A notable characteristic of the real estate capital markets over the last 20 years has been the ability to access non-traditional sources of capital for both debt and equity investment in U.S. commercial real estate. One such source is the EB-5 investment/visa program. Created by Congress in 1990, the EB-5 program creates a fast track for non-U.S. citizens toward a green card in return for capital investment in qualifying U.S. domestic businesses and projects. The EB-5 program has garnered its share of controversy for possible abuses, but can also lower the cost of equity capital for a developer.
An often overlooked issue is the interplay of EB-5 financing with the requirements of a CMBS lender, where the developer, EB-5 investor and CMBS lender have objectives that are in conflict, at least initially. In particular, the EB-5 investor may seek decision-making and investment accrual rights not acceptable to CMBS lenders.
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.
Real estate investing is one of the most powerful mechanisms to achieve financial independence. Financial independence, or financial freedom, is the concept whereby a person does not need to work a typical day job in order to survive; they instead make money in a passive manner and are able to support themselves solely through passive means. Financial freedom equates to the ability to support your lifestyle (which includes your living space, car payments, tuition payments, food, healthcare, and all other daily expenses) without having to go to work every day, and this is done by securing an investment which earns you money on a periodic basis. So, in the same way that many people earn a paycheck every two weeks, a person can own an investment that pays out quarterly dividends, annuity lump sums, or monthly profits – any periodic sum of money which completely supports a person’s financial needs.
There are multiple ways to achieve financial freedom, and real estate investing is just one of them. Many people choose to invest in the stock or bond market, or to work hard at building a company which eventually gains so much success that they are able to live off of the company’s proceeds. Recently, many people have tried their luck in the “bitcoin” or electronic currency markets. These are all means to obtain a steady stream of money on a periodic basis. However, the main concern with these methods of investment is the volatility – it is somewhat difficult for a person to predict how much money they will earn, or whether they will one day lose it all. Real estate investing provides a method to achieve financial freedom that is structured and conducive to long-term financial planning.
Investing in real estate is a broad concept, and there are multiple avenues that you may choose to go down. Buying a property “wholesale” requires a bit of start-up capital and a healthy understanding of a property’s resale value, but this is meant for investors who are looking to turn a quick profit. Similarly, “rehabbing” a property, or fixing and flipping a home, involves buying a property that needs a fair amount of repair or replacement. Once the property is “flipped” into a marketable living space, the investor sells the property at a profit, over and above what he or she paid to purchase the property as well all the expenses associated with renovating a rundown property. Once you get into the realm of renting a property out for an extended period of time, you’ll begin to build financial independence. This can be done through the buy-and-hold strategy of both residential and commercial real estate. Let’s explore each of these.
Passive Income from a Residential Property
The buy-and-hold strategy of real estate investing involves buying a property and holding it for the long-term. One example of this is a real estate investor purchasing a single-family home and renting it out to a family for fair market value. The savvy real estate investor understands the amount of rent that he or she can charge based on comparable market analyses and understanding the level of demand at play in the real estate market for that area. When an investor builds out a financial plan, he or she understands how much needs to be paid towards the mortgage (if there is one), property insurance, real estate taxes, and the homeowner association (if there is one). The total amount of expenses is subtracted from the fair market value of rent that the investor can charge for a home of that size and stature, and with any luck, the investor will have a healthy chunk of profit left over.
Once this investor secures a tenant, the tenant will likely sign a one-year lease. This secures 12 months of profit for the investor, which is helpful for him or her to financially plan and budget for additional investments. This investor may also work a day job, earning a paycheck every two weeks. But their rental property is now bringing in a monthly check – this is the equivalent of earning an extra paycheck a month, who wouldn’t want that? Sure, it will take some initial capital to secure the property, but a quick financial calculation will help determine how much time it will take for the investor to recuperate those funds. Plus, buying a property and holding it for the long-term has the added bonus of potentially selling the home for a healthy capital gain several years down the road. So, not only does the rental property provide a healthy flow of money each month, but it can be sold later on for a lump sum. Another benefit to the buy-and-hold strategy is that the tenant is paying down your mortgage for you and building equity for you in your house. You’re essentially earning equity each month without having to use your own money, and you’re providing your tenant with a lovely place to live. It’s a win-win!
Passive Income from a Commercial Property
There are several differences between investing in residential rental properties and dealing with commercial rentals. For one, the requirements of a residential tenant are quite straightforward. Ideally, you’d secure a tenant with a healthy credit score, enough income to cover the rent each month, and a clean background check. These are the baseline requirements for most landlords of residential rentals. On the other hand, the tenant in a commercial transaction is a business, not a person. Evaluating a commercial tenant entails reviewing a company’s financial statements, bank statements, and even tax returns. There are many more metrics that go into determining a business’ profitability and, therefore, ability to pay their rent that a commercial landlord needs to consider than for a residential tenant.
Another major difference between residential and commercial tenants is that commercial tenants typically have a longer time horizon and often sign multi-year leases. In addition, commercial rents are almost always higher than residential rents, given the many facets that go into determining market rent compared to neighboring tenants and competitors. Both of these factors are appealing to the investor who owns the commercial property, as a higher rent equals a higher profit and a longer time period to collect this profit. This is a solid way to build financial independence as commercial tenants are often a stable and high-quality tenant.
The Math Behind Financial Independence
Let’s conduct a brief thought experiment to really drive home the point behind financial independence. For starters, let’s say you work a normal, 9-to-5 job and you earn $39,000 per year after tax. You get paid every two weeks, which equates to 26 paychecks per year. Each paycheck is $1,500 in income.
$39,000 annual salary / 26 paychecks per year = $1,500 per paycheck
Now let’s say you’ve saved up a fair amount of money and you’d like to invest in real estate and start on your path to financial independence. You find a two-bedroom condo in your area that doesn’t need any major repairs or improvements, just a fresh coat of paint. With the help of your mortgage broker, you obtain a loan and within 45 days you close on your first property. Congratulations!
