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 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.
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.
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.
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!
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Charles Carillo is the founder and managing partner of Harborside Partners. He has invested in over $25 million worth of real estate, in several states, and has extensive knowledge in renovating and repositioning multifamily and commercial real estate. Charles holds a BS from the Connecticut State University.
Owning investment properties can be an awesome way to increase your monthly cash flow and create passive income for your family. Getting the right renters into those properties is critical to your success. To do that, you need to have a solid marketing plan that will grab the attention of the renters that you’re looking for.
How do you find the right renters at the right time who are willing to pay the right price? We’re glad you asked.
Marketing your rental property is a combination of building your network, using established real estate platforms, leveraging social media, and asking current tenants for referrals. Here, we give you 10 specific strategies, categorized by type, for marketing your properties.
In the realm of social media, there are a variety of things you can do to increase awareness of your properties and your business. Not all social platforms are created equally, so be sure to use the right strategy on the right platform for maximum results.
Using Facebook to market your properties is a smart decision because it is one of the most highly utilized social platforms among adults in the United States. It’s simple to setup a business account and you can do a lot with the platform. Once you have your business account setup, you can do a variety of things to boost awareness, engagement, and ultimately your bottom line. Here are some of the things you can do with Facebook:
Instagram is a highly visual platform and will require excellent photos and videos to truly be effective. If you’re not handy with your smart phone, you should definitely consider hiring a professional to take photos of your rental properties. You should also consider small video vignettes that can connect with potential renters in a more intimate way.
To really have a holistic approach to your real estate business, you’ll want to build a solid foundation of followers on multiple platforms. YouTube is a really popular platform for videos that are longer than 30-40 seconds. Contrary to popular belief, you don’t have to be a professional video editor to use this platform. You just need a good content strategy.
You should also consider using the power of established real estate platforms like Realtor.com, Zillow and others. People are already accustomed to using these platforms when looking for a home, so it makes sense to list your properties here, as well. Here are some of the things you can do with these platforms:
This website is one of the most popular sites in the country for people looking to buy or rent a property. Listing your rental properties on this site will give you access to tons of potential tenants, and it has several tools available to help you.
If we’re being honest, most real estate platforms are fairly similar. They all offer the ability to post your listing with photos, information, etc. But Zillow has a full suite of rental management tools that you might find interesting. Here are some examples of what they offer:
All of the different online platforms we’ve talked about so far are extremely important for the success of your rental business. However, as your business grows, you will likely need your own website, or at least a landing page for your tenants and potential tenants to refer to. Contrary to popular belief, it doesn’t have to be the most tech-savvy website on the planet. It needs to be simple, informative and easy to navigate.
There are a variety of choices on the market when it comes to building a website. If you’re not a professional web developer, we recommend choosing a web builder that offers a variety of templates and themes that are easy to use. Web builders such as Wix and WordPress tend to be the easiest for a new business to build a nice website with minimal technical skills.
Look for a platform that is easy to maintain and gives you the option for various plugins. You want your customer journey to be seamless, so make sure your chosen platform can link with your social media, your email provider and any electronic calendars or scheduling features that you plan to use.
When building your website, you need to consider what the potential consumer is looking for. Whether they land on your site as a result of a Google search, a social media post, or a real estate platform listing, they are there for a reason. Be sure to offer the following information to make the process as easy as possible for them:
We’ve discussed some pretty specific marketing strategies in this article, but there are others that are applicable in every single case. Here are some other things to consider when marketing your rental property, regardless of which medium you’re using.
This may seem like a silly thing to point out, but it’s important that your listings are easy to read and interesting to the potential consumer. You’d be surprised at how much it can impact the success of your listing. You need to have a headline that gives the customer all the information they need and a subsequent description that is interesting and engaging.
When we talk about headlines, we’re talking about the most important part of the copy. You need to give them as much pertinent information as possible in order to get them to click on the listing and keep reading. We find that a simple formula will help stop your reader and get them to click. Here it is:
This may seem like a lot of information for a headline, but these are some of the most important pieces of information that your potential renter is looking for. Here’s what it might look like:
This gives them all of the major pieces of information that they will use to make their decision, as well as one selling point that will entice them to click on the listing. If you use this formula, you will likely find a higher click through rate than with headlines that don’t offer this much info.
After the headline, be sure to create copy that is not too wordy, but gives the potential tenant all the information they want to know about the listing. Make it interesting and informative.
Before implementing any of the strategies we’ve discussed, you need to first do your research on the market. Depending on where your property is located, you may be able to charge more or less than if the property were in a different area of town. Doing a quick analysis of the area will help you determine the following information before creating your listing:
This is a good business practice regardless of what you do for a living. In rental properties specifically, it’s a great idea to ask some of your best tenants for referrals. This works really well if you have multiple properties in the same community or area of town. If you have some great tenants who regularly pay on time, take good care of their rental and enjoy having you as a landlord, they are a great source of referrals for you!
Implementing one, five or all of these strategies will help you get your rental properties in front of more potential tenants than simply using the local newspaper. The world is becoming increasingly digital and consumers are looking for their next home on the internet. Most of these strategies can be implemented with minimal education about the platforms being used and the algorithms that support them.
The key to being successful in marketing your properties is figuring out who your target audience is and then marketing to them in a way that is convenient to them. Make sure that your listings are easy to find and that you are easy to contact. Combine all of these efforts together and watch your listings fill, along with your bank account!
Charles Carillo is the founder and managing partner of Harborside Partners. He has invested in over $25 million worth of real estate, in several states, and has extensive knowledge in renovating and repositioning multifamily and commercial real estate. Charles holds a BS from the Connecticut State University.
The word “leverage” tends to evoke some pretty negative emotions in a lot of people. In the world of real estate, however, it can be a huge benefit to you as an investor. With some strategic planning and good decision-making, you can leverage the equity in your current home to purchase your first investment property.
Already have an investment property? No problem! You can use leverage to pull equity out of one of your existing properties in order to purchase more and increase your portfolio.
The big mistake that many home owners make is to pull equity out of their home to purchase cars, boats, vacations and more. All of that sounds great, but what if you used that money to purchase more properties and create passive income for you and your family? Doing so can get you on the road to financial freedom and all the boats and vacations you can handle.
