In our last video we talked about what interest is. View the video below to find out how your interest rate affects you.
Investing in real estate can be lucrative. It can also destroy your financial future if you are not careful. So, how do you make sure that it is profitable, and how do you get started?
Guaranteeing profit is impossible. However, if you create a solid plan and follow that plan, you are going to have to work hard not to retire a millionaire. If you go it without a plan, you run the risk of getting burned.
Where Do I Start?
Start with why, then comes what, and then comes how.
Goals: Decide what your investment goals are, and the timeline you will need to reach them. For example, if you are in your 20s, you don’t need to worry about immediate income and can buy some property that will pay for itself in rent now and generate income in 20-30 years during your retirement. If you are in your 50s, your goals may be different. You will likely want property that is generating immediate income. Your goals will also help you determine what type of property will meet them, and whether you need to flip a few properties first to generate cash to buy longer term investments.
Research: You have a firm grasp on how the internet works, social media, smart phone, and how to make a spreadsheet. If you don’t, you probably know someone who does. Have them help you. Start on some forums like Bigger Pockets and read the blogs on sites like Zillow or Realtor.com. Get a handle the terms and how the process works. Don’t forget to consider repairs during this phase. Line up contractors you trust, and start getting a feel for the costs involved by visiting stores like Home Depot and Lowe’s. You will want to be able to guess at the cost to repair a property by the time you start looking at them, or have a contractor you can call to help with this.
Plan: Now that you know what you want to accomplish, do you have the cash you need? Will you need to finance? Where will your down-payment come from? If you have a television, you have probably seen the ads that say you can flip property using other people’s money. While there is a way to do that in a sense, it is not actually buying a property and turning it for a profit. (It is wholesaling, which we will cover later.) To truly flip a property, you will need your own money. If you don’t have the 25-30% down that most lenders require on a non-owner occupied property, don’t give up. This is where collaborations and partners come in. You might want to look into that.
Your First Investment
After you have formulated your plan, you are ready to consider your first investment. Obviously, it is going to depend on your situation. However, for most people your first investment should also be your primary residence. For this, there are a couple options:
Live-In Flip: If you don’t like the idea of you and your friends buying and renovating a home together (which has a tendency to destroy relationships), and easy way to get started is the live in flip. My first home was an unattractive condo that I bought before I knew what flipping a house even was. All I knew was that I could get into it with almost nothing down, just the few thousand dollars that I had saved already. After I moved in I cleaned, stripped horrible wallpaper, changed out green carpet, and painted. Less than a year later, I sold the property for a nice profit that covered the down payment on my next property, where I did the same thing and made an even bigger profit. The beauty of doing this is that you have to pay to live somewhere anyways, so there are no “holding costs” on the flip. You could take a few months or a few years to sell it, but in the end, you will profit from it.
A Small Multifamily: In lieu of living in your flip, you can buy a 2-4 unit building and occupy one of the units. You then rent the other units out, ideally covering your “rent” in the process, and at the very least, significantly reducing your “rent.” By living in your multifamily property, you are able to decrease your expenses, while locking in the lower rates that are available to owner-occupied property. When you move out, the low interest rate stays in place and your payment stays the same, while that property becomes the first in your collection of real estate investments.
The benefit of the two options above is that you can utilize low-down payment methods to get started, such as an FHA loan. FHA loans allow homeowners to buy a property with just 3.5% down payment. That is significantly different than the 25-30% needed for a non-owner occupied property.
FHA has a program that allows you to incorporate the repairs of a property into the loan itself, so this helps you finance both the purchase and the repairs. You can use this loan on both single family and small multifamily properties, which means you can combine all the benefits of the live-in flip and the small multifamily strategy into one, feasible plan.
Start by Building Relationships
If living in your investment doesn’t sound like it’s for you, you can begin with building relationships with established investors in your area. Attend meetups and investing clubs (yes, this really is a thing). Learn from their experiences. Listen to stories, learn what made them successful and pay attention to their failures. Hopefully by doing this you can avoid your own. Eventually, some of these people may be good partners for you. At the very least, you will learn the ins and outs that the television shows don’t show you.