Here’s a breakdown of your monthly costs for this property:
Mortgage payment $600
Property insurance $50
Real estate property taxes $50
Condo association fees $150
Total monthly expenses $850
With the help of your real estate agent, you determine that you can charge $1,350 per month for a two-bedroom condo in your area, and you secure a qualified tenant who agrees to the stated monthly rent.
When the 1st of the month rolls around, you collect a rent check for $1,350. After paying your mortgage and condo association, as well as funding your escrow account for the annual property insurance and real estate property tax payments, you are left with $500 in profit.
$1,350 rental income – ($600 mortgage payment + $50 property insurance + $50 property taxes + $150 condo association fees) = $500 profit
After one year, this amounts to $6,000 profit. This profit figure does not convey the benefit to you, the property owner, of having a tenant pay down the mortgage each month and essentially building your equity in the property at no cost to you.
Remember that, in addition to this rental income of $500 per month, you earn $3,000 per month ($1,500 per paycheck) at your day job. Let’s figure out how many properties you would have to own in order to earn the same amount from rental income that you do at your day job. For the sake of simplicity, let’s assume that you only buy properties with a $500 estimated profit margin.
$3,000 monthly wages / $500 monthly rental income = 6 properties
6 properties * $500 monthly profit each = $3,000 monthly rental income
At this point, owning just six properties would provide you with the same level of income that you earn from working 40 hours a week at your day job. These six properties are essentially replacing your full-time job, and this is the true motivation behind financial independence – achieving a level of income that enables you to live at your current living standard without being tied to a paycheck. This may sound like a massive goal, and it is, but it’s by all means achievable with the proper planning and dedication. Even if it takes you 10 years to amass six properties which all achieve the desired level of profit, that’s ten years until you gain financial independence.
One of the luxuries of starting to amass real estate investments while you’re young is that there isn’t any rush for you to gain financial independence for the purpose of retiring early. You can choose to continue working as long as you want to, earning additional money from your properties on the side and funneling that money back into your investment business by buying even more properties. In this way, you’re not dependent on the income from your properties but instead can support yourself with your day job. On the other hand, if you’re a bit older and have your sights on retirement in the next few years, real estate investing is still a viable option to achieve financial independence. You’d likely have some money put away in a retirement fund which would supplement any additional income from real estate.
Financial independence is an empowering concept that is within everyone’s grasp with the proper planning and, most importantly, execution. Real estate investment is just one of the many possible vehicles to achieving financial independence, and it has many benefits in addition to the financial aspects. When you amass properties that provide you passive income over the course of your life, you also have the opportunity to pass these properties on to your heirs. In this way, you can instill the concept of financial independence in your loved ones at a very early age and facilitate this for them to an extent until they can manage their finances on their own. The key to achieving financial independence is to find a means of earning passive income. This money will flow to your bank account whether you’re working or lounging on a beach on a remote island – and then you’ll truly feel financially free!
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.
A real estate investor’s ability to network and build relationships will be crucial to his or her success. This is a skill that can be developed over time, but it’s something that should be focused on as an irreplaceable part of the investment business. Oftentimes, you will find the best deals through your network instead of just falling upon a great investment by chance or even through hours of research. Moreover, you can rely upon your network for a wealth of advice, support, and a second set of eyes.
Let’s dive into the different realms of your network and how you can cultivate a deeper relationship within each. Your network can be a source of business advice, investment opportunities, partnerships, and even friendships. Your experience as a real estate investor is greatly enhanced with the help of a powerful network, and there are several ways you can cultivate your network and build business relationships.
Friends and Family
For the beginning investor and seasoned investors alike, your friends and family are some of the most crucial aspects of your network. Oftentimes, people get into the world of real estate investment through family relationships or family-owned properties, and it’s a great introduction into a complex area of business. You likely spend a significant amount of time with your friends and family, and as a normal course of spending time with loved ones you may discuss business, investments, and your longer-term goals. Friends and family can be a great source of information for potential properties, tenants, and can even provide financial help.
As a beginning investor, it may seem difficult to save a significant amount of money for your first several investments. You may recall that investment mortgages typically require 25% of the purchase price of the property as a down payment, and if you think that sounds like a lot of money, then you probably aren’t in a good condition to pay all cash. This is where your friends and family can come in handy.
If you can get your loved ones to look past the hundreds of memories they may have of you as a child and immature teenager, they may actually be able to see you as a full-fledged professional. In fact, they may even be willing to lend or give you money towards the down payment of your investment. Be prepared for the fact that they may want an explanation or even demonstration of how your investment will pan out before they feel comfortable putting some skin in the game.
One of the most important things to remember when it comes to friends and family is that you should never make them feel pressured or obligated to partake in your investing habits. If they are willing to give you money towards your first few investments, be thankful and gracious. If they choose to lend you money with the expectation that they’ll eventually be repaid, set some guidelines. Decide on a timeline to pay them back and stick to it. Don’t ruin the potential for future help by taking forever to pay them back the first time around. Lastly, if they don’t choose to participate financially in your investments – that’s perfectly fine, too. These are your investments, and your risk. You can’t, and really shouldn’t, force others to take on risk that they’re not comfortable with themselves. Friends and family are no exception to this rule.
One final word on friends and family. As a real estate investor, you likely spend hours each week on learning and development. There is a lot to learn, and once you begin investing you continue to learn on the job. You probably spend hours analyzing each potential investment before you find one that’s profitable and feasible. You then spend weeks, if not months, pursuing the property and making your way to the closing table. You are slowly but surely becoming an expert in your field. Family and friends are more than eager to offer you advice and anecdotes that could easily deter your vision or, even worse, make you question your abilities to perform as an investor. Remain confident and use it as an opportunity to educate the people you care about, if you so choose. It’s also completely acceptable to tell them that, while you appreciate their advice and concern, you’re doing everything in your power to take calculated risks and pursue your investment goals.