Let’s start with an example of what leverage is and how it works. Leverage is the concept of taking the equity in your current home and using it as cash to purchase something else that you need or want. In this scenario, we will use that cash to purchase another property that can produce income for you.
Here’s an example:
So how much will the bank allow me to take in cash for my next property purchase?
• $200,000 x .8 = $160,000
When using leverage to purchase an investment property, many banks will require a certain amount of income on that property in order to give you a loan for it. In other words, they want to know that you’ll be able to charge enough money to not only cover the mortgage, but also to have a certain amount of net income on top of the mortgage each month.
Many lenders will expect you to collect 30% more than the mortgage each month in order to feel comfortable giving you the money to purchase the home. To do so, you’ll need to convince them that the property you’re interested in is worth that amount to a renter. An excellent way to do this is to setup a lease option for an interested renter.
A lease option is essentially a rent-to-own contract. More specifically, it’s a lease with an option to buy after a period of time. A contract like this will often attract a higher-quality renter who is more serious and definitely in it for the long haul.
Setting up a rent-to-own contract with a renter will allow you to charge a premium because the tenant knows that a portion of that income is going to the equity in the home which they intend to purchase in the next 3-5 years (or whatever your contract terms are). They will offer a non-refundable down payment and then pay a higher monthly rate than a typical renter, which will then satisfy the bank’s requirement of a net income of 30% over the mortgage payment.
When you purchase a buy-and-hold property, cash flow is extremely important if you want to keep leveraging properties to buy more properties. It’s not unusual for a straight rental property to produce less income than what you’ll need to convince the bank to lend you the money for it. That’s why a lease option is such an important thing to understand.
Ultimately, your portfolio will probably be filled with properties that have a variety of different rental contracts. Some will be straight rentals and some will be lease options. As tenants reach their goals and are able to purchase those properties from you, your income from those sales can be used to purchase new investments.
The ultimate goal is to keep the cash flow coming and to consistently increase it. The more you leverage properties to buy more, the higher the bank will expect your cash flow to be. Making smart investment choices and buying the right properties will play a huge role in your success at creating an ideal cash flow for your goals.
In keeping with the same example, you now have $40,000 to use to purchase your next investment property. In most cases, you’ll need to put down 20% of the purchase price of the home in cash. Many lenders will not allow you to purchase an investment property with less than the 20% because their risk increases significantly.
The first thing you need to think about is the price range of your property. You’re looking for something that’s priced favorably for the amount of money you have available to put down. A $200,000 home will require $40,000 down, but that doesn’t include closing costs and other fees, so you’ll need to find something at a lower price point.
Aside from the 20% down payment, you will also have to pay closing costs and other fees, which often range between 2-5% of the purchase price of the home. On a $150,000 home, this could be anywhere from $3,000-$7,500. If you find a property with a purchase price of $150,000, you’ll pay $30,000 down, plus about $7,500 in closing costs. This is a perfect scenario for your $40,000 expenditure.
If you purchase a house that fits the price range, down payment requirements, etc., the next thing you need to consider is whether or not it needs any repairs. If so, do you have the available funds to make those repairs? How do you plan to pay for them?
Some investors use the equity from other properties (part of your $40,000) to pay for such things. However, if you opt to do that, you’ll need to choose a property that is priced even lower. Other options include available cash from your savings or checking account, credit cards or other funds that you have access to.
If you don’t have access to any funds for repairs, you should focus on finding a property in your price range that you won’t have to renovate prior to renting out.
While we’re on the subject, you need to consider whether you plan to keep the property or fix and flip it. In this scenario, let’s assume you are planning to keep the property and rent it out for a monthly profit. If that’s the case, you need to look at a variety of aspects about the property that will impact the amount of rent that you can charge.
Some items to consider that will impact how much you can charge for rent include:
The neighborhood in which you purchase a rental property will have a large impact on how much you can charge for rent. The goal is to be able to charge at least 1% of the total purchase price of the home per month. On a $150,000 home, that rate would be $1500 per month. Does the neighborhood support this amount of rent?
Many families are looking for a community that is all-inclusive. They want quick access to schools, shopping, restaurants, fitness facilities and more. Be sure to look for investment properties in areas that are well-established, or up and coming. You have to think about the location from the perspective of the potential tenant.
Not only is it important to be close to local schools, but it’s also important that the schools have a great reputation. Again, if you’re thinking from the perspective of the potential tenant, it’s not likely that they are interested in sending their kids to a substandard school. Do yourself a favor and find a property in a good school district so you’ll be sure to have happy tenants.
This one goes along with the location or neighborhood in which the home exists. If you’re trying to rent out a single family home, it’s likely that a family is the tenant who will be interested. Families with children rarely want to live in an area with a high crime rate. Most real estate apps provide this information for you, so add this to your list of things to look for.
If you want your tenants to pay the rent, you probably want them to have jobs. Finding an amazing house in a town or city with a terrible job market is not a great buy. Instead, look for the most robust areas of town and make sure that the job market is booming. This will help both you and your tenants to have a great experience.
Take a look at other rental properties in the same neighborhood or adjacent neighborhoods. You don’t want to price yourself out of the market. All things being equal, a smart tenant will choose the lower-priced property for obvious reasons. Be sure that your property is not the most expensive or the cheapest in the neighborhood. Aim for the middle ground.
If there are a lot of vacancies in the neighborhood, it could be a sign that the market is struggling in that area of town. Vacant properties will result in the supply being greater than the demand, making it a buyer’s (or renter’s) market. This will force landlords to lower their prices in order to rent out their properties.
On a higher level, look at the overall market trends in your city and the individual parts of time. All cities have good and bad neighborhoods and all neighborhoods have good and bad properties. If the market is volatile, do the extra leg work to make sure that whatever property you want to purchase will be profitable for you. There’s never a guarantee, but it’s best to do as much research as possible and go into it with a plan.
Using leverage to purchase another property is an easy way to increase your wealth over time. If you already own a home, you can leverage its equity to purchase your first investment property. Once you build equity in that property, you can use leverage to purchase another one. If you continue this process over a period of time, you’ll be well on your way to building a passive income stream and ultimately the financial freedom that you’re looking for.
Charles Carillo is the founder and managing partner of Harborside Partners. He has invested in over $25 million worth of real estate, in several states, and has extensive knowledge in renovating and repositioning multifamily and commercial real estate. Charles holds a BS from the Connecticut State University.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
Building a portfolio of rental properties is an excellent way to increase wealth over time. However, there are a ton of things to think about before jumping into a deal.
