon your retirement empty-handed. Long-term planning such as estate planning ensures that you know how your investments will be handled among future generations. It’s good business practice for you to look ahead and ensure that your investments provide you a fruitful life for many years to come.
Now that you understand ten important habits of a successful real estate investor, try to apply these concepts to your own life and reap the many benefits of a positive attitude and solid work structure. Real estate investing is not a normal job – you don’t have the ability to take advantage of some of the benefits of a regular office job like team camaraderie and structured processes. The burden is on you to build a process for your business and stick to it. You’re also responsible for keeping your own spirits high when the going gets tough. Keep these ten habits in mind and you will conquer any challenge that comes your way.
Real estate investing is a multifaceted skill, and it’s important to understand that you can’t do it all on your own. Building a team is a crucial step in any real estate investor’s journey. Not only does it humble you to the fact that you still need to rely on others even though you work for yourself, but it gives you access to a panel of experts that can help with your transaction. A prudent real estate investor will have the following people on his or her team: a real estate agent, a mortgage broker, an inspector, a general contractor, a title company, a lawyer, and a tax accountant.
Unless you decide to pursue your real estate license for the purpose of making your real estate investments, you’ll need to partner up with a licensed real estate agent that you enjoy working with on a daily basis. Real estate investors have different risk appetites, needs, and desires than a normal buyer or seller, so it helps if your real estate agent has worked with investors in the past. If you plan on purchasing multiple investment properties at one time or several properties each year, discuss this with your agent in advance. They will need to provide constant input and potential property suggestions to keep up with your unique demand. They can also help weed out properties that don’t fit your investment criteria. Real estate agents are often experts in their local markets, so your agent may be able to help you hone in on a specific area that has good investment potential. They facilitate the entire transaction process and make your life easier. Here’s another bonus – an agent’s commission is always paid by the seller. Don’t let the fear of paying commission keep you from working with a great real estate agent. You can focus on the investment and let them do their job. You’ll be better off for it.
Unless you’re buying a property with cash, you’ll need a mortgage. And unless you live in an ideal world, mortgage interest rates change every single day. Any real estate investor should have two or three mortgage brokers with whom he or she can compare interest rates and discuss mortgage programs. Mortgage brokers are invaluable resources to help understand your transaction costs. Mortgage interest rates have a tremendous impact on the profitability of your property because they greatly affect your monthly mortgage payment. If you use an FHA mortgage, you’ll be paying private mortgage insurance. Your mortgage broker can help you figure out what program to use and whether it’s worth it to pay for points to lower the interest rate, and they can help you plan for closing. They are invaluable when it comes to understanding the financial side of things, and they can even offer lender credits that may help to cut costs. You’ll work with your mortgage broker throughout the entire closing process, so it’s important to work with someone you trust and can build a longer-term relationship with.
When you analyze the market for potential investment properties, your focus as a real estate investor is on the numbers. You will calculate your profitability, your return on investment, and other metrics to help you understand how successful the purchase may be. Once you narrow down your potential properties to the one that you’ll make an offer on, things get a bit more serious. Finding a profitable property is hard enough but be sure to always have property inspections done to confirm that the property is of sound quality. Having an inspector on hand that you can trust and rely upon to be available quickly is crucial. After your first few purchases, you’ll likely build a relationship with one inspection company that you will continue to use for all future purchases. A prudent real estate investor will work out a deal with the inspection company to get a loyalty discount, since you’ll likely be using their services multiple times per year. Once you build a relationship with an inspector, you can better rely on them for honest advice and feedback on the property. You’ll know what to expect even before you get the inspection report which saves you time and the headache of waiting for results.
As mentioned above, the state of the property you’re purchasing is just as important as its profitability. If you run into any major issues during the property inspection process, it would be helpful to have a general contractor that you can trust to help walk you through the issues and create a game plan. A general contractor is well-versed on major and minor issues related to construction, HVAC systems, electrical systems, plumbing, and others. They can give you an estimate on how much it would cost to repair certain issues you may come across with any given property. This would help you determine whether it makes financial sense to continue with repairs or abandon the investment property altogether. Save yourself the guesswork and invest in your relationship with your general contractor. They can give a more accurate estimate than a quick Google search would, and you’d be able to trust them to follow through on the work for which they’ve been contracted.
