There’s an age-old debate in the real estate market as to whether primary residences should be viewed as investments or simply as a place to live. While this debate is something that every homeowner should carefully consider, it is clear that there are reasons for buying a nice home, no matter the market conditions, other than simply to maximize one’s wealth. After all, everyone needs a roof over their head.
The same cannot be said, however, for professional real estate investors or anyone who is investing in a property that has the main purpose of income generation. These investors need to be much more careful about things like market timing. Real estate cycles can often last even longer than business cycles, meaning that an investor that buys into an overheated market could be waiting decades to realize any returns at all.
Unfortunately, there is currently ample evidence that real estate markets from coast to coast are overbought. While there still may be opportunities for solid long-term returns that can be located by savvy investors, the current trends in real estate prices indicate that there will be a reversion to historic averages in the near-term future. Buying into a market at a peak like the one we’re very likely seeing now can have disastrous consequences for the long-term performance of any real estate portfolio.
One of the key indicators that the real estate market is well above sustainable price levels is the number of hours that the average wage earner needs to work in order to buy the median home. In some cities, like Los Angeles and San Francisco, the average wage earner would need to work the majority of their waking hours in order to afford minimally decent housing. Contrast that with the norms of the 1960s when many American families only needed a single wage earner to work for 10 hours per week in order to afford the median home.
Another key factor that may bode poorly for the performance of real estate prices over the next five years is the almost certainty that interest rates will soon begin rising. The real estate market is exquisitely sensitive to interest rates, and worst-case-scenario interest hikes could put a big dent in the price gains that housing has seen nationwide since the financial crisis of 2008.
Riding the heels of an especially strong housing market, investors are turning more and more toward real estate as a viable and profitable business venture. One of the hottest segments of the real estate market is the multifamily housing sector. Despite being a longer process when it comes to generating income and profit than its single-family property investment counterparts, the multifamily market can be extremely profitable when executed properly.
Although it seems counter-intuitive, securing financing for a multifamily property can often be easier than getting the money for a single-family property. The reason for this is because there is a much smaller risk of not generating enough cash flow when there are multiple properties involved. What can often be confusing is calculating the value of a multifamily property because of the myriad of complexities involved. In order to calculate an accurate value, the following considerations must all be examined:
OPERATING EXPENSES: This list of expenses can be varied and long. Examples include snow removal, landscaping, pool maintenance, and pest control.
CAPITAL EXPENDITURES: Also known as CapEx, these funds are used by the property management or investor to acquire new assets or upgrade existing facilities with the intention of improving or increasing the breadth of the operation. Examples of capital expenditures in multifamily properties include new air conditioning units, roofing replacements, playground additions, water heaters, and more. Property managers will want to set aside larger amounts for annual capital expenditures if the property is older since repairs and upgrades will be more likely. Newer properties will not require as much capital expenditure investment, which will make these more attractive to investors.
NET OPERATING INCOME: This definition is self-explanatory. Net operating income is simply the total income generated from the multifamily property after the total operating expenses have been subtracted.
CAP RATE: This calculation is a little more specific. It refers to the exact rate of return from the property after income is considered. These rates are distinct to a certain market and drawn by the kind of property class of the investment. To calculate multifamily value, the net operating income of the property is divided by the cap rate. This is why knowing the cap rate is imperative to understanding the overall value.
While many people get involved in real estate investing, they don’t all take the same path to success. There are several ways that you can get started and that which may not work for your colleagues may work much better for your circumstances. The most popular strategies for investing in real estate are fixing and flipping, wholesaling, creative real estate investing, and buy and hold.
Fix and Flip
This is the most commonly known of the popular types of real estate investing, particularly because it’s something that can be done relatively quickly. It involves buying a property at a low price, repairing and updating the home, and selling it for significantly more. This requires selling the property at a price that will help you recoup the original investment, the money you spent on renovations and repairs, and still provide a tidy profit.
This is the practice of making a profit by finding real estate deals for investors. In wholesaling, the individual gains a profit by selling the property for a higher price to the investor than paid in the contract with the original seller. While this is similar to flipping houses, there are no repairs that need to be made. In this way, it’s a faster and less costly method of investing in real estate.
Creative Real Estate Investing
This is a much riskier way of investing in real estate, but it can be lucrative with enough knowledge of the market. It involves buying properties without traditional bank loans and without having to provide big down payments. One common way this is done is in buying a depleted property with cash and selling it to another investor at a profit.
