Category: Real Estate Strategy

Are Condo Hotels Good Investments?

Real estate investors have a variety of options when choosing what types of properties to purchase. Condo hotels are one of the many choices and are making a comeback. Are they really a good investment choice, or is it just a trend?

In general, condo hotels are great investments if they’re in a popular vacation area. These properties have the potential to generate enough revenue to cover their costs, and then some. However, it’s important to understand the pros and cons of condo hotels before purchasing one.

We’ve put together a guide to help you determine if condo hotels are a good fit for your real estate portfolio. Keep reading to learn more about what designates a condo hotel, how it’s financed, and what’s good and bad about owning one.

What is a Condo Hotel?

A condo hotel, or condotel, is a unit within a larger property that operates as a hotel or resort. Many condotels are in high-end resorts, located in cities that are known for tourism. In particular, these types of properties can be found in places like Florida, California, and Las Vegas.

Condo hotels are not always this way, however. They are sometimes just a single, studio-type room, inside what appears to be a normal hotel operation. In fact, you’ve likely stayed in a condo hotel at some point if you travel for recreation.

This type of property was first created in the 1990’s, as an alternative to time-share properties. The condo hotel has a ton more benefits than time shares, mainly because the owner can turn a profit on the property. With a time-share, it’s typically the owner of the entire building who makes the money, while a condotel allows the owner of each individual unit to make money.

How Does a Condo Hotel Work?

Every property is different, but all condo hotels operate in a similar fashion. The owner of the unit has the ability to use the unit for a certain amount of time each year. When the owner is not using it, they can add it to the hotel’s inventory to be rented on a nightly basis.

Condo hotel owners split their revenue with the property (hotel) management company. Each deal is different, but many of them can be as high as a 50/50 split. In return for 50% of the rental revenue, the management company takes care of renting, marketing, cleaning, etc.

Are Condo Hotels Profitable?

Condotels can be profitable when the economy is good and people are traveling on a regular basis. Since the vast majority of these properties are in tourist-rich areas, it comes as no surprise that their profitability is often based on the health of the tourism industry. There are other factors that also affect how much profit your property can produce.

The sales price and mortgage rate can also significantly impact how much money you make on your condo hotel. If you don’t purchase the property at a good price, your mortgage could be much higher than the potential income each month. This could be a means to an end if you keep the property long-term and pay down the mortgage, but it’s something to think about in the beginning.

At the end of the day, buying a condo hotel can be a very profitable venture. You just need to make sure that you’re bringing in more money than you’re spending. It sounds like simple math, but there are several external factors that could affect your success, including those we just talked about.

What are the Benefits of a Condo Hotel?

Generally speaking, condo hotels have a ton of benefits for both their owners and their management companies. They are revenue-producing properties with minimal management responsibilities on the part of the owner. They also tend to be in highly sought-after areas, which make them easy to resell.

Attractive Properties

Most condo hotels are resort-style properties that offer a host of amenities such as swimming pools, spas, and restaurants. Some are 5-star properties, while others are more simple. Regardless of the amenities offered, the majority of condo hotels are well-kept and attractive.

Since the hotel management company depends on the rental income from these units, they take pride in keeping them clean and presentable. Many operate under major brand names such as Marriott, Four Seasons, and Hilton. This branding power can bring major benefits to investor-owners who want to maximize profits from their property.

Prime Locations

Condo hotels managed by major brands are often in premium locations that attract hundreds of thousands of visitors annually. Places like Clearwater Beach, Aspen, and the Las Vegas Strip are excellent choices when considering a condotel as your next purchase. However, be prepared for a premium price tag, as well.

If your pockets aren’t quite deep enough to purchase in a premium property, you’re not completely out of luck. There are plenty of smaller properties available for purchase with the same condo hotel model. These properties may be harder to find, but are worth the search. They tend to be in great locations, as well, and depend on tourist activity to pay the bills.

Revenue Stream

Purchasing a condo hotel that is already operational is basically like buying a business. You’re buying a property with an existing revenue stream that has the potential to pay for itself. Different properties will produce different amounts of revenue, so you should ask for the financial history before making a purchase.

