Currently, when real estate prices are growing at an unprecedented rate, more and more potential investors are inclined to invest their money in real estate. When buying a house or a condo, we very often do not consider this as an investment and only over time we realize that our house / apartment is in fact the best and most important investment we have ever made.
Real estate is cyclical, prices go up, then they can fall, but even if this happens, the result will be positive over time. Studies show that real estate increases on average by about 6.1% per year, outpacing inflation by 33% per year. Investing in real estate is considered one of the most reliable and profitable investments, if you understand what you are doing, why you are doing it and know how to do it.
I hope that my advice will help novice investors to make the right decision.
Before you invest any money, answer yourself a few questions. How much time per week can you devote to finding promising real estate? Do you have the skills and personal qualities to deal with tenants if you decide to buy a house / condo for rent? If you decide to buy a house that needs fixing (fixer-upper), can you repair it yourself? If not, do you have a reliable contractor who will do the job efficiently and quickly? How much will it cost and how long will it take?
Before investing any money, read the literature on real estate investments, discuss with familiar investors. The purpose of this article is to draw your attention to certain aspects in the field of real estate investments. There are three main forces in investment: criteria, conditions, connections (network).
Criteria are standards that describe the property you are looking for. Decide what type of property you need. You can buy a single family home or multi-family property (duplex, triplex). Each of the options has its advantages. But for beginning investors and investors with a small capital in their hands, buying a single-family property looks like the best option and involves much less risk.
Look at the condition of the property. Experienced investors are looking for real estate, for which the percentage of the expected growth in value is above the average in this city, and then buy it at a discount in price. Usually a discount in the price due to the fact that the property needs to be repaired. The more serious the repair required, the more serious the discount you can expect. But for investors who are still taking the first steps, it is recommended to start with real estate, which requires minor repairs (with the exception of those who have serious construction experience). Novice investors often make the mistake of repairing real estate as if they were going to live in it. This is an erroneous approach.
The location of the property. It is very difficult to find a property suitable for investment in prestigious cities or districts known for their good reputation. Because everyone wants to live there, and this is pushing prices up. The best investment opportunities are in the so-called transit cities or regions, that is, in those that have not recently had a good reputation, but are currently changing intensively for the better.
By the way, in one of these areas I live and work, I see how it is rapidly changing for the better, as house prices rise.
Inside these areas, too, have their own details that are worth paying attention to:
1. A house in a quiet cul-de-sacs is more expensive and will be sold in the future more than a house on a nearby busy street or a house opposite a shopping center.
2. Houses with trees on the site are valued more than without trees or bushes.
3. Large plots, corner plots, cul-de-sac plots, hidden plots are more attractive to potential tenants or buyers.
4. If the adjacent plots are labeled (zoned) as commercial or multifamily, this can both increase and decrease the price of real estate, depending on their condition.
This is the proposed price, downpayment, the percentage at which the bank gives you money.
To be a successful investor, it is important to understand the current market prices for the sale of real estate and the current prices for rents. Studies show that buying a property is best for the price lying at the lower limit of the average market price. Real estate at an average market price — not the most expensive in this place, but not the cheapest — will provide a reliable cash inflow from rent, a reliable growth in real estate value over time (appreciation), and relatively little hassle with tenants in this price range. Mid-market real estate is the best option for beginning investors.
Another important point during the purchase: you must try to achieve the best price and bargain always and for everything. You never know what you can get until you ask.
This is a team of qualified specialists: partners, contractors, lenders, accountants, property managers, real estate agents.
The most successful investors, as a rule, do not play alone, but carefully select a team of specialists, each of whom will do his part in his time. A serious investor creates such a team in advance. In this case, you will know in advance how much this specialist’s work costs, how quickly and how efficiently the work will be done, and what you can rely on. This will give you the opportunity to plan and act quickly. If you don’t have such a team, you’ll have to work alone or search and hire someone if you need help. It is very important that all members of your team are interested in working with you. To do this, you need to show that you are a person of business and you are actually making deals, and not wasting their time.
Two main types of investment:
The first is to buy and sell quickly. This is a more risky investment. Buy cheaper (foreclosure, short sale) and sell. Or buy, improve and sell. Or find a property and give it to an experienced investor (for commission).
Two main conditions for this type of investment:
A) Quickly sell
To do this, you need to know the market well and avoid mistakes, determining the selling price. The price for which the property can be sold, and the price for which you can quickly sell, are two different prices. The faster you can sell your purchased property, the less your expenses will be for its maintenance from the moment of purchase until the moment of sale. The greater will be your profit. Experienced investors believe that selling quickly means selling within the first two weeks.
B) Buy at a discount
This gap between the market price of the house and the real purchase price is a sort of permissible error. In the event of an error in the calculations (additional repair costs that were not expected, the contractors are working more slowly than was calculated), this difference can cover unaccounted expenses and make them less painful. For properties worth more than 150,000, an ideal discount of $ 20,000-25,000.
The second type is to buy and rent. Here the risk is less. This is a long-term strategy. But here it is necessary to calculate in advance whether the purchase is profitable for you.
You will rent this house. How much? You need to know how much he gave up in the past, how many similar houses are rented in the area. Suppose you can rent a house for $ 4,000 a month, or $ 48,000 a year. But most likely the house may be vacant 3-4 weeks a year. So count $ 44,000 a year. To understand whether it is profitable for you, you need to remember that you must deduct your expenses for paying a loan to a bank (for example, $ 27,000 per year), land tax (for example, $ 7,000), maintenance costs for a house — minor repairs (for example, , $ 4000 per year).
Subtracting from 44,000 our expenses (27,000 + 7,000 + 4,000 = 38,000), we get our income – $ 6,000 per year.
If after all deductions you are in the black, then you have made a successful purchase and successfully invested your money.
According to a study by the US Department of Housing and Urban Development, rents have grown at an average annual rate of 5.3% over the past 30 years.
Investing in real estate also has the advantage of being able to write off certain things from taxes, for example:
1. Points upon receipt of mortgage.
2. The percentage you pay to the bank that gave you the money.
3. Payment of land tax (property taxes).
4. Owners of rental properties may deduct interest on credit cards used to pay for purchases and services for real estate.
5. The cost of repairing and improving real estate, especially those that increase its value.
5. Owners of rental property may annually (with the exception of the first and last year) write off a certain part of the base value of the property (depreciation).
6. If pension funds (IRA) are invested in the purchase of rental or business real estate, then as long as the profit from the business or sale of real estate remains in the pension fund, it is not taxed (tax-deferred). And you can reinvest this money in the purchase of the next property.
There are other important things that are best discussed with a tax specialist.
Property management. In all respects, it is better to buy a house-investment close enough to your place of residence. Otherwise, you will have to pay for the property manager services, and these are additional costs. But, on the other hand, it is saving your time.