Another party that will be present throughout the closing process and which is absolutely crucial to the closing of the deal is the title company. It helps to build a relationship with a title company because they facilitate the entire transaction process from offer to closing. Many title companies are willing to offer a reduced service fee for repeat business, but more meaningful than this is the trust you’ll build with the team that delivers you the property deed. Title services are an important part of the purchase process because they determine whether the previous owner is truly delivering a free and clear title. This is the only way to ensure that the property you’re buying will be yours and yours alone. As an investor, this is a non-negotiable part of buying a property.
The benefits to having a lawyer experienced in real estate law on your team should be obvious. A practitioner in real estate law can help answer any legal questions you may come across during your real estate investment ventures, and there will be many. They can also help walk you through difficult conversations or situations with the other parties that are often involved in any given transaction. In the worst-case scenario, they can represent you in the event that you become involved in an illegal or unethical situation. While most real estate agents have access to a legal hotline through their local or national Realtor association, it’s best for you to have a lawyer on your side that you can trust and that you can reach out to without any hesitation or delay. As a real estate investor, you may run into circumstances that are legally questionable, and a sensible real estate investor would ensure that all of his or her boxes are checked and that nothing is being done that shouldn’t be.
Finally, as a real estate investor, your tax accountant will likely become your best friend. The tax system is baffling enough as it is – you’ll want someone you can trust to walk you through the annual tax return process and to give you general advice on how to conduct yourself in business and in finances throughout the normal course of business. There are a wide array of credits and tax deductions available to real estate investors, including mortgage interest deductions, benefits for having a home office, and mileage deductions for traveling to and from properties. Your tax accountant can help reduce your tax burden and maximize the benefits you receive from the business you’re already conducting. Instead of spending hundreds of hours learning the tax code and manually itemizing your tax return, work with a tax professional that you trust and can envision working with long into the future. As your real estate investing business grows more complex, your tax accountant can help you structure your business to be the most beneficial to you. Most importantly, they will help ensure your compliance with the tax laws and prevent you from getting into trouble with the tax authorities.
By now it should be clear that real estate investment is not a one-man (or one-woman) job. It involves a multitude of experts in order to get to the finish line. Having a team that you trust and that you enjoy working with can make all the difference. As a novice real estate investor, don’t feel overwhelmed that you have to do all of this yourself. You have plenty of people around you that are experts in what they do, so that you can be an expert in what you want to do. Building a team takes time, but it is a natural progression as you continue to do business with the same people. If one member of your team isn’t giving you what you need, don’t hesitate to move on to someone else. Real estate investment is a tough business as it is, and your team is meant to make your job easier, not more difficult.
When it comes to financing your real estate purchase, you have plenty of options. Many investors pay cash for their investments. This is an attractive option to sellers because the closing process is expedited and the risk of loan denial by a bank is eliminated. In return, cash buyers often receive a lower purchase price. If you don’t have a bundle of cash readily available to purchase real estate, have no fear! There are a multitude of financing options available today. We’ll cover fixed rate and adjustable rate mortgages and explain the different mortgage types, including conventional, FHA, and VA mortgages. Finally, we’ll differentiate between conforming and non-conforming loan types.
The main difference between fixed rate and adjustable rate mortgages is the interest rate. Interest is the price you pay for borrowing money, and the interest rate on your loan can significantly impact your return on investment. This should be intuitive; the more money you pay to the bank, the less money you get to keep as profit. With a fixed rate mortgage, you have the same interest rate for the entire life of the loan. This is beneficial for planning and budgeting because you can be assured that you’re “locked in” to pay the same amount of interest every month. There are no surprises with a fixed rate mortgage. Fixed rate mortgages are typically offered on a 15-year or 30-year basis.