How do you know if it’s a good investment? What things should you be looking at in order to make your decision?
This article will outline a variety of simple steps to take when analyzing a potential investment property. It includes a series of formulas, calculations and things to consider so you know whether or not it’s a good deal for you. No two deals are the same and no two investors are the same, so it will vary depending on your specific situation.
The potential income you can earn on a property is the first step in your analysis and there are several ways to do this. For this discussion, we will assume that the only income for the property will be monthly rent. Some properties also have storage, parking, laundry machines and other income, but we will assume only rent for now.
The Gross Rent Multiplier is the sales price for that property divided by the total annual rent that you anticipate being able to collect. In this scenario, use the asking price on the property as your sales price. You might be able to get a better deal by negotiating well, but using the asking price will keep you on the conservative side as you do your calculations.
To determine how much you can charge for rent, take a look at other properties in the same neighborhood or similar neighborhoods. Do some comparative analyses of what other renters are paying for similar homes in similar neighborhoods. This will help you determine what you can charge for the property.
Now, you can simply do the math: sales price divided by total annual rent. This will give you a single number. It’s not a percentage or a number on a scale, but when you do the same analysis on multiple properties, you can compare them all to see how the GRM differs. The lower the GRM, the better.
In a nutshell, this rule says the monthly gross income should be equal to or greater than one percent of the purchase price. Your monthly gross income is the total amount of income you are collecting on the property. Since we’re only talking about rental income in this discussion, this number is simply the amount you intend to charge for rent.
This is another great way to compare properties. Some will be within the one percent rule and others will not. It doesn’t mean you should walk away if they aren’t, because there are tons of other factors that affect the value of a deal, but it’s a great thing to look at while you’re doing your analysis.
This calculation is the gross income minus the expenses. You can calculate this on a monthly or annual basis, depending on which specific number you’re interested in. If you want to know your cash flow, or how much you’ll be putting in the bank each month, calculate the monthly net income.
Your total income is the amount you will charge for rent and your total expenses will include your; taxes, insurance, HOA fees, utilities, and more. It is anything that you plan on paying for. Some landlords will wrap the cost of utilities, lawn care and other services into the rent payment and others will leave that to the tenant to pay. There’s no right answer, but be sure that you identify what you’ll be paying vs what the tenant will be responsible for.
To do the calculation, simply subtract your total expenses from your total income. This will give you an approximation of how much income you can plan to receive from this property on a monthly basis. If you want the annual figure, multiply the monthly rent by 12 and the total expenses by 12, then re-do the calculation.
*Pro Tip: Smart investors set aside a little bit of money each month for repairs, capital expenditures and vacancy. Be sure to include these items in your list of monthly expenses on the property to get a clear picture of net income.
This is a measure of the percent return that you can expect to have on your investment. It is the net income divided by the total investment. For this calculation, you need to consider the annual net income, rather than monthly as we calculated in the previous section.
To determine your total investment on the property, you will add the down payment, closing costs and the amount of any repairs you plan to do prior to allowing tenants to move in. It is basically all the cash that you have to invest while purchasing and upgrading the property versus the amount of money you are putting in your pocket every month.
Once you have all of the income and investment costs calculated, simply divide the income by the investment amount. This will give you a number with several decimal points. Multiply that number by 100 to find your return percentage. In this calculation, the higher the percentage, the better.
Obviously, the numbers are the biggest indicator of whether or not a deal is actually a good deal. However, there are other factors to consider after determining that the numbers are working in your favor.
One of the most important factors to consider after crunching all the numbers is the future of the property. You want to do some research on the current market value as well as what you think the house will do in the future.
The trends of a particular neighborhood or area of town will help you to better understand what this property is likely to do. If you look at some comps and they all seem to be losing value, you may want to reconsider the purchase.
If you’re planning on keeping the property for 10 or more years, it might be okay to purchase it even if the trends for that area aren’t going up right now. Regardless of trends, if you keep it for that long, you are likely to build a lot of equity in the home.
But if you’re planning on renting it out for a few years and then selling, you may want to look elsewhere. If the property values in that area come crashing down, you may find yourself upside down with the mortgage payments.
Commercial development projects can have a huge impact on residential neighborhoods. Sometimes they can increase home values and sometimes they can negatively impact them. You should do some research on this, as well.
For example, a historically low value neighborhood that is undergoing some major commercial development is a really great opportunity for investors. If you get into the space at the right time, you can find some fantastic deals. “Buy low and sell high” as they say…
Purchase a home as low as you possibly can, keep it until the market recovers and grows, and then sell it for a much higher price. In the meantime, you can do a few upgrades and rent it out to pay for the mortgage. If the commercial development around the neighborhood is adding restaurants, retail locations and other amenities, chances are that the home’s value will increase as those projects are completed.
Equity is a huge piece of the puzzle that many investors forget to consider in their calculations. It is absolutely possible for several of the formulas above to give you less-than-desirable results and the deal is still a good one.
Why? Because at the end of the day, equity is king. (Well, cash is king, but maybe equity is the prince).
Simply stated, equity is the difference between the home’s market value and the amount you owe on the mortgage. If you have $50,000 in equity, that’s how much you should walk away with if you sold the house right now at market value, assuming all closing costs and other fees were covered by the buyer.
There are a variety of ways to ensure that you have plenty of equity in your rental property when it comes time to sell it.
The Down Payment: The minute you put a down payment on the property, assuming it’s a fair purchase price, you have at least that amount of equity in the home. If you have the cash to use, it can be a really good idea to put more down so you get better interest rates and lower mortgage payments.
Buy at a Discount: If you buy the home for a discounted price, or less than market value, you automatically have even more equity. Try to find a short sale, foreclosure, estate sale, divorce or someone who needs to get out quickly. People in these situations are generally highly motivated sellers and you can find a reasonable deal that is good for both parties.
Add Value: If you add value by doing various upgrades and renovations, you can almost force the property to appreciate in value. This can be a hit-or-miss strategy, so be sure to do your comp analysis to see what other properties in the area have and what they’re selling for before you spend a ton of money.
Buy and Hold: This is the most basic of all equity growth strategies. You basically buy the property and hold on to it for a long time. Pay the mortgage down over that time and you will naturally build equity.