Buy and Hold
This involves buying a property, possibly renovating it, and holding onto it for an extended period of time. By renting out the property, you can turn the property into a stable source of income. However, this practice requires intimate knowledge of the market and an ability to predict trends, or you may end up with a property that won’t attract tenants. A vacant property will end up costing you money.
These are four unique and very different investment methods and there’s no rule that says you can’t adopt several of them. You may combine a couple methods to develop your own strategy. As is true with any type of investing practice, you will have to find the method that works best for you.
“In this current climate” is a cliché lately – but it is a valid cliché. However, in this current climate, some people might just not be able to afford a house. Or conversely, a homeowner finds that the value of their home is at an all-time high and wants to cash in. There are plenty of reasons why renting is a beneficial option for buying, especially in certain markets.
- Renting allows for major life flexibility. In major markets, younger people are renting over buying, and this seems to be an extremely popular choice. Due to unsustainable raises in the housing market buying a house may not be an option, therefore renting is the best option. By renting, renters allow themselves the greatest flexibility if a good opportunity presents itself, or if they are not happy with their current situation, or if they want to move to another place quickly. Renting keeps the lease down to one of two years, allowing for life improvements and possible pivots in the future.
- Renting does not lock your life down into debt for 30 years. If not subscribing to the typical white picket fence dream, the prospect of facing paying a mortgage for 30 years may not be the best life choice. The stress of having to maintain a payment for so long locks people down into lifestyle choices – possibly a job they may not like, or circumstances they may change, or unforeseen debts that may occur. There are also studies that show a person having a debt hanging over their heads is clearly detrimental to life.
- Investing instead of paying may lead to bigger monetary gain. The math seems to be there. There are some bets unconsciously made when buying – the result of investments, the real estate market prices (after all, the recession did a number on many people), the pace of inflation, property taxes, paying interest. These calculations have renters winning out in the long run, however, the numbers may be variable.
No matter how many facts and numbers are thrown around, it is ultimately down to the individual needs and desires of the person making the choice. Behavior is behavior, and people tend to seek out facts that support what they feel. Good luck!
Real estate is one of the most attractive investments among those seeking to invest. It is one of the few products that frequently appreciates in value as opposed to depreciating. One of the biggest issues to be an active real estate investor, however, is that it can be time-consuming. Many real estate investors have full-time jobs that keep them from being on call around the clock to address concerns. That is why the following list of three ways to invest in real estate and hold down a full-time job at the same time has been created. The suggestions are, in no particular order, as follows:
- Proper Tenant Screening
- Utilizing Automation
- Considering REIT’s
Proper Tenant Screening
Choosing the wrong tenants can be a nightmare. Rent always seems to be late and property owners are shelling out above average amounts of cash to fix appliances that keep breaking. To avoid this, be sure to properly vet tenants in a rental property. This way, the risk of not receiving payments in a timely fashion are minimized and someone who will respect the real estate is occupying it. Doing the legwork up front can save thousands of dollars in real estate investing costs down the road.
With modern advances in technology, it is easier than ever to automate so many different aspects of a real estate investment. Billing can now be done without ever lifting a finger. A bill reminder will automatically be sent to the renters of a property. Payments can then automatically be deposited into the owner’s account. Because owners also often take care of other aspects like the electric and water bills, these processes can be taken care of through automation as well as saving both time and resources.
Real Estate Investment Trusts, or REIT’s, are a great way to invest in real estate without actually having to manage a physical property. REIT’s trade just like stocks and the amount of money an investor puts in is their share of the total property ownership of the REIT. REIT’s are required by law to distribute dividends which take the place of more traditional rent. The returns may not be quite as high as owning a physical property, but it is a great way to enter the space without a huge time commitment.
House hunting can be a fun, yet frustrating experience. While it’s exciting to look for a home of your own, you also have to recognize that sellers are trying to put their homes in the best possible light. By recognizing common phrases, you’ll be better equipped to know which homes should be avoided altogether.
“Pride of Ownership Shows”
At first glance, this phrase implies that the owners have taken good care of the property. However, in most cases, it also means little, if anything, has been updated. You can look forward to decades-old tiling, antique appliances, and more than a few rooms that need a remodel.
“In One of the Hottest Neighborhoods”
If you see a descriptive phrase that uses words like “hot” or “up and coming,” be aware that you’re expectations may fall short of the reality. Often, sellers will use these terms to describe neighborhoods that are expected to take a good turn and attract developers. Typically, these neighborhoods will lack nearby amenities and may only show the promise of improvement.