If you’re purchasing a condo hotel as a vacation property for yourself, you may be more interested in finding a location that you enjoy visiting than the potential revenue streams it could generate. Conversely, if you’re purchasing the property for the sole purpose of earning some passive income, then look for the property that will generate the most money, regardless of where it is. Either way, having a revenue stream is a major benefit of condo hotels.

No Management

If you truly want to earn some passive income, this is an excellent option. Unlike other rental properties, a condo hotel is usually 100% hassle free for the owner. You’ll have to pay an HOA fee and some other maintenance/management fees, but the property will be taken care of for you. That’s just part of the deal.

With long-term and short-term rentals such as houses and condos, the marketing, renting, cleaning, and maintenance often fall on the owner to do. Of course, you can hire a management company to do all of that for you, but you may wind up paying more than you would have by just purchasing a condotel.

What are the Drawbacks of a Condo Hotel?

Condo hotels can be frustrating properties because they are reliant on the health of the economy for survival. Natural disasters, economic issues, and global pandemics can all have a major effect on how much revenue this type of property can generate. They also may not appreciate in the same way that other real estate investments have the potential to do.

Condo Hotels Rely on the Economy

Due to the resort-style nature of condo hotels, most of them are reliant upon the health of the economy. If your condo hotel is in an area that is known for tourism, you can expect it to take a hit when the economy dips. History shows that people travel less when the economy takes a down turn, which is reflected in most businesses within the tourism industry.

The economy is affected by a variety of uncontrollable factors, including politics, wars, treaties, and more. Foreign affairs can affect the number of travelers coming from overseas. Natural disasters can hinder people from visiting the specific area where your property is located. Global pandemics can bring the world’s economy to a screeching halt. You just never know!

Residence Restrictions on Condotels

Most property management companies who operate condo hotels will place restrictions on how many nights per year an owner can occupy the property. They depend on the revenue share from each unit and will therefore only allow the owner to stay there for a limited amount of time. As an investor, you need to know how often you can use it before making the purchase.

If your key objective with the property is to make money, you may not be concerned about this metric. In this case, you should focus more on the average occupancy rates of the hotel over time. However, if you plan to use the property as a vacation home on a regular basis, the residence restriction becomes a lot more important as a metric for whether or not you should purchase it.

Management Fees

One of the benefits of owning a condo hotel is the lack of management that you’ll have to do. One of the major drawbacks is how much revenue you have to give up in exchange for that luxury. Many properties have a revenue split as high as 50/50 for the management company and the owner.

This should be another factor on your list of items to think about before purchasing a property. Sometimes, this will still be a pretty sweet deal. On the flip side, it could eat away the majority of the additionally money that you could’ve generated.

Re-Sale of Condo Hotels

The re-sale value should always be a consideration when purchasing a property. Whether it’s a first home, second home, or investment property, you should always consider the current and previous comps, as well as what the market is projected to do in that area. With a condo hotel, this projection can be much more difficult.

Since condotels don’t act the way other properties do, it can be really difficult to determine whether they will gain value or not. In many case, they don’t. The larger property in which the unit is located generally holds its value due to the prime location and robust tourism. As a result, condo hotel owners should not expect a major return when the resell the property.

Financing for Condo Hotels

We will dig into this in greater detail in the next section, but this is a drawback for most people. Securing a loan for a condo hotel can be extremely challenging due to the nature of the property and the potential risk involved. For this reason, many first-time investors go for a traditional rental property instead.

What Type of Financing is Available for a Condo Hotel?

From a mortgage broker’s perspective, condo hotels are considered to be much riskier than first homes. For this reason, financing is harder to find and is more stringent. You can get a mortgage for a condo hotel, but you’ll pay a larger down payment and your lender will require great credit scores and an income high enough to cover both your first and second mortgage.

When financing a condo hotel, most lenders will require at least 20% down, if not more. Unlike traditional second-home purchases, lenders will not factor the potential rental income into your financing. This means you’ll need to qualify with the right debt-to-income ratio, without considering the potential revenue from the property into the equation.

In short, getting financing for a condo hotel can be really tricky. Potential buyers are often rejected for financing on this type of property due to the classification of the condotel as non-warrantable. This means that the minimum requirements for mortgages set forth by Fannie Mae or Freddie Mac are not met. If this happens, the lender will not be able to sell the mortgage and will therefore not underwrite it.