Networking Events and Professional Associations
While networking with your friends and family may seem a bit forced or unnatural, there do exist many organizations whose sole purpose is to foster networking and business relationships. As a real estate investor, you may have a real estate license and belong to your local Realtor association. The National Association of Realtors™ as well as local associations often host periodic networking events for their licensed professionals for the sole purpose of gathering together like-minded individuals. If you don’t have your real estate license, you can still join a national or local real estate investment association. These events are specific to the investment realm in that they connect you with people who are interested in financing investments, people who have properties to sell, people who advise investors, people who manage properties, and many others who could benefit you in your investment goals.
The greatest benefit of a professional association dedicated to real estate investment is that the intention is very clear – it is meant for real estate investors just like you. Sometimes networking with individuals in other social circles can be uncomfortable because you feel like you are delivering a pitch, whereas when you meet with local real estate investment club members, the intention is very clear. Everyone is there for a common purpose and you can take advantage of the wealth of knowledge among your circle. Networking events are often free, or they may charge an entry fee or membership fee. You should weigh the benefits and costs for each association and determine where you can realize the most value.
Social Media Networking
One of the newest forms of networking occurs via social media. This is a new phenomenon given that the Internet is less than 50 years old, and mainstream social media is hardly more than a decade old. Nowadays, people advertise their homes for sale on Facebook and Twitter, a practice that was never seen before the advent of social media. Through these mediums, real estate becomes a more accessible concept to a larger audience. You can “follow” real estate investors and advisors on social media platforms like Instagram, and you’ll receive updates when they post new content. This is especially beneficial if you follow influential people that are truly successful in real estate investing, as they may divulge their knowledge and trade secrets through these informal platforms.
Social media networking is more informal than networking as part of an in-person association, but it also allows you to reach a wider array of people. Now you can easily connect with real estate investment professionals and potential business partners across the world and access a wealth of knowledge that would otherwise be completely unavailable to you. The informal nature of social media makes it more conducive for you to reach across the imaginary lines between you, an amateur real estate investor, and a more seasoned investor or business advisor. Using social media platforms, you can also build virtual networks of people who share advice, provide tools that are useful to real estate investors, and develop educational content to pass on their knowledge to others.
On the flip side, you can network yourself by posting to your social media platforms about your real estate investment successes and experiences. This will invite commentary and discussions from your group of followers, which can also lead to new and beneficial business relationships. Putting relevant content out to your social circle ensures that people are aware of your role as a real estate investor. This greatly increases the chances that someone will immediately think of you should a real estate investment opportunity arise. The more you network yourself on social media platforms and among online communities, the greater your network can grow.
The Art of Cold Calling
One of the most tried and true methods of building your network is the age-old practice of cold calling. Cold calling is the practice of calling a person without any prior communication, and it can apply to people who wish to buy or sell properties as well as professionals that are in some way related to the real estate investment sector. Seasoned professionals often enjoy spreading their knowledge and cultivating relationships with those who are new to their field. It’s not uncommon for new real estate investors to reach out to more experienced investors and ask for advice or guidance.
Find an established investor in your community and cold call them – offer to take them to lunch or for a coffee and pick their brain. Keep in mind that the best long-term mentoring relationships are mutually beneficial. That is, they have benefits for both parties in the relationship. Find a way to offer your services and expertise to your new mentor, and you’ll ensure that you both will find the relationship to be positive and rewarding.
As you build your team, you’ll likely find yourself cold calling professionals that you’ll need for each of your transactions, like inspectors, attorneys, title companies, and mortgage professionals. It’s a good idea to develop a “script” for your cold calling, or a set of questions that you’ll use to conduct a brief interview of professionals in your field to determine whether you would work well with that individual and develop a longer-term relationship.
Some of the best relationships can come out of a simple cold call, and it’s one of the simplest ways to start building new relationships in your field. Identify yourself as a new or emerging real estate investor who is working on building a team and identifying opportunities to serve others. Feel the other person out to determine whether or not you would work well with him or her. Does this professional seem to understand your goals? What can they do for you? Conversely, and perhaps more importantly, what can you do for them? These are just some of the questions you should explore as you dive into cold calling.
Building Relationships in Everyday Life
The final way to develop your network and build relationships is to engage in communication with everyone you encounter in your everyday life. This involves a mental shift to constantly identify opportunities and to have an open mind and heart. You never know how someone may help you with your investment goals or whether they turn out to be a business partner or advisor. When you’re standing in line at the grocery store, sitting at the airport gate waiting to board, or having a meal at the restaurant’s bar next to another person that you normally wouldn’t engage with, take a moment to introduce yourself and build a relationship.
Keep in mind that most people don’t like to feel like they are being “sold” on something, and they clam up if they feel you are delivering them a sales pitch. Instead, focus on just being present and having a nice conversation. If real estate investing happens to flow into the conversation naturally, use it to your advantage without being pushy. You’ll begin to see every interaction as an opportunity to build a relationship and potentially form beneficial business connections.
Now that you understand the importance of developing a network and building relationships, use this knowledge as you interact with others in your day-to-day happenings. Understand the benefits of a mentoring relationship, the potential that may lie amongst your friends and family, and the incredible resources that social media and internet marketing offer. Your network is your lifeblood and, as a successful real estate investor, it’s truly the foundation of your entire business. Foster it, and you’ll reap the benefits for years to come.
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.
Real estate contracts or purchase agreements contain legal terms like any other business agreement. As they are complicated, get them adequately explained to you.
If you’re new to the business or need to know what these terms mean because you’re buying a property, read on as this article will explain them thoroughly.
These contracts or agreements are valid, legal contracts that act as safeguards for everything related to the purchase to work in a way both parties (a seller and a buyer) have agreed. They serve as legal safeguards because, as is always the case, buying real estate involves a lot of money, and everyone, especially the buyer, needs to have assurances that everything will go according to plan and nothing will go wrong.