Passive Price Appreciation: This strategy is very similar to the scenario we discussed regarding commercial development. If you choose properties in the right locations, it can be a great strategy for long-term ownership. If the neighborhood is up-and-coming, it can appreciate quickly.
Although you calculated these costs into many of the calculations earlier, it is still necessary to do a deeper dive. If you’re buying a house that needs to be renovated, you need to be strategic in doing so. Here are a few tips and tricks regarding renovations and upgrades.
Don’t go custom. You might love bright colors, funky patterns and custom designs, but this is an investment property – not your forever home. Resist the temptation to put in a bunch of custom fixtures and high-end features. The goal is to make the place safe, livable and appealing to the majority of people who will see it. Stick to the basics and save money in the process.
Use individual businesses for repairs. If you’re not able or willing to do the necessary repairs yourself, you should use individual service providers for the different items that need to be fixed. For example, if you need some plumbing and electrical upgrades, along with new carpet, it is tempting to get one general contractor to bid the whole job for you.
This is a BIG mistake. That general contractor will likely cost hundreds or thousands more than if you reached out to a plumber, an electrician and a flooring company. Your goal is to spend the least amount of money possible while making the property safe and livable. It doesn’t have to be perfect.
Only complete the necessary repairs. If you’re not planning to flip the house, there is no reason to go in and immediately rip everything out and replace it. As previously stated, you’re just trying to make it safe and livable. Do a full assessment of the home, or use the home inspection document from the purchase process. Choose the items that are the highest priority and complete those first. Then rent it out and start making that money back.
Over time, you can make other repairs and upgrades. But remember, your goal is to make money, not spend it, so only do what is necessary.
Buying a rental property is a huge investment. It is well worth your time to do the research and calculations on the front end to avoid painful consequences of a bad deal on the back end. Take your time to evaluate each property and find the deal that is best for you.
If you currently own a rental property, and your revenue is covering your expenses with a little extra to put in the bank, that’s awesome! But what if you could bank even more each month by simply thinking outside the box? What if you could increase your net revenue to double what it is right now?
Would you be interested in that?
There are so many ways to add value for your tenants that they would be willing to pay extra for. You can also get creative and utilize your property to create more income in other ways. All it takes is a little creativity and looking at things in a different way.
If you own a property in an area where parking is a high commodity, this is a no-brainer. Whether you’re in the city where people have to search for parking, or you’re close to a sports or music venue, you can cash in on it. And don’t worry, you can take care of your tenants, too!
Let’s say you own a single family home near a football stadium. If there is enough grass, a large driveway or otherwise, you can use that space and sell parking spots for a premium to the fans who are attending the event. All it takes is a sign with your price on it and someone to collect the cash and direct the cars to the right spots.
You can make this an attractive deal for your tenant, as well. Obviously, you need to ensure that they still have space to park during the events. After that, you can offer a portion of the profits to them, waive one month of rent, or any other offer that they might accept.
The key is to make it a win-win for both of you. If you’re both making money off the deal and it doesn’t destroy the property, go for it!
It should come as no surprise that people LOVE their stuff, and that some take it to an extreme level to the point that they can’t fit everything in their home. This can be a major advantage for you if you choose use the opportunity as a money-making venture. The major concern is whether or not you have the space to rent out.
Renting additional space works really well when you own a multi-family property. The living spaces are likely smaller than in a single family home, which means people will be looking for extra space to store their things. You can sell storage space to them in garages, attics, basements or extra units in the building. If you’re super savvy, you can make it a goal to own a multi-family property and a storage building that are next door, or in close proximity to one another.
If you own a single family home, it can be a little more complicated, unless you have another spot nearby. This works really well when you’re renting a carriage house, an apartment over your garage or a mother-in-law suite. These situations almost always have a larger house connected or on the same property, which gives you the opportunity to rent additional space.
This might seem like an odd one, but you really can make it work to your advantage. Installing solar panels on the roof of your rental property can be a major cash cow for you. You need to first do the research on whether or not it’s a good investment for you by considering the amount of time it will take to recoup the cost and how old the roof is at the time of installation.
Once you decide that it’s a good investment, you can get it done and start making some extra money. There are multiple ways to accomplish the same thing, too.
One option is to install the solar panels and then increase the price of rent to include electricity. You then ultimately become the utility, and your tenants will pay you instead of the electric company. Whether it’s a single or multi-family establishment, you are likely to create enough energy to cover everything that is being used and have some left over.
Since power grids are becoming smarter and smarter, many of them now offer a two-way transfer. This means that if you have excess power after running all the necessary electricity at your property for the month, you can sell the rest back to the grid. This is not an option that you would do “instead of” selling to tenants. It would be “in addition to”.
There are more than 40 states in the U.S. that allow this type of transfer. It’s called “net metering”. Not only will you receive a check from the power company for the excess energy, you can also get some great tax benefits, as well. Start by checking with the power company in your area to find out if this is an option for you.
Many people are willing to pay for convenient, time-saving services in and around their homes. Depending on the expendable income of the tenants in your property, this could be a really creative and smart way to generate more income. Think about all the different services that you, your family and friends use on a regular basis. Can you recreate them?
Each of the following is an example of a service that you could offer to your tenants for an additional fee. You can choose to offer them a la cart, or as a package deal. You can also include them in the rent, or have your tenants pay separately. Either way, it’s worth considering!
Offering lawn services like grass cutting, tree trimming, gardening, wedding, fertilizing and more is a great place to start. There are tons of people who don’t have the time or the desire to do these sorts of jobs around their homes. If you have the ability to do it yourself or to sub-contract it out, it’s definitely worth considering.
This is another really great option to not only serve your tenants, but to generate additional revenue for your business. Consider the cost of doing it yourself versus hiring a company to do it and conduct a basic ROI evaluation. If the numbers look good, give it a try and see how it goes.
If you really want to go above and beyond, you can partner with a local dry cleaner to offer a pick-up and drop-off service for your tenants. In this scenario, your tenants could leave their dry-cleaning on the front door for the cleaner (or you) to come pick it up. Once it’s done, it is delivered back to their door. This is a convenient way to do additional business with your tenants and they will appreciate it, as well.
Think about all the apps and grocery stores that offer this service! Can you find a local business who is currently doing it, or setup one for yourself and hire someone to do it? It might take a little more setup time to get this to work, but it’s definitely an option worth exploring. Home grocery delivery is a rapidly growing service that you could cash in on.