Final Thoughts

Some people consider condo hotels to be more of a lifestyle purchase than an actual investment. That’s because many investors choose to purchase them in areas where they like to vacation. While this isn’t a bad strategy, it’s not the only strategy.

Real estate investing comes in many forms, and the condo hotel is just one of the many options available to you. If you’re just getting started, you may find it challenging to get financing for a property like this. They are extremely unique and can be a challenge to get your hands on. But if you do, if could be really profitable for you.

Picture: Pixabay

Short Term vs. Long Term Rentals: Which is Better?

When it comes to investment properties, there are a variety of options to choose from. But there are also a variety of conditions to think about prior to making your purchase. In the rental space, you basically have a choice between short term rentals and long-term rentals. There are other sorts of investments available, but these are the two basic types.

Many investors own a combination of both. If you’re curious why they wouldn’t just choose one type or the other, you came to the right place. In this article, we will discuss the differences between them and why you might choose one or the other.

Short Term Rentals

Short term rentals are typically defined as rentals that last for a few days to a few weeks. They are also generally furnished and provide utilities, cable, internet, and other amenities for their guests. They are sometimes referred to as vacation rentals and serve as an alternative to staying in a hotel.

Owning short term rentals can be extremely lucrative. However, it’s important to understand the pros and cons that are specific to short term rentals. Let’s take a look.

Pros:

Higher Income

With short term rentals, you will almost always generate more revenue. This is because you have people circulating through the property on a regular basis, paying nightly rates while on vacation. Depending on the location, you can generally charge anywhere from $150-$350 per night. If the property is fully booked the majority of the time, you will generate a significant amount of income.
These properties can be rented out on a variety of platforms such as Airbnb, Home Away, VRBO and more. The key to making them successful is to understand the market where your rental is located and which of these platforms is the most popular for that market. Believe it or not, different markets are more partial to certain platforms.

Ability to Adjust Pricing

Unlike long term rentals, the owner of a vacation rental has the freedom to adjust pricing as they see fit. If inventory is filling up quickly, the owner can choose to raise the rent in order to maximize their profits. This works really well in markets that have busy tourist seasons. You can charge more during the busy season simply based on the supply-and-demand principle.

Ability to Use Them

The beautiful thing about owning a short-term rental is that you have the ability to use it whenever you want to. You can simply block the dates so that they are made unavailable on whatever website you rent it out on. This is important to many investors because it gives you a place to go on vacation without the added expense of hotels.
If you really love a particular city and you visit often, you should consider looking into the rental market in that area. If you find that the short-term rental market is healthy, that might be a great place for you to purchase a short-term rental. Then you can fully book it when you’re not using it, but can also visit whenever you want!

Better Maintenance

You’ll find that maintenance is also listed in the “cons” section, so let’s look at both sides of the coin. The good thing about short term rentals is that they have to be cleaned frequently and you can often pass the cleaning and maintenance fees on to the renter. Because someone is in the property several times per month, cleaning and resetting the space, you are likely to find any maintenance concerns long before they become serious problems. This allows you to address them in a timely manner and protect the integrity of the property.

Diversified Risk

When it comes to risk of receiving your rental payments, you’re definitely in a better spot with a short-term rental. This is because you have lots of people coming through the property on a regular basis. If renters book your property online, they will pay the online portal directly and the portal will deposit the money into your account after the stay. This is cool because you don’t have to worry about chasing people around to collect rent payments, which can be really stressful.

Cons:

Heavy Management Needs

You already know that a short-term rental needs to be cleaned and reset multiple times per month for the next renter to come in. It’s almost like running a bed and breakfast. It requires cleaners, handymen, maintenance crews, landscapers, and more. Of course, you can pay people to do all of these things, but that will take away from your total income on the property.
Generally speaking, the maintenance and management fees for a short-term rental are much higher than for a long-term rental. Since it requires more work, the property manager will require more pay. If you’re a hands-on owner and you want to do all the work yourself, you can save on these fees, but be aware that it can quickly become a full-time job.

More Rules and Regulations

As we discussed earlier, short term rentals are basically like running a business. As such, there are rules and regulations that must be followed. Every city, state, and community will have different policies around operating a short-term rental. Some will allow it, some won’t, and some will just make it really difficult on you as the property owner.
This is because the short-term rental business through portals like Airbnb, VRBO, and others, are bringing revenue into various markets. As soon as the local government learns about a new business, they will generally want their cut! Conversely, cities who risk losing money as a result of vacation rentals outside of the downtown area, often impose strict guidelines on such businesses.