Even if you are an investor, you might want to stay away from properties with this as a headline. It indicates a property in distress most of the time and suggests you will need to make several updates just to make the property welcoming. If you’re looking for a home, this may not be the best choice for you.
“Offered as Is”
This is another one that would be best avoided. Often, “as is” suggests the owner knows there’s a great deal wrong with the property and he’s hoping to pass his problems onto an ambitious buyer. By the time the needed repairs are complete, you may have spent more money than the home is actually worth.
Think condo, but smaller. If you’re on the market for a single-family home, you’re probably looking for something roomy and something with potential for expansion. You’ll find neither in homes that are marketed with this phrase. These are typically very small homes that won’t suit your needs.
This is a deceptive phrase indicating you’ll probably spending a few weeks just getting the yard presentable. The current owner probably hasn’t put much effort into maintaining the “curb appeal” of the home. Of course, if you love the rest of the home and want to spend the money, you can always hire professional landscapers to do the dirty work for you.
These are some common phrases used in real estate marketing. While you should be wary of them, not every one of them is the kiss of death. Be aware that you may be getting more than you expect, but also keep an open mind. You may end up getting that diamond in the ruff.
Real estate investing offers a great way to grow your savings and build wealth. While many people want to get involved in this possibly lucrative venture, the responsibilities that go along with owning property may be keeping them from acting on their interests. However, there are many options for investing in real estate that don’t include becoming a landlord.
Buy Real Estate ETFs
As mentioned in a previous post, an ETF is an exchange-traded fund that’s comparable to mutual funds in that they consist of stocks relating to a particular theme. However, unlike mutual funds, an ETF is traded publicly on the exchange. Vanguard’s VNQ is one such real estate themed ETF. This fund invests in REITs, or real estate investment trusts, which focus on stocks concerning commercial real estate, such as office buildings, hotels, and similar buildings.
Real Estate Mutual Funds
A more traditional route may be to invest in real estate mutual funds, which provide the possibility of growth without the high risk. DFREX is a favorite in this category, partly because it offers lower fees than other funds. Additionally, DFREX consistently performs well. The fund shows great promise for future gains, because it’s supported by decades of professionally driven research. Nobel Prize winners help to develop the fund’s strategy.
Invest Directly in REITs
This is another option for investing in real estate without taking actual ownership of any property. REITs are like funds in that they stick to a general theme, such as commercial real estate, so you can opt for whichever category appeals to you the most. If you choose to explore this option, do so with caution. The U.S. Securities and Exchange Commission (SEC) recently issued warnings against REITs that aren’t publicly traded. The agency highlighted a lack of liquidity, lack of value transparency, and high fees as factors that create unnecessarily high risk.
Invest with Commercial Real Estate Developers
These can be hotel corporations, resort or timeshare operators, or commercial contractors. By buying stock in these types of organizations, you can benefit from their growth without having the responsibility of buying property yourself. You will have to thoroughly research each company to ensure you’re making a sound investment, but, otherwise, this can be a promising alternative.
These are just a few ways you can invest in real estate without getting your hands dirty. Most people live lives that are too busy to add maintaining a rental property to their schedule, so these options let you reap the benefits of real estate investing more freely. As your money grows, you may find more opportunities for investing in real estate centric funds, stocks, and companies.
There are two ways investors make money in real estate: renting and selling for profit. Of course, the savvy investor can use both methods, even on the same property. Here we will go over some details of each method.
It should be emphasized that whether renting out a property or selling for raw profit, the importance of location can’t be overemphasized. The fact is that nearly any model of residential or commercial building can be replicated in many locations. However, the local amenities, culture, atmosphere, weather, or historical value cannot be duplicated. It is such factors that give rise to widely different prices and rents for otherwise identical structures.
Cash Flow: Rent
When renting, the first priority is attracting and retaining tenants. Generally, home-like rental properties or long-term commercial leases are a better option than short-term rentals that, admittedly, fetch a comparatively higher monthly rental. This is because vacancies take their toll and are bad for cash flow. Make sure to specify clear lines of responsibilities for tenants and the property owner. Maintenance, repairs, utilities and tax responsibilities accrue as costs to the property owner, so make sure that rental cash flow at least matches maintenance and other necessary expenditures.
