Real Estate Investing
This guide is intended to give you the definitions and understanding to help you have the confidence to go out in the world and stake your claim in the world of real estate investing. Making money in real estate investing has many different facets and a ton of terminology you will need to know. We have broken this all down to help you understand the who, how, when, why, and what of investing. So, dive right in and start your path to financial independence.
Why Should I Consider Real Estate Investing?
You might start by asking, “how is your retirement account looking?”. If you have enough money and you can retire comfortably, then real estate investing may or may not be for you. A financial planner can help evaluate your ability to retire — more on that in a bit. The reasons for investing in real estate are varied but are always based on your financial goals. Some people are content with an 8 to 5 job, while others are looking for ways to increase wealth and become independent. These are the people that tend to look for opportunities, sometimes even taking undue risks to meet their goals. Real estate has been a consistent performing investment strategy for many decades, outperforming stocks, bonds, and other financial instruments over the decades.
The Math You Need to Consider
Financial planners use tools such as the 25 Times Rule to help to determine how much an investment and cash portfolio should be valued for someone to retire without worry. The rule is based on the amount you need to live, as an example, if you require $100,000 every year to live, you should have a portfolio valued at $2,500,000. As your financial planner liquidates your assets, they use a 4 Percent Rule. This rule means they will liquidate about 4 percent of your portfolio over the next 25 years until your portfolio is liquidated. This means that if you plan to retire at the age of 65, your income will last until you are 90. After 90, all bets are off because you are going to be broke.
If we compare stock market investors to real estate investment, you will see a much different approach to your retirement plan. If your portfolio contains $3,000,000 in real estate that produces an income of $50,000 a year, that is a vast difference from liquidation over time. In addition, in real estate, you will likely see your investment property appreciate over the years. This will not only cover your income needs but leaves a financial legacy to pass down to your children and grandchildren.
The most exciting part is that it will only take $500,000 in investment capital to accumulate $2,500,000 in real estate based assets. Stock market investing, on the other hand, will take about $1,000,000 to have a retirement income of $50,000 per year, assuming a four percent return for both types of investments over nearly 30 years.
Beyond this, there are many other ways that real estate investing is better than investing in stocks and other financial instruments. For example, real estate can provide generally predictable cash flow, it will likely go up in value, and as you make your mortgage payments, you will see equity growth. As a retirement plan, real estate provides a self-sustaining investment, whereas stocks are self-liquidating assets. Knowing this, which do you think is better? Self-sustaining assets or self-liquidating assets?
Top 12 reasons for real estate investing
1: Predictable cash flow
Without cash, there is no retirement. Cash flow indicates your spendable income after all operating expenses. Your real estate investment portfolio should have a cash flow of at least 6%.
2: Real Estate Usually Appreciates
If you go back to the late ’60s, appreciation has been steady for real estate, even during when the economy tanked in 2007.
You should understand that leverage is a fundamental advantage of investing in real estate. Leverage means you use capital borrowed to increase your potential return on investment. Regarding real estate, leverage comes in the form of a mortgage that is used to reduce the need for the investor to use their capital to purchase investment properties.
Let’s assume that a $400,000 investment property paid for in cash has a $40,000 net cash flow. That is a 10 percent positive cash flow. Now, let’s assume you borrow $300,000 amortized over 30 years at 5%. Yes, you borrowed money to cover 75% of the property value, and you have a mortgage payment. However, by doing this, even factoring in the mortgage payment, your annual return doubles to more than 20%.
This is true for several reasons, but after you have equity in one or more investment properties, you have the leverage you need to borrow more and buy more properties by getting a second loan or refinancing your original loan to pull out equity. Buying an investment property with little or no money out of pocket can be risky. There are mortgages for investment properties that will require little or no out of pocket cash. In this case, even though you may be able to purchase more properties, a smart investor will not obtain debt before thoroughly weighing and understanding their risks.
Understanding the different mortgage options available will help you know their benefits and risks, which is critical to your success. Investment loans will typically require either 20% equity or cash down payment of the sale price. You should always do your due diligence when shopping for mortgages and proceed cautiously in the waters of zero down, balloon loans, and adjustable rates.
5: You Can Improve Your Investment and Increase Equity
A lot of investors intentionally buy properties that could use improvements, which can make real estate investing attractive. Real estate is tangible, and you can improve the value of most properties, even with a little sweat equity on the part of the investor. No matter how you accomplish it, you stand to make your investments worth more by improving them.