Long Term Rentals

Now let’s talk about long term rentals. These are generally unfurnished spaces that are rented for periods lasting 6 months or more. They serve as the full-time residence for the tenant during the period of the lease.

Pros:

Consistent Income

Your income is not likely to fluctuate very much with a long-term rental. Your tenants should be paying a monthly rate that you both agreed upon when you signed the lease. This is great for budgeting purposes because you know exactly how much is going to come in and when it’s going to come in.
The main caveat to this scenario would be if your tenant doesn’t pay their rent. That causes a whole other set of problems! But if you’re screening your tenants well (hint hint), you hopefully won’t have to deal with this situation very often.

Less Management

With a long-term rental, you generally will have a lot less to worry about on a daily basis. This is because you have one tenant paying their rent once a month. It doesn’t get much simpler than that. Moreover, many long-term renters will stay in the same place for long periods of time. If you have a family renting one of your properties on an annual basis, they may stay there for several years!
Another great piece of the management puzzle is that property management for a long-term rental is usually much less expensive than it is for short-term rentals. Since tenants are usually in the space for an extended amount of time, there is less of a need for ongoing maintenance, cleaning, and marketing fees.

Tenant-Paid Utilities

Another great thing about long-term rentals is that the tenants pay for the utilities. When a new tenant moves into the property, it is customary for them to setup their own water, electric, cable/internet, etc. There is no need for you to worry about these utilities unless the property becomes vacant, at which time you’ll need to turn them on to get the property ready for the next tenant.

No Furnishings

With a long-term rental, you also don’t have to worry about furnishings. They typically come completely empty and it’s up to the tenant to bring in their own furniture and décor. As the landlord, you will usually be expected to provide appliances, but that tends to be pretty simple to do.

Cons:

Screening Tenants

This isn’t necessarily a con, but it’s definitely something that could be more difficult than you might think. Finding good tenants is critical to being successful with long term rentals. Since your tenants will likely be with you for a long time, it’s helpful to have good ones!
There are a variety of tools available online to help you understand how to screen your tenants and what to look for. Getting this process nailed down before signing your first lease is a great strategy for success right out of the gate. Investors often make the mistake of being a little loose with their first rental, which has the potential for disaster.

Evictions

One of the most difficult things to do as a landlord, is evict someone from your property. Not only is it a complicated legal process, it’s just not fun. You’ll need to send an eviction notice, file a complaint with the city clerk, go to the court hearing, etc. Like I said – not fun. The best thing you can do to protect yourself from this is to screen your tenants! Have an excellent screening process and evictions will be a lot less likely.

Less Revenue

Long term rentals generate less revenue than short term ones. This is because you are only able to charge the amount that you agreed upon in the lease. You are further limited by what the rental market in your area can handle. That means if all of the comparable rentals around your property are going for $2,000 per month, it’s gonna be really hard for you to charge $3,000 per month and actually secure a tenant.

You Can’t Use It

Last, but not least, there’s the obvious factor that you can’t use the property whenever you want to. If you have long term tenants in your property, you can’t just pop in for the weekend and ask them to leave. You have a contract that says they will live in the property full time in exchange for “x” amount of dollars. You’ll be better off purchasing long term rentals in an area where you don’t necessarily want to visit on a regular basis, and short-term rentals somewhere that you’d love to vacation.

Making Your Decision

Now that you know a little bit more about short term and long-term rentals, you can start to build a plan based on your needs and what you’re interested in doing. There’s no right or wrong answer when it comes to which type of property to invest in. Only you know which of these items are the most important to you.
Here are some additional tips and tricks to consider when making this decision.

  • Ask your realtor to help you investigate the regulations on rental properties in the area that you’re looking for a property. They will have access to this information and can help you make an informed decision.
  • Follow the regulations in your area once you purchase a property. Getting caught violating them can have severe penalties that are rarely worth the risk.
  • Choose your marketing platform wisely. Many new investors will put their property on multiple listing sites to make sure it gets booked. This is great in the beginning, but once you find a platform that consistently books your property, you can probably discontinue using the others and have one less thing to worry about!
  • Screen your tenants and your property management company REALLY well. These two things can nearly make or break your rental business.