On the flip side, interest rates change periodically with an adjustable rate mortgage, or ARM. For instance, a 5/1 ARM has a stable interest rate for the first five years, after which it adjusts every one year. This can make financial planning for the real estate investor difficult. Let’s take, for example, an investor who pays $300 in mortgage interest each month and earns a healthy $400 monthly profit on a rental property. After five years of a stable interest rate (and stable interest payment of $300 per month), the investor’s adjustable rate mortgage has an interest rate adjustment. Now the mortgage interest payment jumps up to $375 per month, and the monthly profit subsequently drops to $325 per month. It’s common for adjustable rate mortgages to have a very low introductory interest rate which can be attractive to short-term investors. Once the adjustments kick in, however, they are commonly tied to a national mortgage index. Investors may prefer to use an adjustable rate mortgage to take advantage of low interest rate periods and take a chance that they won’t experience high interest rate periods. It’s a gamble, but it depends on the investor’s individual attitude towards risk.
Once you decide between a fixed rate or adjustable rate mortgage, you’ll choose the mortgage type, including conventional, FHA, or VA. The differences between these mortgage types have to do with whether the loan is insured. Conventional mortgages are not insured or guaranteed by the government. The minimum down payment requirement for a conventional mortgage is 5% for a primary residence and 20% for an investment mortgage. VA loans are part of a program offered by the U.S. Department of Veterans Affairs to military service members and their families. One huge benefit of VA loans is that there is no minimum down payment requirement! However, real estate investors cannot use VA loans to purchase investment properties, as the program requires the borrower to use the property as a primary residence.
FHA mortgages are insured by the Federal Housing Administration. The minimum down payment requirement for an FHA loan is 3.5% which makes it an attractive alternative for many personal home buyers. FHA loans have two main disadvantages for the real estate investor to consider. The first is that FHA loans are primarily restricted to buyers who intend to occupy the property they are purchasing. The second is that FHA loans require the borrower to pay for private mortgage insurance, or PMI. The price of the PMI is determined based on the borrower’s credit score, and it adds another monthly cost for the real estate investor to account for. One workaround to the FHA loan residency requirement is for the real estate investor to live in the property for some time and rent it out later. This is ideal for people who are just getting started in real estate investment and still need a place to live for the time being. As you can tell, these are all valuable considerations for the prudent real estate investor.
Another concept related to mortgages is based on the size of the loan in question. As a real estate investor, you will often make purchases of varying size. For example, one year you may purchase a single-family home as a rental property, and the next you may purchase an apartment building with 12 units. These two investments will carry two very different price tags. Depending on the size of the mortgage loan you need, you’ll fall into either the conforming loan or the jumbo or commercial loan category. Conforming loans meet the underwriting guidelines that have been established by the government. Non-conforming loans may also be granted, but they are typically accompanied by adverse factors like prohibitively high interest rates. Jumbo loans exceed the size limits established by the government, and for this reason the lender considers the borrower to be high-risk. To compensate for the higher risk that the lender takes on, it may require higher down payments, higher credit scores, and higher interest rates.
There is no shortage of factors that will impact a real estate investor’s investment – and mortgages are just one area of contemplation. If you’re not able to purchase an investment using all cash, then a mortgage is a necessary evil. Mortgage payments are a huge factor that impacts the overall profitability of a real estate investment, so make sure you choose the mortgage type that suits your investment goals. Be sure to work with a reputable mortgage broker that can help you understand the intricacies of choosing which mortgage is right for you.
Real estate has long been considered a viable and reliable area for investment. Unlike the stock market, which can fluctuate based on the whims of the market, real estate is relatively cyclical in terms of time and is extremely local in nature. This means that a slow market in Los Angeles, California does not necessarily mean a slow market in Miami, Florida. In addition to this, the asset in a stock market is just a number on a computer screen – it’s not tangible, or something you can touch and feel. Let’s compare this to real estate, where you can actually see (and live in!) the asset you buy. You can add paint to improve it cosmetically, do more extended maintenance to improve it structurally, and generally control what you do with the asset.
Passive real estate investing through the “buy-and-hold” strategy entails buying a property for the long haul. This is opposed to wholesalers and flippers, who buy properties in the hopes of making a quick return. Buy-and-hold investors purchase a property, typically using bank financing, and rent it out for long-term passive income. The term “passive” means that you are not actively working for the money you earn. After the initial investment into a turnkey residential property or an income-producing commercial property, investors typically hand the property over to a property manager who takes care of the tasks related to hosting a tenant. These investors then receive a check from the property manager each month with a portion of the earnings.