Fix and Flip
Buying low and selling high is the holy script of investing. When buying real estate, beware that the purchase price essentially traps liquidity upon sale completion and for as long as it takes to renovate and resell the house. Also consider the opportunity cost of other income-producing activities, including renting, that the property owner could be doing. Such opportunity costs can add up, but if the buyer were to completely outsource the “fix” to others, the added cost would reduce or even eliminate the profit margin upon resale.
Note that both methods of making money from real estate entail unexpected costs along the way. Vacancies, irresponsible and toxic tenants, as well as competing units can take the steam out of anticipated cash flow from rental properties. Costly repairs, illiquid funds, and all-in marketing and resale costs can deflate profit margin from fix-and-flip properties. Consider the time and expertise required for each investment method and pick whatever works best. Real estate can be lucrative, but is not risk-free.
If working with a real estate appraiser feels like a frustrating and complicated matter, you’re not alone. There’s a reason it feels as though your appraiser is keeping something from you and that’s because he or she is keeping secrets. Here are a few things you probably didn’t know about your appraiser.
- Appraisers are Under Pressure
When the housing bubble burst a few years ago and created the Great Recession, mortgage lenders weren’t the only ones that took the heat. Appraisers also came under fire and the Dodd-Frank Wall Street Reform and Protection Act of 2010 now requires the government to keep a closer eye on all real estate appraisers. This is why the process is so much more complex and takes more time.
- Appraisers are No Longer Local
Those same reforms have created a situation in which appraisers are often sent to regions with which they have no familiarity. Since they don’t know the markets that are local to the properties they’re appraising, their estimates may be either too low or too high. This can keep a homeowner from getting the true value for their home and, conversely, can prevent a buyer from affording a home that should be within their range.
- Who Does the Appraiser Really Work For?
In a normal home-buying scenario, the buyer pays the fee for the appraiser, which can fall anywhere within the $350 to $500 range. Even so, the appraiser doesn’t work for you and his reports go directly to the lender. This means that neither the buyer nor the seller will likely see the appraisal firsthand. According to federal law, you have to be given a copy of the appraisal, if you submit a written request for it. However, most people aren’t aware of the law, so they never see the appraisal for which they paid.
- Always Get a Second Opinion
It can be beneficial to get an appraisal of your own in advance, so you’ll have something to compare to the official appraiser’s findings. This can be fairly simple by asking your real estate agent to deliver a broker’s price opinion. While your lender may not accept the broker’s opinion in place of the appraisal, it does provide that point of reference. A difference in estimates can end up saving you as much as $20,000 on a home purchase.
Appraisers won’t tell you everything about their jobs. This is partly because they have to react to pressure from banks and that affects every appraisal. By staying alert and seeking outside advice, you may be able to better ensure your appraisal is fair and on point with the area market.
The most obvious way to capitalize on the current booming housing market is to invest in traditional real estate opportunities. However, there is a myriad of other ways to grow your wealth through real estate by going through less risky back channels. Here are a few ideas to get you started:
EXPLORE NEW HOME CONSTRUCTION: Limited inventory of existing homes has led to an even bigger boom in the new home construction sector. Real estate experts expect this trend to continue for decades to come, making this industry sector a safe bet for your investment dollars.
PUT MONEY INTO REAL ESTATE FUNDS: As the stock market continues to see unprecedented growth, many financial experts are recommending investing in both real estate focused exchange-traded funds (ETF), as well as real estate specific mutual funds. By diversifying your accounts across a wide range of real estate markets, you will mitigate risk and have the opportunity to jump into emerging global housing markets.
LOOK ONLINE FOR OPPORTUNITIES: In today’s high tech market, digital is king. The real estate industry has not been left out of this trend and it seems like new online real estate companies are popping up every day. To capitalize on this emerging market, it would be wise to look into investing your real estate dollars into commercial and residential markets while receiving cash flow dividends in return.
INVEST IN A REAL ESTATE SPECIFIC COMPANY: Savvy investors often look to bypass the traditional real estate investments, instead choosing to place their funds into companies focused on real estate. Some examples of this type of company would be classic residential real estate companies, resorts, and timeshares.
REAL ESTATE INVESTMENT TRUSTS: These REIT’s are a popular way to put your money into this strong housing market without having to hold any physical property. This strategy is also an ideal way for novices to the field of real estate to get their feet wet and learn about the market without taking on the risk of buying property or having to learn how to be a property manager. Because REIT’s are required by law to provide a minimum of 90 percent of their taxable income to shareholder dividends, investors are guaranteed cash flow.