Real estate is a fantastic way to build wealth over time, but it will take some education and planning to get started. Working with a real estate professional whom your trust is an important piece of the puzzle. Make sure your realtor is doing his/her homework and helping you make the best decisions for your long-term goals.

Image: Pixabay

Why 2021 is the Year of Tangible Assets

It’s no secret that 2020 was a difficult year for many industries. The Covid-19 pandemic all but destroyed industries such as travel, hospitality, sports and entertainment. The stock market was at an all-time high, came crashing down and then built its way back up.

In the midst of all the economic turmoil came instability in housing. Millions of families struggled to home-school their kids, work remotely (if that was even an option for them), and put food on the table. Even worse, many families lost their income and are still struggling to get back on their feet.

This resulted in land lords struggling to collect rent payments, which in turn, affected their income, as well. The whole thing has been a vicious cycle, but medical experts are hopeful that we are over the hump.

In the wake of such instability, many investors are left wondering what to do next. There are two or three basic strategies that seem to be emerging and savvy investors need to know which one to employ.

Strategy #1: High Risk Stocks

There seems to be a crowd rushing towards bitcoin, cryptocurrency and other high-risk stocks. Although there is certainly a ton of money to be made in the stock market, there’s also a risk of losing it all. Experts are referring to both bitcoin and the stock market in general as huge bubbles right now.

The stock market rollercoaster of 2020 saw an epic crash in March, but also a surprising and historic recovery. Tech stocks like Amazon, Netflix, Facebook and Google were collectively up by double digits. In fact, by the end of November, Amazon was up 70% for the year!

Many experts are predicting that tech and other volatile stocks will become stagnant or even come crashing down as the world slowly returns to normal. I have my doubts about that, but it’s worth noting that investing in high risk stocks in a time of such uncertainty in the world is risky business. Some investors have the tolerance and the money to do so, but others are less confident, or at minimum, more conservative.

Strategy #2: Sit Back and Watch

Those who don’t have the stomach to chase high-risk investments or try to time the market are choosing to do nothing. These are the investors who may have done fairly well in the past, but were burned by the 2020 situation. Maybe they panicked and pulled their money out of the market in March and missed out on the 60% recovery.

Needless to say it’s impossible and almost foolish to try to time the market just right. This has never been a great strategy for the majority of investors. That’s why financial managers typically encourage their clients to keep a low-risk, diversified portfolio and to keep it going over time.

In a year that will hopefully bring new beginnings, I’m not sure that sitting on my hands is the right move. This strategy is a no-win situation regardless of your investing experience. You can’t win if you don’t play and the sideliners stand a lot to lose if they spend another year watching from the wings while the rest of the world invests.

Strategy #3: Tangible Assets

In case you’re unclear on the difference between tangible and intangible assets, let’s talk about the key differences first. Every smart investor should be well versed in the assets available and what the benefits are of each. Depending on market conditions and the overall economy, different types of assets are better choices for different people and different times.

Tangible Assets

Tangible assets are physical property that can be purchased and owned by a company or person. Some examples of tangible assets are:

  • Land – Real Estate
  • Structures
  • Equipment
  • Machinery
  • Jewelry
  • Artwork
  • Inventory
  • Securities such as cash, stocks and bonds

Some tangible assets are much more volatile than others. For example, investing in art or antiques could prove to be incredibly profitable. On the other hand, you could also get stuck with them for a long time. Experts in this field typically advise investors to be smart with their choices. You should love whatever it is that you’re investing in, just in case you are unable to resell it later on.

Real estate is a more secure tangible asset, assuming you purchase in a good area for a good price. Real estate can still be volatile with property values rising and falling, but it’s a generally stable investment to make. You can feel good about investing in real estate as opposed to material items that may or may not produce a profit over time.

Intangible Assets

As you might’ve guessed, intangible assets are the opposite of tangible ones. These are things that you can’t physically see or touch, but they have value and could potentially produce income. Some examples of intangible assets are:

  • Copyrights
  • Patents
  • Trademarks
  • Intellectual Property

Although these can also be great investments, it’s rare that private investors would focus on them. If you’re trying to build an investment portfolio that will produce a passive monthly income, real estate is safe and it will get you there much faster in most cases.