Once a contract or agreement is signed, both parties have assured legal rights and individual responsibilities they need to follow and fulfill.
However, the difficulty with these contracts is that they are often very complex and something that only a lawyer can understand.
As with any long-term goal, real estate investing can be tedious, difficult, and time-consuming. Here we’ll discuss ten habits for success as a real estate investor. Keep these tips and tricks in mind when you feel discouraged or uncertain. If you implement these habits in your everyday work, you will find that you are more productive and better positioned to achieve your goals.
Habit 1: Write things down
If you’re like most other real estate investors, much of your business is conducted over the phone or in person. You connect with dozens of people throughout each transaction, and even more over the life of holding a property. Sometimes you’re at your desk working, and other times you get calls while you’re driving or out with family. In any event, you’re probably contacted multiple times per day. It’s close to impossible to expect yourself to remember every detail of your business that you discuss over the phone. That is why it’s so crucial to write things down. Keep a notebook handy at all times, use the Notes app on your smartphone, or send yourself text messages and emails – whatever you need to do in order to capture the thoughts and information you’re confronted with on a daily basis.
Let’s say you own a handful of rental properties and you don’t utilize a property management service, so you handle everything on your own. You’re driving to the supermarket and you get a call from one of your tenants that the toilet is leaking, and you promise them you’ll call a plumber to go service the toilet right away. You hang up and see a text message come in from your spouse to remind you that your condo downtown needs new air filters. This reminds you that you need to make your HOA payment on that single-family home by the beach. You pull up at the supermarket and now you’re racking your brain to recall your grocery list – you needed coffee and paper towels, right? No matter – you’ll walk through the store and figure out what you need by scanning the shelves. By the time you get home an hour later, you can’t remember which action item belongs to which home, and you’re overwhelmed with everything you need to do. If you utilized a paper to-do list, an app with the same functionality, or any other method to get ideas out of your head and onto paper (or into your phone), you minimize forgetting important tasks.
Habit 2: Utilize tools
On a related note to Habit #1, it’s a good habit for you to utilize some of the many tools at your disposal. If you don’t already use a software program to manage your investments, it wouldn’t hurt to consider purchasing one. Nowadays, there are hundreds of programs available for purchase online ranging from the modestly-priced to the super-advanced and extremely costly. On the other hand, you could build spreadsheets in Microsoft Excel or similar applications yourself. The main benefit of utilizing a tool of any kind is to be able to have a dashboard of your investments, as well as the ability to delve into property-specific details.
Real estate investment tools and spreadsheets can give you a picture of your overall profitability across all properties you own. For residential investments, these tools calculate important metrics like your return on investment (ROI), tenant turnover, time to collect rent, and many others. Commercial investment tools are generally more advanced and provide insight into annual returns and forecasting into future years, cash-on-cash return, vacancy rates, and expense breakdowns, among other metrics. Any real estate investor should get into the good habit of having a clear picture of his or her investment portfolio. This will help you determine how potential investments in the future would impact your overall portfolio. It can also help you present your investment capabilities to potential partners, investors, and lenders.
Habit 3: Rely on your team
As a real estate investor, you likely work with a multitude of individuals during the course of your business. Most investors build a team comprised of realtors, mortgage brokers, inspectors, contractors, property managers, lawyers, and tax accountants. When you have such a diversified team of highly-specialized people, it’s a luxury to be able to rely on them to handle their aspects of the transaction. Take advantage of the breadth of knowledge available at your disposal and use your team the way you would in sports. It’s nearly impossible to do this all on your own, and your team is in place to help you act effectively.
It is easy to feel overwhelmed when contemplating a potential investment. The upside is so high, and yet the risk is ever-present. This is the time to rely on your team to help you understand all aspects of the transaction at hand. If you have questions, ask them until you are comfortable with the subject under question. Bounce ideas off of your team. Remember that two heads are better than one, and don’t let your pride get in the way of asking for help. It’s crucial for real estate investors to have a team built of experts in their field. That way, you can focus on being an expert in your field – investing.
Habit 4: Trust your judgment
In the era of Big Data and Google, we live in a constant state of access to the world’s information. There is such a thing, however, as analysis paralysis. When you’re constantly presented with so many viable options, it’s hard to take action on any one investment. Don’t let the expanse of knowledge interfere with your own personal judgment. It takes a few years to get a feel for the business, but your confidence as a real estate investor will naturally come with time. Once you develop your sense of self in this industry, you will feel more comfortable relying on judgment to make better business decisions.
There is something to be said for trusting your gut. Let’s say you’re evaluating a potential rental property. The numbers work, but they’re not anything spectacular. They meet your investing thresholds but do little else in the realm of financial benefit. Your licensed real estate agent takes you to see the property in person, and you don’t get a great “vibe” from the neighborhood or the property itself. You can’t quite put a finger on it, but there’s something about the property that’s holding you back from seeing it as a viable investment option. Keep in mind that investment properties stick with you for quite some time. You want to have a baseline level of comfort with any one of your investments. It’s okay to trust your judgment and walk away from a property you’re not totally comfortable with, especially when it’s barely meeting your thresholds for financial viability.
Habit 5: Build a schedule
As a real estate investor, your priorities are often pulled in very different directions. If you’re working on multiple transactions at one time, it can be difficult to keep track of your commitments. This highlights the importance of getting into the habit of building and using a schedule. Just as it is crucial to write things down, it’s just as important to use a calendar and stick to it. You’ll need to keep track of showing appointments for numerous properties, offer deadlines, inspection deadlines, loan commitment dates, and other important timelines outlined in most real estate contracts.
While to-do lists and productivity apps are great for writing out items of high importance and action items, they don’t have a built-in functionality to remind you at a specific date and time of what you need to do or where you need to be. When you build out a schedule of all the important dates related to a transaction, it’s easier for you to adhere to timelines and follow a transaction through its entire lifecycle. It also avoids the dreadful missed deadlines that can sometimes result in lost deposits or missed opportunities to back out of a contract.