Although there are lots of dog-walking apps and services on the market, your tenants are likely to trust whoever you recommend for these types of things. You can offer dog-walking on a daily basis, as well as pet-sitting when your tenants go on vacation. This allows the pet to stay comfortable at home, rather than being boarded at a kennel and gives the tenant peace-of-mind that their furry friend is well taken care of.
If you have a really great relationship with your tenants, they might even trust your recommendation on who should watch their kids. Whether it’s your own teenagers who are looking to make some cash, or you hire a contractor to do it, this is another excellent service. Parents are always looking for a great babysitter to take care of the kids while they take a night off. And who better to help them with it than you?
Obviously, all of the options listed above will take some due diligence, planning and potential bargaining with local service providers. If that’s not something you’re interested in doing, there are other ways to ensure you are making top dollar for each property you own.
This is one of the best ways to increase your net income each month. We all know that the market fluctuates on a regular basis. We go through periods where interest rates are through the roof and others where they are amazingly low.
If you really stay on top of the market and what it’s doing, you’ll be in a great place to refinance at just the right time. If you get a great deal and don’t spend a ton on closing costs and other fees, you can really improve your revenue situation substantially.
It’s really helpful to shop it on an annual basis, too. Just like car insurance and other such necessities, many people become complacent and just pay their premiums year after year without ever shopping around. Be smart about it and always be on the lookout for what might be the right option.
A great way to accomplish this is to start by finding a lender whom you trust. If you have a lender or an advisor who can help you identify the right time to refinance, that’s worth its weight in gold. Ask them to reach out to you when the market is primed for great refinancing deals. Don’t worry – you’re not an inconvenience. I promise you, they have a list of prospects to call when the market is at just the right spot.
This is another area where many investors are under informed and don’t get the full tax benefit of their properties. We don’t recommend trying to figure this out on your own unless you’re a tax professional. But we DO recommend looking in to the matter by contacting a tax professional and discussing all of the options.
More often than not, investors will learn about additional tax benefits they didn’t know they had. These can be the result of renovations that you made to the property, energy-efficiencies that you added but didn’t realize you could get a break for, and so on. Your best bet is to keep really good track of all the improvements and investments you make to the property. Then share those with your tax advisor every year when you file your taxes. You’ll be amazed what is possible.
The key to all of this is just learning to think outside the box. Don’t get complacent as an investor and think that the monthly rent from your tenants is your only opportunity. The sky is the limit when it comes to offering additional services and amenities that your tenants might be willing to pay for.
Always do the research on the potential ROI, the costs associated with the service or services you want to offer and what type of insurance may or may not be necessary. If you think insurance will be necessary for the service you want to offer, bid that out, as well. Go into the decision with as much information as possible for optimal results.
Hopefully, this article has sparked some ideas for you. As an investor, you are the CEO of your real estate business and you get to call the shots. The more creative and forward-thinking you can be, the better. Not only will you be able to make more money from your rental properties, but your tenants will have the pleasure of convenient services that are offered from the same person they trust – YOU!
There are tons of TV shows, YouTube channels and articles that make it seem like the fix-and-flip model of real estate investing is really simple and straightforward. However, it’s not as easy as it looks and there is more than meets the eye. There are tons of mistakes that new investors make that could easily be avoided with a little bit of education and coaching on the front end.
If you’re thinking about getting into fix and flip real estate investing, we encourage you to do some research and learn from people who have been doing it for a while. There’s no sense in reinventing the wheel when there are tons of resources available to you to help and keep you on the right track from the very beginning. In this article, we are going to break down some of the key mistakes that new investors make and how to avoid them.
This type of investing involves an investing purchasing a property not to keep or use, but to turn around and sell for a profit as quickly as possible. Most fix and flip scenarios involve some level of cosmetic enhancements, renovations or improvements that are done to the home prior to putting it back on the market to sell. It’s a really great way to turn quick profits if you do it well.
According to ATTOM Data solutions, 6.2% of all home sales in the United States in 2019 were house flips completed by fix and flip investors. That’s approximately 250,000 homes and an average of $62,000 gross profit on each. The key here is “gross” profit. Notice it didn’t say “net”.
What’s important to understand about flipping houses is that once you close on the property, the quicker you can turn it around, the better. For this reason, flippers are often attracted to foreclosures, short sales and other such situations that allow for a quick turnaround. But you also have to be really careful to balance the attractiveness of a quick turnaround with the amount of money and work it could take to get it ready to put back on the market.
Let’s dive into some of the mistakes that new investors make and how to avoid them. The more you know on the front end, the better off you’ll be!
This is a lesson that is often learned the hard way amongst new investors. Just because you can get a house for a really cheap price doesn’t mean it’s worth it. There could be very good reasons why it’s priced so low and taking it on is not always a wise decision.
Doing your homework on the neighborhood, the housing market and current conditions can save you thousands in the long run. It takes a little bit more effort in the beginning, but can be a total game changer. There are lots of resources, websites, mobile apps, etc. to help you make sound decisions during the buying process, so be sure to look into those, as well.
There is a rule called the “70% Rule” that we highly recommend you consider when researching your properties. It simply states that you shouldn’t purchase the home for more than 70% of what it will be worth AFTER the renovations or the AVR (after repair value). In order to adhere to this rule, you have to know what the house will actually be worth and approximately how much it will cost you to do the renovations that need to be done.
Ideally, you want to be able to purchase the homes in cash to avoid paying any financing fees, interest, etc. However, most investors who are just getting started don’t have access to that kind of cash right out of the gate. Making smart decisions in your financing will be a major game changer for you in the end.
There are tons of vendors out there offering “no money down” and “low money down” options, but they are often touted by fly-by-night companies, rather than legitimate lenders. Don’t get caught in that trap because you are much more likely to lose money in the end, rather than making any. Additionally, if you are financing not only the property but also the acquisition of the property, you will be paying interest on that money, too. Remember that every dollar counts.
Research all of your lending options and ask lots of questions in the process. You want to find a lender you can trust who can provide a mortgage product that works for you. Look for low interest rates, low closing costs and minimal fees.
Then you need to consider how long it’s going to take you to turn the property around and get it back on the market and sold. Since you’ll be paying the mortgage while you’re renovating it, you need to consider those costs in your calculations. Again, every dollar counts.