Trends Impacting Tangible Assets

In an uncertain market where pharmaceutical companies might rise and tech companies might crash, it’s smart to consider the third strategy, which is to invest in tangible assets. It’s highly likely that the real estate market will continue to see some churn. As an investor, you need to know where to buy and where to sell.

As the world continues to recover from the pandemic and people search for their new normal, it goes without saying that there will be some big changes. The real estate market has seen major changes in buying and selling patterns over the past twelve months. Here are some of the things impacting real estate and some ways you can make them work for you.

Mass Migration
The Covid-19 pandemic has spurred a wave of migration from cities in California, New York and other high-cost areas. People are instead opting for locations with a lower cost of living and more favorable tax laws. As a result, properties in some areas of the country are becoming easier to buy or sell.

Additionally, many families may have been forced to foreclose on their homes and may therefore be looking for rentals. This could be the perfect time to capitalize on your investment property income, as well. Regardless of your current investing portfolio, there are two basic strategies in this category that will be affected by the mass migration throughout the country.

Buy and Hold
This could stand to impact your investing decisions in a few different ways. One school of thought is to employ the buy and hold strategy. Continue purchasing investment properties as you normally would, use an aggressive pay down strategy, and rent them out to cover the mortgage.

This has always been a smart strategy for building wealth over time. If you have the money to invest and the time to accrue wealth over the following years, this is a great option. Housing will always be a need. You just need to find the investments that make the most sense for you.

Buy and Flip
On the other hand, if you’re handy with power tools, or have access to someone who is, you could also benefit from this strategy. Buying a house, doing some repairs or renovations and selling it off is a great way to make some quick cash that you can then use to put down on the next property. However, you have to buy low and sell high for this to work.

In states where there is a mass migration of people into the area, selling these homes shouldn’t be an issue. The more likely obstacle you will encounter is the ability to buy low. Since so many people are moving into Florida and other low-cost Southern states, it can be hard to find homes for good prices right now. It is definitely a seller’s market.

Low Interest Rates
While we’re on the subject of buying and selling, let’s talk about interest rates. They are at all-time lows right now and it appears that they will stay that way for a while. This means borrowing costs should remain low, allowing consumers and investors to purchase properties more easily.

When borrowing costs are low, many investors employ the concept of leverage, in which they expand their debt in order to increase their potential for higher returns. This strategy can be a smart one to employ if you have the financial status to do so. Here’s a simple example of how it works:

Let’s say you own a $250,000 home and you want to use a home equity line of credit (HELOC) to purchase an investment property. A HELOC will allow you to borrow up to 80% of the home’s value, minus the amount that you still owe on the mortgage. So on this home, you can borrow $200,000. If you owe $100,000 on the mortgage, that leaves $100,000 for you to purchase an investment property.

Taking that money to purchase an investment property when rates are low and things are good is a smart investing strategy. Yes, you are borrowing against your home and it can be risky, but it can also be really profitable. Only you can decide what your level of risk tolerance is.

Presidential Transition
It goes without saying that any transition in power at the top of our ranks is going to have an impact on the housing market. From tax rates to interest rates, everything has the chance of being altered in one way or another. Since each presidential cabinet has different views on what’s best for the country, this will impact investors in various ways.

So far, polls have shown that both buyers and sellers are becoming more and more uncertain about the real estate market. History shows that uncertainty in the market can make it harder to sell a home. If your strategy is buy and hold, this could work out perfectly for you.

Studies also show that millennials are becoming more and more confident in buying homes. Given that they are the largest generation to date and they are of family-rearing and home-buying age, investors could flip houses fairly easily and make quick cash with each transaction. The key, as previously mentioned, is to buy low and sell high. If they are snatching up homes left and right, there’s no reason to buy and sell unless you just want the passive income vs the quick cash.

Quarantine Boredom
We also need to address the elephant in the room, which is quarantine boredom. 2020 saw an historic amount of job loss, turmoil and basically solitary confinement for millions of Americans. During that time, it’s not surprising that the tech stocks rose to crazy-high levels. What else were Americans supposed to do with their time?