The buy-and-hold strategy is ideal for retirees who don’t want to actively manage an investment and just want to receive a steady flow of money throughout their retirement. It’s also quite ideal for young investors who have a longer investment horizon, or time consideration, for their investments. They can purchase income-producing properties whenever they are financially viable, even at the start of their careers! Now they can collect a paycheck from their employer and a check from their rental property. Most employed adults have a 401-k plan through their employers, and typically have a pension plan as well. Real estate investing is a steady and relatively safe way to build a retirement portfolio and diversify your investments even further.
One important concept related to passive real estate investing using the buy-and-hold strategy is the benefit of using bank financing instead of buying a property with cash. It’s true that you can often negotiate a much lower purchase price when you have cash to pay with – it’s enough of an incentive for the seller to forego the pains of dealing with a buyer who must get approved for a mortgage and ultimately fund the loan at the closing table. The seller gets cash in their bank account, and the buyer walks away with a new property – everybody wins, right? Not exactly, and that’s due to a concept called return on investment, or ROI.
Return on investment is a metric that many investors use to determine how successful their investments are. It’s expressed as a percentage and is calculated with a simple math problem: (total money earned) divided by (total money spent). It is typically calculated on an annual basis, so the ROI for your first year owning the property will be calculated as follows: (total rent money earned in year one) divided by (total amount of money spent purchasing the property, including the purchase price, closing costs, and any money spent on initial repairs and improvements). This calculation gives the investor a general idea of how much “bang for the buck” the property has.
When an investor buys an investment property using all cash, the portion of the equation related to the total amount of money spent is extremely high. This, in turn, drives the ROI metric down and essentially tells the investor that he or she is getting a low return on the property for year one. On the other hand, when an investor buys a property with bank financing, the bank typically requires a 20-25% down payment. Though this may sound high, it’s a lot less money than paying 100% in cash. This lower initial investment will drive the ROI up when compared to a cash transaction. Keep in mind that ROI should increase as the years go on, because the total money spent is generally the highest at the time when the property is initially purchased. ROI is just one of many metrics that investors use to gauge their success, but it can be a quick and helpful signal.
Once you’ve decided whether to purchase using cash or financing, it’s important to have a general sense of what your profit will be. A licensed real estate agent will be able to help you get the relevant figures for the properties you are interested in. Profit is essentially the money you earn after all expenses are paid, and for a residential rental property it’s calculated as follows: (total rental income) minus (total property expenses). Pretty simple, right? Let’s expand a bit on what property expenses consist of. These include your monthly mortgage payment if you’re using bank financing and monthly HOA dues if the property resides in an area with a homeowner’s association. It’s also important to include escrows in your calculation of property expenses. Escrows are funds put away for later, and these include property tax payments, property insurance payments, and a reserve for maintenance and repairs. You should determine what profit threshold you are comfortable with so that you can easily spot the properties that fall within your requirements.
Here’s a simplified example of how to calculate your profit. Let’s say you found a single-family home with 2 bedrooms and 2 bathrooms. You’re putting down a total of $50,000 plus $5,000 closing costs. The homeowner’s association charges $150 per month. The yearly taxes on the property for the prior year were $3,000, and property insurance runs about $1,500 per year. The property needs a little bit of work, so you figure you’ll need $500 for paint and electrical panel replacements. After speaking with your mortgage broker, you find out your monthly mortgage payment will be $800 per month. Then, after speaking with your real estate agent, you find out that the average rent in the neighborhood is $1,600 per month for a 2-bedroom, 2-bathroom house. What’s your profit? How about ROI?
Profit = Total Rental Income – Total Property Expenses
Total Rental Income = $1,600 per month
Total Property Expenses = $800 monthly mortgage payment + $150 monthly HOA payment + $250 monthly tax escrow + $125 monthly property insurance escrow
Profit = ($1,600) – ($800 + $150 + $250 + $125) = $275 per month
Return on Investment = Total Money Earned / Total Money Spent
Total Money Earned = $275 monthly profit * 12 months
Total Money Spent = $50,000 down payment + $5,000 closing costs + $500 initial repairs
ROI = ($3,300) / ($55,500) = 5.9% annual ROI
Once you have these figures, you can make a more informed decision on whether the rental property in question is right for you. If you’re ready to get started with passive real estate investing through the buy-and-hold strategy, consult with your licensed real estate agent and mortgage broker.