If you finance your investment property, you’ll be paying a mortgage payment and interest for every month that you own the property. This means that time is money – literally. Making good use of the time and being efficient with renovation plans is critical.
We recommend a few different techniques in this scenario.
Many new investors are still working a full-time job because they have not yet built their investment portfolio to the point that they can quit their 9-to-5. If this is you, try to be realistic about how much time you can dedicate to the work that needs to be done. Do you have a spouse at home? Kids? School? All of these things can contribute to distractions that will keep you from being able to complete the work in a timely manner. It’s not a bad thing, but rather just something to think about.
If you’re in a really great place financially, this might be a good option for you, but for most fix and flip investors, particularly new ones, the real profits come from doing the work yourself. We call this sweat equity. If you’re able to purchase the home, do the majority of the work yourself and in a timely manner, your profits will increase exponentially. The cost of contracting the work to someone else might be so high that it eats up any profit you would have made.
There are many fix and flip investors who are contractors, builders, carpenters and other craftsmen for full-time work and do the investing as a part-time or seasonal gig on the side. These investors generally have the skills and knowledge to be able to complete the work quickly and efficiently, which allows them to turn better profits on their investments.
If you’re not handy with a tool box, you might want to consider whether or not the investment in the property and the contractors will be more than the profits earned after the resale. If the profits will be marginal at best, it might not be a great option for you. Instead, you could consider partnering with someone who is able to do the work, or opt for a different type of real estate investing.
If you ARE someone who is handy with a hammer and enjoys doing the construction yourself, it can be really easy to over-do it. When you’re passionate about home improvement and renovations, you can get carried away with all of the possibilities of the property. Try to restrict renovations to only the necessities.
This goes back to doing your research and knowing your market. Although it would be awesome to renovate the kitchen, all the bathrooms, knock down some walls, etc., is it really a smart decision? In some cases, the answer might be yes. But more often than not, the answer is likely no. If you purchase a house for $80,000 in a neighborhood where houses sell for about $120-130K, it doesn’t make sense to dump $50,000 into it. You’re not going to sell it at a price that is high enough to overcome your renovation costs.
Instead, think about what is absolutely necessary to make the home as attractive as possible to the current buyers who are purchasing homes in that area. Make those improvements as quickly and efficiently as possible and get the house back on the market. Also, don’t underestimate the power of a really good deep cleaning job, fresh paint and great landscaping. Curb appeal is more important than you think, so don’t forget about it.
There are many resources available in the market to help you figure out what your return on investment (ROI) is going to be on any given property, based on sales price, finance fees, renovation costs and resale. A good rule of thumb is to shoot for an ROI of 20-30%. This gives you some wiggle room in case something goes wrong. If there is a major issue during the renovation, you have more financial cushion before you end up losing money. The best rule is: don’t lose money!
Buying an investment property and doing the work to get it ready for resale can be a really exciting time. But many novice investors are too eager to get started and just jump at the first house they see, without doing their research or considering any of the other things we’ve talked about thus far. Although your knee-jerk reaction might be to dive in head-first, try to rationalize your decisions and be patient.
Do your research on the different areas of town in which you’re interested in purchasing an investment property. Then be patient and wait for the right deal. I’m not saying sit at home and wait for it to fall in your lap, but I AM saying that you need to weigh the pros and cons of each potential investment that you look at. If something seems off, or it’s not quite the right deal, let it go and wait for the right one.
This goes for contractors, as well. Hopefully, you are able to do the majority of the work yourself. If you find yourself needing to sub-contract some of the work, again, patience is a virtue. A good rule of thumb is to get three quotes from three different vendors before making a decision. Many new investors jump at the first bid and hire that contractor, not knowing whether or not it’s a good deal and whether or not that contractor is any good.
Fix and flip real estate investing is a great way to turn a quick profit for a savvy investor. If you have the skills to do the renovations yourself and the time to get them done quickly, this might be a perfect investing option for you. Just make sure you don’t make the mistakes we’ve discussed in this article.
The reason that most people invest in real estate is to make money. When you’re just getting started in the industry, you will make a lot more money if you pay attention to the deals, be patient and do your homework. If can be an incredibly lucrative side hustle or primary job if you do it well and avoid the major pitfalls that most new investors run into.
If you’re a real estate investor at any level, you know the value of time and money. You likely got into this space for the sole purpose of creating a passive income for yourself and your family. But how much time and effort are you spending on your investments and is there a way to become more efficient?
The answer is YES! There is absolutely a way to become more efficient and make more money at the same time. This is where multi-family housing comes in to the picture. It is definitely worth considering and we will discuss how and why a little later in this article.
Multi-Family housing is just a fancy word for apartments and condominiums. It is basically a structure or a community full of buildings that have “units” where families live. Multiple families living in the same building… hence the term “multi-family”.
There are a variety of reasons why this is a more efficient investment. As I said in the beginning, if you know the value of time and money, you’ll be interested to know how to maximize both.
Multi-family real estate has had the highest average annual returns for more than 25 years. It has outperformed industrial, retail, hotel and other investments. In fact, between 1992-2017, it produced 9.75% returns for its investors.
Smart investors consistently look for options that will produce high returns and put their money to the best use possible. Some investors are more risk-averse than others, but multi-family is usually a safe investment for all the reasons we will discuss in this article. It’s a smart decision and housing will always be a need, regardless of what is happening in the economy or the world.
Studies show that both millennials and baby boomers are increasingly becoming renters rather than homeowners. For millennials in particular, homeownership is often out of reach due to the steady increase in home prices. For baby boomers, it is likely the desire to spend time traveling or doing leisure activities, rather than house and yard work.
Regardless of the reasons for renting, both of these generations represent a large portion of the marketplace. Millennials are the largest generation in U.S. history and if the majority of them are renters, the multi-family real estate business will continue to grow.
Due to the fact that multi-family housing enjoys shorter-term leasing agreements, owners and investors can adjust pricing more quickly as the market changes. For example, rent on an apartment will typically be 6-months, 12-months or even 18-24 months. Conversely, on office space and other commercial structures, the lease agreement could be 5, 10, 20 years or longer.
Because of the shorter-term leases, landlords can increase the rent more often and more quickly to adjust when the market changes and they need more cash flow. Other commercial investors do not enjoy this same level of agility.