By getting involved in local real estate groups, you will also make contacts that will guide you to wholesalers, real estate agents and financiers that won’t take advantage of you. Each time an opportunity presents itself, you can evaluate it to see if it’s the right one. If you need help with this, ask. Investors love to help each other, especially when it’s your money they are discussing and not theirs. When you are ready to pull the trigger, you will know.
But What About Wholesaling?
Wholesaling gets a lot of attention, because the ads love to talk about how easy it is and how you can make thousands of dollars in your spare time with no money.
Wholesaling is a real thing. You get a property under contract at a discounted price and sell it to an investor who will flip it. Sounds easy. So why isn’t everyone doing this? Let’s think about this. Do you have homeowners lining up to sell you their home for less than market value? If not, you have to find them. I’ve done it, and so have a lot of other investors. However, it is not as easy as it sounds. In my experience, most people who try to get into wholesaling never make serious money, and stop because they find that it is harder than they thought. Granted, it’s a business that you can start with little money, that has flexible hours and the benefit of learning the business of real estate without investing a lot of money, but it is still a job that requires time, dedication, motivation, and marketing. A lot of marketing.
Start thinking about your goals and go from there. Do your homework. Remember, no plan = no profit, and you aren’t doing this to make beautiful homes for others to live in out of the goodness of your own heart, right?
If you are looking to buy a home in 2018, early market news does not sound very promising. According to recent reports from Zillow and Realtor.com, prices are going up, mortgage rates are going up and inventory is going down. All across the country lack of available homes is creating a buying frenzy with bidding wars driving prices up even further. Add to that, the tax incentives for home ownership are now uncertain. If you listen to the reports, you are probably thinking, “Why bother?”
Renting does make sense at times. When you move to a new area that you are not familiar with, it’s a great idea to rent while you figure out where you want to settle down. When you are just starting out, renting an apartment with a group of friends is the way to go. When your future is uncertain, by all means, rent. However, there are still many reasons that buying makes sense as well.
One of the biggest reasons to seek home ownership is that buying allows you to invest in your home. Put simply, when you buy a home, you are paying rent to the bank. When you sell that home, assuming all goes well and you accrued some equity, you get that rent that you paid back in profits, so you basically lived there for free. That doesn’t happen when you rent.
Investing in your home can pay off over time, too. Real estate has a history of appreciation, even with the ups and downs of the market. Consider what your grandparents paid for their home. Is it worth the same amount today? Likely not. If your grandparents sold that home today, what would their profit be? More than they paid for it, most likely, and more likely than not, more than they paid for it with interest. And, even if it wasn’t worth more than they paid for it with interest, the home is now paid for, and what more can you ask for than that in retirement?
A family is another reason to own versus rent. Owning a house gives children a place to call home. They have a hometown, a community they know, and friends to grow up with. There will be a place to go home to on holidays when they have a family. There will be a place that their children know. Our nation is changing daily, but kids still crave routine, and a home is one way to give them that.
Lastly, don’t forget the American dream. It may have changed in recent years, but for most people, a home is still part of it. What you want just because you want it matters too.
If owning a home is a goal of yours, it can still happen. Interest rates remain historically low, making borrowing money less expensive than it has been in a long time. Rates went up in 2017, but even with those increases, rates are still lower than they have been since the 1970s. A lower interest rate means you can afford to finance a higher purchase price while still staying within your monthly budget. (To see the impact interest rates have on your payment, use this mortgage calculator from BankRate.)
In short, don’t give up on your dreams because of what you hear on the news. While it may not be fake news, it doesn’t tell the whole story, and it certainly doesn’t mean the end for you. You may have to look a little longer or look a few streets over from the neighborhood you want to be in, but your dream is still within reach.