In addition to helping you stay on top of contract dates and deadlines, a schedule can help map out your investment initiatives. When building your schedule, incorporate time for you to network, research, and explore new investment opportunities. Add time for you to follow up with your contacts in the field. Include time for yourself, like going to the gym, running errands, and spending time with your family. Because you don’t have a normal 9-to-5 job, you also don’t have the structure that comes along with a corporate job. You most likely work from home, or from anywhere with an internet connection, and you probably don’t have a clear separation between work time and personal time. Build that separation! Include it in your schedule and hold yourself accountable. The time you spend outside of work rejuvenating and refreshing your energy will pay you back tenfold during work hours. Your brain needs a break from real estate, and you can get into the habit of building a schedule that accommodates your life and your business.
Habit 6: ABL – Always Be Learning
There’s a phrase in the sales industry that has stood the test of time: ABC – Always Be Closing. It’s a phrase that reinforces the importance of constantly closing the sale. In the real estate investment realm, it’s a great habit for you to ABL – Always Be Learning. With such a fast-changing industry, and the fact that it’s so local in nature, it’s crucial for the successful real estate investor to get into the habit of constantly learning. There are market trends, industry updates, and local newsletters available at your disposal on the internet for virtually any town in the world.
In additional to market-specific knowledge, it’s a great habit to continue learning about investment methods, loan options, and the foundations of real estate mathematics. A good real estate investor will stay up-to-date and knowledgeable on a wide range of topics in order to serve as a better partner to his or her team and to be comfortable with all aspects of investing. There is a wide array of online courses in all things real estate that are offered for free or very low prices. If you get into the habit of learning something new every day, you will never feel uncomfortable in the sometimes-ambiguous world of real estate investing.
Habit 7: Use your resources wisely
Most people have the misconception that becoming a real estate investor requires a whole lot of your own cash. While it may make sense for you to purchase your first several properties with your own money, you should get into the habit early of using your resources wisely. It probably doesn’t make sense for you to always use your own money to purchase investment properties, especially if your goal is to get involved in multi-family units or commercial transactions that require a large sum of money. Once you have a few profitable properties, you should let those profits speak for themselves. Use your successful investments as leverage to convince a bank lender, private lender, or angel investor to give you funds towards your future investments.
Savvy real estate investors are in the habit of using their resources wisely. They don’t sacrifice their own funds for high-risk investments; they are big fans of using OPM (Other People’s Money). OPM allows you to take on higher-value or higher-risk investments that you normally wouldn’t take on if you had to invest your entire life savings. This is a strategy that many real estate investors use once they have developed experience in a certain investment niche and have networked with people who have the willingness and ability to invest their money.
There are plenty of options for real estate investors who don’t want to use their own money. Hard-money lenders offer large sums of money, but often at prohibitively high interest rates. Bank lenders also offer large sums of money but require lots of documentation and proven investment success. Private individuals like angel investors or business-savvy friends and family may also offer their money, but beware of taking money from people with which you have established relationships. Most people don’t have the same risk threshold as a real estate investor, and they are generally unaware of how long it may take for them to recoup their money. Use OPM wisely, but use the resources at your disposal before you decide to dip into your own pocket.
Habit 8: Don’t put all your eggs in one basket
Many real estate investors choose to specialize in one area of the market, whether that’s residential rentals, wholesales, fixer-uppers, or commercial investments. While there’s nothing wrong with specialization, especially if you have a diversified portfolio within each niche area, it’s always a good habit to diversify your overall portfolio across different market segments. Get into the habit of keeping an open mind when it comes to investment opportunities. Don’t turn away a multi-family unit just because you’re used to buying single-family homes. Try to evaluate the opportunities as they come and be open to new ideas.
This is a habit that can be cultivated over time, and it’s an important quality to build. If your team knows that you’re open to discussing investments outside of the realm you’re traditionally used to, you’d be surprised at how many opportunities are thrown your way. Success comes in many shapes and forms, and other investment avenues may be more profitable than others. A good mix of various investment types will help protect you from the ups and downs of the real estate market and the national economy.
Habit 9: Network, Network, Network
Another good habit of a successful real estate investor is to build a network of like-minded individuals. You may notice that as you amass profitable properties, friends and family who questioned the validity of real estate investing in the past become suddenly interested in the prospect. They may want to invest in real estate themselves, and they’ll look to you for guidance. Once you expand past this circle of family and friends, you should create a habit of networking at all times. Be open to discussing your investment experience with others and answering their questions and addressing their concerns. Most people are ill-informed about the intricacies of real estate investing, and you can help expand their perspective.
Building your network opens you up to potential sources of business. Consider a conversation that you strike up with someone at a social event. You may discover that they are thinking about selling their home but that they don’t want to work with a real estate agent. They are concerned that they’ll be talked into a huge price reduction because of the many improvements their home needs. You, a savvy real estate investor, happen to have a good amount of cash available for your next investment. You ask them how much they would care to sell their home for in the event that someone can pay cash, and you strike up a deal. A single conversation can lead to a great investment opportunity for you.
If you get into the habit of networking with everyone you meet, in the sense that you discuss your profession and gauge others’ interest in it, you may discover people that are willing to invest, people that wish to offload their dated properties, people that have friends in high places and can help connect you to a potential business partner, or people that genuinely want to learn more about real estate investment. This is a habit that can lead to more business, more acquaintances, and more opportunities.
Habit 10: Build a long-term plan
If you’re a successful real estate investor, it’s a good idea for you to get in the habit of building a long-term plan for yourself. You should start thinking about your retirement long before you reach the age that you wish to retire. Building a long-term plan may include incorporating your investment business into an LLC or S-corporation. It includes talking to your tax accountant on a regular basis, as he or she can help uncover tax benefits and incentives that are already a normal part of your business expenses. It also includes determining how many properties you want to own at any one time, and what your long-term investment strategies are.