Multi-family structures are an extremely efficient form of investing because you can attract renters all in one place, rather than having 20 independent houses all over town. Chances are very good that you only have one mortgage for the whole property, along with one fee for landscaping, grounds keeping, insurance and potentially a property manager. It is much more time-efficient to operate in this capacity because you only have one location to deal with.
When buying, selling and renting your various properties, you would need to work with a ton more people on single-family homes than you would with a multi-family property. With individual homes, you would likely need to work with 20 different sellers and 20 different inspectors at 20 different addresses! With a multi-family property, it’s one seller, one inspector and one address for the same 20 renters.
The buying and selling process is more streamlined in this scenario, which saves a ton of time for the investor. Once the purchasing process is complete, it’s all about getting the units rented out and the cash flow coming in.
You can also consider the increased efficiency from a marketing standpoint. If you own 20 individual single-family homes and you have to market them individually, that can be really time consuming, not to mention expensive. You need a different landing page for each one, different photos, different descriptions, etc. If they are in different neighborhoods, you will also need different marketing strategies based on the target audience.
With a multi-family structure that has 20 units inside, you can be much more efficient. Yes, you still need 20 renters and you still need to market the units, but it takes a lot less work. You can have one landing page, one description, one gallery full of photos and so on. Renters who are looking for homes in your area will be able to see all that you have to offer in one spot, which is convenient for them, as well.
If you own and operate the structure, you can also brand it however you like. Whether you’re interested in forming an LLC or your own brand of apartment or condo, you have the ability to do that. If not, that’s okay too.
If you’re not yet in a place where you can afford to purchase a multi-family housing structure on your own, that doesn’t mean you’re completely out of the game. It just means that you need to do some other forms of investing and saving more cash until you get there. You can develop a basic strategy for building your portfolio and go from there.
There are also some key considerations when it comes to getting approved to buy a multi-family structure vs a single-family home. I recommend talking to your lender before assuming it’s not possible for you. Many banks will approve the purchase of a multi-family property much more quickly than a single-family home.
Because multi-family units have a track record of producing a steady cash flow from month to month. Even if the property has a few vacancies, it is highly likely that the renters in the other units provide more than enough cash to cover the expenses of owning the building. When a lender looks at all of these details combined, they see a much lower risk and are more likely to lend the money.
If your lender says no, don’t fret! Investing in multi-family housing doesn’t always mean owning the structure. It could mean other forms of investing where you purchase shares in someone else’s projects.
One of the strategies that is growing in popularity and making investing more accessible is the creation of real estate investment apps. YES! There’s an app for that!
If you’re thinking I’m crazy, just hear me out for a second. Real estate is an industry that is highly dependent on data, location and money. What is the one device that you probably already use for all of those things? You guessed it – your phone.
You probably use your phone for GPS, real estate searches, internet browsing/research and you might also log into your bank accounts from your phone. If you’re comfortable using it for all of these things, why not download an app that will help you do them all at the same time?
Depending on what type of investor you are, there will be different apps that will help you accomplish your goals. There are apps specifically designed for certain aspects of real estate investing such as commercial structures or fix-and-flip homes. There are other apps that are more general and all-inclusive. Which one will work for you really depends on your area of interest.
Fundrise is a great option if you’re looking for an all-in-one solution. It gives you access to both residential and commercial investments, but requires a certain investment level for each tier. You have to choose a tier when you open your account: core, advanced or premium. The three tiers have minimum investment requirements of $1,000, $10,000 and $100,000, respectively.
This app functions more like a traditional investment account at a financial institution. You invest the money and they choose the investments. This is excellent for investors who are okay with giving control of their money to someone else. But if you want full control, this one is not for you.
Yieldstreet is another app that gives investors access to investment options that used to be reserved for hedge funds, crowdfunding investors and ultra-wealthy people. With this app, you will have access to commercial and residential properties. The residential properties are mostly multi-family, high-producing entities.
This is a great option if you have a little cash to invest, but not enough to purchase an entire building. You can start here and as your investment grows, you can save up to purchase that investment property.
Property Fixer is an excellent resource for investors who like to fix-and-flip both single-family and multi-family residences. It can help you do a full analysis of the property while onsite, rather than trying to create spreadsheets and such when you get back to the office. It will include things such as buying and holding costs, projected return on investment and mortgage calculators.
If you upgrade to the pro version, you can create portfolios, brand your PDF files and send them to clients or investors right from the app. It also lets you itemize expenses and upload photos for a complete package related to a single property.
Ten-X is almost like an auction site. It will help you find the best deals on commercial properties in your area. Both buyers and sellers use this app, which also has a robust web presence. It his highly data-driven to help you make the best choices for your investment portfolio.
However, this is an online sales mechanism. So, if you’re in a place where you’re not quite ready to buy yet, you’ll be better off going with an app that lets you invest or buy shares, rather than the whole property.
If apps aren’t your thing, you can always sit down with a private investment broker and ask about your options. Much like the apps listed above, many brokers can offer access to a variety of properties that you wouldn’t otherwise be privy to. They can help you manage your investments and choose the right properties in areas that are increasing in value.
When talking to a broker, be sure to consider their minimum investment amounts, fee schedules and limitations. How much control will you have over your own money vs how much they will control it for you. Only you can make the decision on how much control you want to relinquish to a broker.
Multi-family real estate is an excellent investment for both beginners and seasoned professionals. It has historically produced higher returns with lower risk than many other options. For this reason, it is an excellent way to diversify your investment portfolio with peace of mind.
Whether you choose to invest by purchasing a building, or through an app or brokerage, you can feel good about your decision. As the market for multi-family housing continues to grow, your investments should too.
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.
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:
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.
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.
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.
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:
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.
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.
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!
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:
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.
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.
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.
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.
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,
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.
Real estate investing is an excellent strategy for long term wealth accumulation, but how do you know if you’re ready?
In a nutshell, you’re going to need some cash reserves and a good strategy that works for you. There are tons of real estate investment strategies and it’s easy to get overwhelmed. But narrowing your focus can help you get started on the right foot.
Here are the top three things that will tell you whether or not you’re ready:
Contrary to popular belief, you don’t need a ton of cash on-hand to begin investing in real estate. Many investors actually prefer to take out loans from private lenders rather than using their own cash. It all depends on your financial situation, your credit score and your level of comfort with taking risks.