Now that we are mostly out of the weeds, experts are predicting a slow but full recovery of the economy. As the Covid 19 vaccine continues to roll out and be circulated to the masses, businesses will start to reopen and new ones will emerge. People who were quarantined for months on end will hopefully have the opportunity to get back to work and back out into the real world.

As a result, there could be a rise in home purchases from people who might’ve had plans to do so prior to the pandemic, but were unable to follow through for one reason or another.

Conclusion

Regardless of what type of investor you are, there is no sense in spending an entire year doing nothing. In fact, choosing to do nothing with your investments is a conscious decision to become stagnant for a period of time. I don’t know about you, but that’s definitely not my goal.

Instead, consider looking at the various investment properties available in your area. Consider whether the buy and hold strategy will work for you, or if you would prefer to flip properties. Both can be a brilliant strategy if you play your cards right.

How to Build Your Real Estate Portfolio From Scratch

Many of my friends and colleagues are interested in owning rental properties as a way to earn passive income. I think it’s awesome that people have this goal and that real estate can help them reach it. But I also want to help people understand exactly what it takes to get there.

Let’s say your goal is to eventually bring in $10,000-$20,000 per month, which would essentially allow you to retire from your 9-5 and start living life on your own terms. Let me be the first to say that I think this is a fantastic goal! But what’s your strategy?

In this article, I will walk through the steps of building your portfolio, starting with your very first property. I help you build a plan that will work for you without breaking the bank in the short term.
Let’s get started.

Step One: Assess Your Current Buying Power

This is going to look different for everyone, so stay with me. Depending on the amount of available cash you have, you might be looking to start with just one investment property, or a handful of them. For this example, let’s focus on just one.

If you have decent credit, minimal debt and a little bit of cash to put down, you may be in the perfect position to purchase your first investment property. I recommend discussing your options with a few different lenders.

Questions you should ask your lender include, but are not limited to:

  • How much can I be approved for?
  • What will my interest rate be?
  • What’s the difference in rates for investment homes vs second homes?
  • What are my options for the length of the loan and how quickly can I pay it down?
  • Are there any penalties for paying it off early?

Once you decide on a lender, be sure to obtain pre-approval so you can confidently put an offer in on a property when you find the right one. Once you collect all the information you need to make a good decision for your current financial situation, you can move on to the next step.

Step Two: Choose a Property in an Area That Sells

This may seem like a no-brainer, but it often is not. You need to start your property search by looking at the different areas of town. What areas are you interested in?

If you’re looking for a house in the suburbs that you can rent out to families, you will want to consider several factors that appeal to that audience. Most families are all about location, location, location. You want to find a neighborhood with easy access to schools, shopping, recreation and even places of worship.

If you’re considering a condo or high-rise downtown, the conversation shifts a bit. People looking to rent these types of residences tend to be single or married without children. Sometimes they are empty-nesters looking to downsize. In this scenario, you’ll want to consider parking, storage space and the amenities of the community.

The other thing to consider is whether or not the community you have chosen allows rentals. Whether it’s a neighborhood or a high-rise, chances are good that there are some restrictions on rentals. Be sure to do your research on your selected neighborhoods before putting in an offer.

Step Three: Purchase the Property

Once you’ve decided what type of property you’d like to purchase, BUY IT! Your realtor and lender will walk you through this process, but it basically entails putting in an offer, considering any counter-offers from the seller, going through the home inspection process, etc…

If you’re working with a realtor, this will all seem like a fairly simple process. If you ARE the realtor, you already know what to do.

Step Four: Marketing

Now that you own your investment property, it’s time to start marketing it and finding potential renters. Finding the right tenant has a lot to do with where you purchased your property and who your target audience is. If you’re still not sure who they are, do a little more research on your area.
You’re looking for information like this:

  • What are the market rates in your area for rentals of similar size?
  • Who are the main inhabitants in your area?
  • Who is moving in and out of the area?
  • What do people value the most about that specific neighborhood?

Once you learn a little bit more about the people living in the neighborhood, you can start to target your marketing to find the right tenants.

Social Media

It’s no secret that social media is one of the easiest ways to get your product or service in front of the masses. But again, do your research first. Based on what you learned about your target audience, join some online forums and groups that cater to those specific types of people.