It’s not entirely crucial that you stick to every aspect of your plan. It’s merely a good habit to become forward-thinking and to understand the future implications of your current habits. When you build a habit of thinking ahead, you become a better business person today. You also reduce the chances that you’ll be caught in a rough financial situation or come upon your retirement empty-handed. Long-term planning such as estate planning ensures that you know how your investments will be handled among future generations. It’s good business practice for you to look ahead and ensure that your investments provide you a fruitful life for many years to come.
Now that you understand ten important habits of a successful real estate investor, try to apply these concepts to your own life and reap the many benefits of a positive attitude and solid work structure. Real estate investing is not a normal job – you don’t have the ability to take advantage of some of the benefits of a regular office job like team camaraderie and structured processes. The burden is on you to build a process for your business and stick to it. You’re also responsible for keeping your own spirits high when the going gets tough. Keep these ten habits in mind and you will conquer any challenge that comes your way.
The U.S. economy has enjoyed a record expansion cycle, having eclipsed in 2018 the 1990-2000 prior record surge. So, as commercial real estate navigates a choppy top-of-the-cycle period, recruitment and retention continue to be foremost priorities for companies across the industry.
How are company leaders and boards attracting talent amid change?
Whether executed internally or externally by a search firm, recruiting is largely a marketing campaign where you must identify the strengths and selling points of your firm, the role, the team and the intangibles, and make certain those benefits are clearly and effectively articulated to prospective candidates.
In our work helping both large and small real estate firms, we’ve found the following key attributes are essential for attracting top tier candidates:
Real estate investing is a multifaceted skill, and it’s important to understand that you can’t do it all on your own. Building a team is a crucial step in any real estate investor’s journey. Not only does it humble you to the fact that you still need to rely on others even though you work for yourself, but it gives you access to a panel of experts that can help with your transaction. A prudent real estate investor will have the following people on his or her team: a real estate agent, a mortgage broker, an inspector, a general contractor, a title company, a lawyer, and a tax accountant.
Unless you decide to pursue your real estate license for the purpose of making your real estate investments, you’ll need to partner up with a licensed real estate agent that you enjoy working with on a daily basis. Real estate investors have different risk appetites, needs, and desires than a normal buyer or seller, so it helps if your real estate agent has worked with investors in the past. If you plan on purchasing multiple investment properties at one time or several properties each year, discuss this with your agent in advance. They will need to provide constant input and potential property suggestions to keep up with your unique demand. They can also help weed out properties that don’t fit your investment criteria. Real estate agents are often experts in their local markets, so your agent may be able to help you hone in on a specific area that has good investment potential. They facilitate the entire transaction process and make your life easier. Here’s another bonus – an agent’s commission is always paid by the seller. Don’t let the fear of paying commission keep you from working with a great real estate agent. You can focus on the investment and let them do their job. You’ll be better off for it.
Unless you’re buying a property with cash, you’ll need a mortgage. And unless you live in an ideal world, mortgage interest rates change every single day. Any real estate investor should have two or three mortgage brokers with whom he or she can compare interest rates and discuss mortgage programs. Mortgage brokers are invaluable resources to help understand your transaction costs. Mortgage interest rates have a tremendous impact on the profitability of your property because they greatly affect your monthly mortgage payment. If you use an FHA mortgage, you’ll be paying private mortgage insurance. Your mortgage broker can help you figure out what program to use and whether it’s worth it to pay for points to lower the interest rate, and they can help you plan for closing. They are invaluable when it comes to understanding the financial side of things, and they can even offer lender credits that may help to cut costs. You’ll work with your mortgage broker throughout the entire closing process, so it’s important to work with someone you trust and can build a longer-term relationship with.
When you analyze the market for potential investment properties, your focus as a real estate investor is on the numbers. You will calculate your profitability, your return on investment, and other metrics to help you understand how successful the purchase may be. Once you narrow down your potential properties to the one that you’ll make an offer on, things get a bit more serious. Finding a profitable property is hard enough but be sure to always have property inspections done to confirm that the property is of sound quality. Having an inspector on hand that you can trust and rely upon to be available quickly is crucial. After your first few purchases, you’ll likely build a relationship with one inspection company that you will continue to use for all future purchases. A prudent real estate investor will work out a deal with the inspection company to get a loyalty discount, since you’ll likely be using their services multiple times per year. Once you build a relationship with an inspector, you can better rely on them for honest advice and feedback on the property. You’ll know what to expect even before you get the inspection report which saves you time and the headache of waiting for results.
As mentioned above, the state of the property you’re purchasing is just as important as its profitability. If you run into any major issues during the property inspection process, it would be helpful to have a general contractor that you can trust to help walk you through the issues and create a game plan. A general contractor is well-versed on major and minor issues related to construction, HVAC systems, electrical systems, plumbing, and others. They can give you an estimate on how much it would cost to repair certain issues you may come across with any given property. This would help you determine whether it makes financial sense to continue with repairs or abandon the investment property altogether. Save yourself the guesswork and invest in your relationship with your general contractor. They can give a more accurate estimate than a quick Google search would, and you’d be able to trust them to follow through on the work for which they’ve been contracted.
Another party that will be present throughout the closing process and which is absolutely crucial to the closing of the deal is the title company. It helps to build a relationship with a title company because they facilitate the entire transaction process from offer to closing. Many title companies are willing to offer a reduced service fee for repeat business, but more meaningful than this is the trust you’ll build with the team that delivers you the property deed. Title services are an important part of the purchase process because they determine whether the previous owner is truly delivering a free and clear title. This is the only way to ensure that the property you’re buying will be yours and yours alone. As an investor, this is a non-negotiable part of buying a property.