Here are some of the key considerations to help you decide whether or not you’ve got enough cash in the bank, or good enough credit to find a lender.
Are you in survival mode? Living paycheck to paycheck can be a tough situation. Or maybe you’re not quite in the “living paycheck to paycheck” spot, but you make just enough to pay your bills and start digging yourself out of debt. This is a normal and commendable place to be. But it’s not likely a great place to start investing just yet. Focus on getting to a comfortable spot first, unless you can qualify for a loan
What do your reserves look like? Do you have cash reserves in the bank? In general, you want to have $1,000 in an account for a rainy day fund. This is for emergencies and unplanned expenses. Beyond this, it is wise to have about 6 months’ worth of bills saved up for the property you want to purchase. If you’re looking to purchase a rental property with a $1,000/month mortgage, you want to have at least $6,000 in the bank.
Investing in real estate can be as much or as little work as you want it to be. Some investors really want to be hands-on while others don’t have the time or the interest in doing so.
Let’s talk about the specifics so you can make the best decision for you.
Passive Investors make monetary investments in properties without getting involved in the decision-making, negotiations, etc. For example, when you invest in the stock market, you don’t get involved in the daily operations of the companies in which you invest. You simply earn some dividends when the company does well.
Passive investing is similar. People who invest passively in real estate typically do so in one of three ways: the stock market, crowdfunding or partnership.
If you already have a full-time job that you enjoy and that allows you to live your preferred lifestyle, passive investing is likely a great option for you. Depending on how much cash you have to invest, you can really build a nice portfolio.
There are downsides to everything and this is no exception. In passive real estate investing, you need to make sure that the stocks you purchase or the partners you choose are reputable. Make sure they are purchasing properties in a viable end of town. Do the research on the projects they are working on before putting in any money!
Active Investors are involved in the identification, purchase and/or management of the real estate in question. The simplest example of this is a person who flips houses. They find a home that they think will be a good investment, put in an offer, purchase it, renovate it and then sell it (hopefully) for a profit. Although there is a lot more that goes into the process, this is a good illustration of active investing.
Another example of active investing is to purchase rental properties. In this scenario, you purchase a rental property, find a renter and allow their monthly rent to serve as an income source for you. Many of these investors hire property management companies to take care of the logistics of finding, renting, getting contractors to do repairs, etc. But it is still much more involved than passive investing.
Some of the key benefits of active investing are control over the situation and the opportunity to make more money in a smaller amount of time. If you are the one purchasing and managing the property, you are relying only on yourself to make good decisions, rather than a company, a partner or a large real estate investment firm. You also have the opportunity to flip the house quickly and make a fast profit.
This type of investing typically requires a higher toleration for risk.
Once you decide what kind of investor you’re going to be, you will need to develop a strategy on how to make it a successful venture. Your strategy can change drastically based on your available/accessible cash.
Strategies for Passive Investors
If you’ve already decided that you’re going to be a passive investor, you need to develop a plan that makes sense for you. Real estate investments via stocks, bonds and REITs are a great place to get started.
What is a REIT? I’m glad you asked!
REITs or Real Estate Investment Trusts are companies that own and manage income-generating properties. These include residential properties like apartment buildings and condos, as well as non-residential properties like hotels and shopping malls. These companies share their profits proportionally with their investors on a quarterly or annual basis.
Some REITs are publicly traded while others are non-traded. It is helpful to discuss your options with an investment broker to help you choose which ones are best for you.
So let’s talk about next steps.
To invest in stocks, bonds and REITs, start by identifying a broker you want to work with or an online brokerage that you trust. It pays to do your research and find one that has a similar philosophy to yours and a fee schedule you can live with.
If you’re working with a broker, you’ll want to schedule time to sit down and talk about your goals. Tell them why you want to invest, how much available cash you have and what your ultimate goals are. Your broker will discuss the various options and assess your tolerance for risk. From there, the two of you will build a plan.
If online brokerages are more your speed, there are tons to choose from.
After developing a plan with your broker, it’s time to take that leap! Whether you have just a small amount to invest at the beginning, or a much larger sum, now is the time! As you become more confident with your investments and returns, I think you will find it really gratifying to invest in this way.
Note to self: Crowdfunding is a much bigger world. It is a type of investing that is typically reserved for accredited investors. If that’s you, then go for it. If not, perhaps it will end up on your real estate investment bucket list.
As an active investor, there are several ways to jump into the real-estate business. But let’s consider how your available cash affects your strategy.
If you’re in survival mode right now, it might be best to focus on real estate as a side-hustle or even a job, rather than an investment. Simply put, you need more money coming in right now, rather than going out. There are a variety of full and part-time opportunities in real estate that will get you involved in the industry and making connections, while putting more cash in your pocket. Leasing agents, real estate agents, property managers, appraisers and other such jobs are a great way to get into it without investing just yet.
If you have plenty of cash available to invest, there’s no better time than the present to start doing it! If you’ve identified yourself as an active investor, start looking for your first fix-and-flip or rental property. It’s important to know whether you want to flip it or rent it out before you purchase a property. These two types of properties will look very different. One will be a “fixer upper” while the other might already be in great shape and you’ll just need to find a renter.
Fix and flip investments are a great way to make a profit quickly, assuming you’ve done your homework on getting a great price, doing the renovations and then listing and selling it. You need to consider what your ROI will be once it’s all said and done.
In the fix and flip world, the faster you get it done, the better. You don’t want to hold onto these properties for too long because you’ll end up paying the mortgage until it’s sold. After all, you OWN it…
Rental properties are a completely different animal. With these types of investments, there is generally a lot more risk involved. Again, you need to do some homework on the potential ROI of a rental property. You’ll need to be confident that you can rent it at a price that will give you a positive cash flow each month. To create a positive cash flow, you need to consider all expenses that are tied into owning the property.
For example, if you purchase a rental home with a mortgage of $1500/month, an HOA of $200/month and a property management company of $150/month, you’re looking at $1850 per month plus maintenance and upkeep if it’s not covered by your management company. So you’re looking to rent it out for $2200-2500/month or more in order to make a profit each month.
Of course the math is much more complicated than that, but you get the picture.
Real estate investing is an exciting and sometimes scary world. But doing some research on the front end and answering the simple questions above will help you get started off on the right foot. A great strategy and a business plan will give you great peace of mind and the confidence to take the first step.
So what are you waiting for?