You will be amazed at how much you can learn about your target audience by hanging out where they do. You’ll learn about their habits, hobbies, interests, dislikes and more. Once you learn more about them, you can craft your messages in ways that will resonate with them.

You also need to create social media accounts for your properties or your business as a whole. Remember that the internet is a visual medium, so you need really great photos of your properties to entice people to click. Once they click, you need more photos for them to view.

Give them more information than they need. If they feel like they have to search for it, they will exit your post and keep scrolling.

Word of Mouth

As antiquated as it may sound, people still take recommendations from their friends, family and even anonymous people online! Think about it… you read Amazon and Google reviews before purchasing, don’t you?
Ask existing tenants to write testimonials for you. Or do a short 30-second video of them saying their testimonial out loud!

Online Marketplaces

There are tons of places online where property owners can advertise their available properties. You can look at the various platforms, their fee schedules and requirements and figure out what will work best for you. Here are just a few options:

  • Zillow
  • Realtor.com
  • Hotpads
  • RentalHouses.com
  • Oodle
  • Padmapper

Depending on your marketing budget, some of these might be more realistic for you than others. But they are worth the time investment to at least learn what your options are.

Your Own Website

Whether you’ve been in business for several years, or you’re just getting started, a website can be one of the most lucrative things you can invest in. Consumers are savvy and information-hungry. They want information at their fingertips when it’s convenient for them.

Just as with social media marketing, you want to make sure your website has fantastic images and lots of information. Have you ever been looking for a house online and you won’t even click on the ones with terrible photos? Your customers are the same way!

Take the time to take great photos of the home. If you can invest in a professional photographer, go for it! If not, newer smart phones have fantastic cameras, so you can get some great shots on your own.

Last but not least, consider whether or not you need to hire a professional web designer. If you have the expendable cash, it can be a great investment. If not, I recommend either WordPress or Wix. Both platforms are designed to help non-web-designers create and launch their own websites.

Step Five: Screen Potential Tenants

This process can seem daunting when you’re just getting started. But I recommend you to be as diligent as possible to minimize the risk to your property and your business. The following steps are critical in the process of screening potential tenants:

Have potential tenants fill out an application. You can create one on your own, use a template or have a lawyer draw one up for you.

Run a credit check. This will give you information on the past 7-10 years of the tenant’s payment history to other creditors, including past landlords. Depending on what state you live in, you may or may not be able to charge the potential tenant for the cost of the credit check.

Run a background check. This will give you information about the tenant’s past. You can order these through companies such as StarPoint and ScreeningWorks. This will give you information about previous evictions, crimes committed and other public records.

Complete reference checks with previous landlords. If your application is thorough and includes past landlords / living spaces, you can reach out to these people for information about the tenant’s behavior and payment history.

Call the tenant’s employer. Verify the income amount that they listed on their application. You want to be confident that they can pay the rent on time each month.

Interview the tenant. This is one of the most important things you can do. It will be mutually beneficial for both parties to get to know one another and decide whether or not the relationship is going to work.

Step Six: Do It Again!

Once you’ve gone through all the steps listed above and you have some renters in your first property, you can start considering what your next property will be. You can return to step one and start again!

However, I highly recommend waiting for a little while until you’re comfortable. Get to know the process and how to manage your first investment property before going out on a limb with another one!

Over time, your income per month will hopefully grow and you will have more to invest. As I said in the beginning, you can absolutely grow your business to the point that you can walk away from your 9-5. It just takes time, patience and smart decision-making.

Should I Hire a Property Manager?

Only you can answer that question for yourself. Maybe you were an executive at a company and didn’t have the available hours in the day to dedicate to your rental properties.

You may or may not be in that situation. If you have the time and the know-how to market your properties, screen clients, handle maintenance issues, etc. then you will be fine! If not, I really do recommend a management company to handle those items for you.

If you screen them carefully, you will find one that fits your needs and your budget. I also base a lot of my decisions on how I feel about their integrity. You need someone who will be honest and who is licensed and insured,

Conclusion

Hopefully you now have a clear understanding and the outline of a plan for how to go from where you are right now to owning your first investment property. Remember that it takes time to build your portfolio. Not overextending yourself at the beginning will help you be more successful in the long-term.

Picture: Pixabay

Investing Through the Buy and Hold Strategy

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.

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