The benefits to having a lawyer experienced in real estate law on your team should be obvious. A practitioner in real estate law can help answer any legal questions you may come across during your real estate investment ventures, and there will be many. They can also help walk you through difficult conversations or situations with the other parties that are often involved in any given transaction. In the worst-case scenario, they can represent you in the event that you become involved in an illegal or unethical situation. While most real estate agents have access to a legal hotline through their local or national Realtor association, it’s best for you to have a lawyer on your side that you can trust and that you can reach out to without any hesitation or delay. As a real estate investor, you may run into circumstances that are legally questionable, and a sensible real estate investor would ensure that all of his or her boxes are checked and that nothing is being done that shouldn’t be.
Finally, as a real estate investor, your tax accountant will likely become your best friend. The tax system is baffling enough as it is – you’ll want someone you can trust to walk you through the annual tax return process and to give you general advice on how to conduct yourself in business and in finances throughout the normal course of business. There are a wide array of credits and tax deductions available to real estate investors, including mortgage interest deductions, benefits for having a home office, and mileage deductions for traveling to and from properties. Your tax accountant can help reduce your tax burden and maximize the benefits you receive from the business you’re already conducting. Instead of spending hundreds of hours learning the tax code and manually itemizing your tax return, work with a tax professional that you trust and can envision working with long into the future. As your real estate investing business grows more complex, your tax accountant can help you structure your business to be the most beneficial to you. Most importantly, they will help ensure your compliance with the tax laws and prevent you from getting into trouble with the tax authorities.
By now it should be clear that real estate investment is not a one-man (or one-woman) job. It involves a multitude of experts in order to get to the finish line. Having a team that you trust and that you enjoy working with can make all the difference. As a novice real estate investor, don’t feel overwhelmed that you have to do all of this yourself. You have plenty of people around you that are experts in what they do, so that you can be an expert in what you want to do. Building a team takes time, but it is a natural progression as you continue to do business with the same people. If one member of your team isn’t giving you what you need, don’t hesitate to move on to someone else. Real estate investment is a tough business as it is, and your team is meant to make your job easier, not more difficult.
When it comes to financing your real estate purchase, you have plenty of options. Many investors pay cash for their investments. This is an attractive option to sellers because the closing process is expedited and the risk of loan denial by a bank is eliminated. In return, cash buyers often receive a lower purchase price. If you don’t have a bundle of cash readily available to purchase real estate, have no fear! There are a multitude of financing options available today. We’ll cover fixed rate and adjustable rate mortgages and explain the different mortgage types, including conventional, FHA, and VA mortgages. Finally, we’ll differentiate between conforming and non-conforming loan types.
The main difference between fixed rate and adjustable rate mortgages is the interest rate. Interest is the price you pay for borrowing money, and the interest rate on your loan can significantly impact your return on investment. This should be intuitive; the more money you pay to the bank, the less money you get to keep as profit. With a fixed rate mortgage, you have the same interest rate for the entire life of the loan. This is beneficial for planning and budgeting because you can be assured that you’re “locked in” to pay the same amount of interest every month. There are no surprises with a fixed rate mortgage. Fixed rate mortgages are typically offered on a 15-year or 30-year basis.
On the flip side, interest rates change periodically with an adjustable rate mortgage, or ARM. For instance, a 5/1 ARM has a stable interest rate for the first five years, after which it adjusts every one year. This can make financial planning for the real estate investor difficult. Let’s take, for example, an investor who pays $300 in mortgage interest each month and earns a healthy $400 monthly profit on a rental property. After five years of a stable interest rate (and stable interest payment of $300 per month), the investor’s adjustable rate mortgage has an interest rate adjustment. Now the mortgage interest payment jumps up to $375 per month, and the monthly profit subsequently drops to $325 per month. It’s common for adjustable rate mortgages to have a very low introductory interest rate which can be attractive to short-term investors. Once the adjustments kick in, however, they are commonly tied to a national mortgage index. Investors may prefer to use an adjustable rate mortgage to take advantage of low interest rate periods and take a chance that they won’t experience high interest rate periods. It’s a gamble, but it depends on the investor’s individual attitude towards risk.
Once you decide between a fixed rate or adjustable rate mortgage, you’ll choose the mortgage type, including conventional, FHA, or VA. The differences between these mortgage types have to do with whether the loan is insured. Conventional mortgages are not insured or guaranteed by the government. The minimum down payment requirement for a conventional mortgage is 5% for a primary residence and 20% for an investment mortgage. VA loans are part of a program offered by the U.S. Department of Veterans Affairs to military service members and their families. One huge benefit of VA loans is that there is no minimum down payment requirement! However, real estate investors cannot use VA loans to purchase investment properties, as the program requires the borrower to use the property as a primary residence.
FHA mortgages are insured by the Federal Housing Administration. The minimum down payment requirement for an FHA loan is 3.5% which makes it an attractive alternative for many personal home buyers. FHA loans have two main disadvantages for the real estate investor to consider. The first is that FHA loans are primarily restricted to buyers who intend to occupy the property they are purchasing. The second is that FHA loans require the borrower to pay for private mortgage insurance, or PMI. The price of the PMI is determined based on the borrower’s credit score, and it adds another monthly cost for the real estate investor to account for. One workaround to the FHA loan residency requirement is for the real estate investor to live in the property for some time and rent it out later. This is ideal for people who are just getting started in real estate investment and still need a place to live for the time being. As you can tell, these are all valuable considerations for the prudent real estate investor.
Another concept related to mortgages is based on the size of the loan in question. As a real estate investor, you will often make purchases of varying size. For example, one year you may purchase a single-family home as a rental property, and the next you may purchase an apartment building with 12 units. These two investments will carry two very different price tags. Depending on the size of the mortgage loan you need, you’ll fall into either the conforming loan or the jumbo or commercial loan category. Conforming loans meet the underwriting guidelines that have been established by the government. Non-conforming loans may also be granted, but they are typically accompanied by adverse factors like prohibitively high interest rates. Jumbo loans exceed the size limits established by the government, and for this reason the lender considers the borrower to be high-risk. To compensate for the higher risk that the lender takes on, it may require higher down payments, higher credit scores, and higher interest rates.
There is no shortage of factors that will impact a real estate investor’s investment – and mortgages are just one area of contemplation. If you’re not able to purchase an investment using all cash, then a mortgage is a necessary evil. Mortgage payments are a huge factor that impacts the overall profitability of a real estate investment, so make sure you choose the mortgage type that suits your investment goals. Be sure to work with a reputable mortgage broker that can help you understand the intricacies of choosing which mortgage is right for you.
Real estate has long been considered a viable and reliable area for investment. Unlike the stock market, which can fluctuate based on the whims of the market, real estate is relatively cyclical in terms of time and is extremely local in nature. This means that a slow market in Los Angeles, California does not necessarily mean a slow market in Miami, Florida. In addition to this, the asset in a stock market is just a number on a computer screen – it’s not tangible, or something you can touch and feel. Let’s compare this to real estate, where you can actually see (and live in!) the asset you buy. You can add paint to improve it cosmetically, do more extended maintenance to improve it structurally, and generally control what you do with the asset.
Passive real estate investing through the “buy-and-hold” strategy entails buying a property for the long haul. This is opposed to wholesalers and flippers, who buy properties in the hopes of making a quick return. Buy-and-hold investors purchase a property, typically using bank financing, and rent it out for long-term passive income. The term “passive” means that you are not actively working for the money you earn. After the initial investment into a turnkey residential property or an income-producing commercial property, investors typically hand the property over to a property manager who takes care of the tasks related to hosting a tenant. These investors then receive a check from the property manager each month with a portion of the earnings.
The buy-and-hold strategy is ideal for retirees who don’t want to actively manage an investment and just want to receive a steady flow of money throughout their retirement. It’s also quite ideal for young investors who have a longer investment horizon, or time consideration, for their investments. They can purchase income-producing properties whenever they are financially viable, even at the start of their careers! Now they can collect a paycheck from their employer and a check from their rental property. Most employed adults have a 401-k plan through their employers, and typically have a pension plan as well. Real estate investing is a steady and relatively safe way to build a retirement portfolio and diversify your investments even further.
One important concept related to passive real estate investing using the buy-and-hold strategy is the benefit of using bank financing instead of buying a property with cash. It’s true that you can often negotiate a much lower purchase price when you have cash to pay with – it’s enough of an incentive for the seller to forego the pains of dealing with a buyer who must get approved for a mortgage and ultimately fund the loan at the closing table. The seller gets cash in their bank account, and the buyer walks away with a new property – everybody wins, right? Not exactly, and that’s due to a concept called return on investment, or ROI.
Return on investment is a metric that many investors use to determine how successful their investments are. It’s expressed as a percentage and is calculated with a simple math problem: (total money earned) divided by (total money spent). It is typically calculated on an annual basis, so the ROI for your first year owning the property will be calculated as follows: (total rent money earned in year one) divided by (total amount of money spent purchasing the property, including the purchase price, closing costs, and any money spent on initial repairs and improvements). This calculation gives the investor a general idea of how much “bang for the buck” the property has.
When an investor buys an investment property using all cash, the portion of the equation related to the total amount of money spent is extremely high. This, in turn, drives the ROI metric down and essentially tells the investor that he or she is getting a low return on the property for year one. On the other hand, when an investor buys a property with bank financing, the bank typically requires a 20-25% down payment. Though this may sound high, it’s a lot less money than paying 100% in cash. This lower initial investment will drive the ROI up when compared to a cash transaction. Keep in mind that ROI should increase as the years go on, because the total money spent is generally the highest at the time when the property is initially purchased. ROI is just one of many metrics that investors use to gauge their success, but it can be a quick and helpful signal.
Once you’ve decided whether to purchase using cash or financing, it’s important to have a general sense of what your profit will be. A licensed real estate agent will be able to help you get the relevant figures for the properties you are interested in. Profit is essentially the money you earn after all expenses are paid, and for a residential rental property it’s calculated as follows: (total rental income) minus (total property expenses). Pretty simple, right? Let’s expand a bit on what property expenses consist of. These include your monthly mortgage payment if you’re using bank financing and monthly HOA dues if the property resides in an area with a homeowner’s association. It’s also important to include escrows in your calculation of property expenses. Escrows are funds put away for later, and these include property tax payments, property insurance payments, and a reserve for maintenance and repairs. You should determine what profit threshold you are comfortable with so that you can easily spot the properties that fall within your requirements.
Here’s a simplified example of how to calculate your profit. Let’s say you found a single-family home with 2 bedrooms and 2 bathrooms. You’re putting down a total of $50,000 plus $5,000 closing costs. The homeowner’s association charges $150 per month. The yearly taxes on the property for the prior year were $3,000, and property insurance runs about $1,500 per year. The property needs a little bit of work, so you figure you’ll need $500 for paint and electrical panel replacements. After speaking with your mortgage broker, you find out your monthly mortgage payment will be $800 per month. Then, after speaking with your real estate agent, you find out that the average rent in the neighborhood is $1,600 per month for a 2-bedroom, 2-bathroom house. What’s your profit? How about ROI?
Profit = Total Rental Income – Total Property Expenses
Total Rental Income = $1,600 per month
Total Property Expenses = $800 monthly mortgage payment + $150 monthly HOA payment + $250 monthly tax escrow + $125 monthly property insurance escrow
Profit = ($1,600) – ($800 + $150 + $250 + $125) = $275 per month
Return on Investment = Total Money Earned / Total Money Spent
Total Money Earned = $275 monthly profit * 12 months
Total Money Spent = $50,000 down payment + $5,000 closing costs + $500 initial repairs
ROI = ($3,300) / ($55,500) = 5.9% annual ROI
Once you have these figures, you can make a more informed decision on whether the rental property in question is right for you. If you’re ready to get started with passive real estate investing through the buy-and-hold strategy, consult with your licensed real estate agent and mortgage broker.