6: Real Estate For Retirement
In some respects, real estate investing is a forced savings program that will typically yield more and more value over time. This makes real estate investing the perfect investment strategy for retirement because of increased cash flow. This is because when you initially purchased the real estate, the cash flow is less. After all, the rate of principal reduction is less on the mortgage. As you pay down or pay off the mortgage, your cash flow will increase.
7: The Tax Deduction That Keeps on Giving
Federal and state tax codes are generous to investors. They allow for deductions for expenses involving real estate, such as maintenance, improvements, and even mortgage interest. These deductions are significant to understand as they can offset your gross income, thus reducing your overall tax.
8: Real Estate Investments Depreciate
Federal and state tax codes allow for depreciation as a non-cash expense allowing for a depreciable value of investment properties even though the actual value appreciates. We know this may seem crazy, but it is accurate, and it can enable real estate investors to generate positive cash flows while decreasing taxable income. By taking advantage of this tax concession, you can realize an even higher return than you may have initially planned.
9: Lower Tax Rates for Real Estate
If you sell an investment property after a year, then the gain is subject to capital gains. By understanding the capital gains tax rates, you will generally see a tax rate between 15% or 20%, which is usually less than the percentage for your tax bracket.
10: Capital Gains Deferred With a 1031 Exchange
A 1031 exchange is a tool that allows an investor to transfer capital gains from selling one investment property to a new property. This effectively defers the payment of tax on capital gains enabling you to realize huge returns with little or no tax penalty.
This means if you sell a property at a profit, you can roll all of the profit into another property and avoid paying a capital gains tax. There are some strict rules, and you can learn by researching the IRS Code in Title 26, Section 1031. However, at the core, the IRS says, “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or investment if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”
11: Rental Income
While we have discussed this as an implied benefit, direct rental income is a huge benefit for real estate investors. Smart investors will always look at the actual cash yields when weighing their portfolio and investment strategy.
12: Inflation-Proofing Your Investments
Rental income will typically increase with inflation, as mortgage payments remain stable. Besides, when inflation rises, it can mean more renters. As mortgages will become more expensive for the average consumer and therefore, there is an increased demand for rental properties, which drives an increase in rental rates.
Educate Yourself Before You Start Investing
The hope of getting rich quick with real estate investing is appealing, but don’t let it blind you to the realities. Be sure to do your own due diligence before you invest. Real Estate Investing can be extremely profitable, but your knowledge needs to be as thorough as possible. Yes, some make it big without a ton of investing knowledge. However, smart investors don’t rely on luck, and they do their homework before making a commitment or tying up their finances. Real estate can be profitable when people know to make wise investments.
Before You Buy a Property Evaluate, Evaluate, Evaluate
Think about the amount of time and effort it takes to find a good property to invest your efforts and money. You should have a strong desire to know the best ways to evaluate the deal to know if it is truly suitable for your investment portfolio. A savvy investor will visit the property, do extensive research on the neighborhood, and be acutely aware of the value of comparable properties.
Understand How Investors Profit from Real Estate Investing
Cash flow is a pinnacle factor for a profitable real estate investment. However, other considerations can and should influence your choice of properties. A typical investor will consider many factors. How much profit is there they fix the property up and sell, known as flipping, versus putting it into the rental market, sometimes known as a fix-and-hold.
Are You Ready to Be a Landlord?
You need to be honest with yourself here because if your temperament is one that cannot be confrontational, then becoming a landlord may not be for you. A good Landlord keeps their investment properties occupied, and someone must be available 24-7 to address issues with the renter or the property. You can hire a property manager to handle all of the daily business operations, but that will affect your bottom line.
Vacancies are an important factor that can be hard to assess. If you cannot find a renter for an extended period, you will have to cover the expenses for the property until you find someone to rent it. To be on the safe side, you should factor in at least two months of vacancy per year. As a result, you need enough cash to cover gaps in rental income due to vacancies.
Long Term Investment
Rental properties rarely turn a profit early on because the revenue from rent goes to the mortgage, expenses, and estate taxes. However, over time, the mortgage balance will get paid down, resulting in a positive cash flow that becomes monthly income. We always advise our clients to take a long term approach when buying property for rental income.
Diversify Your Income
The average yearly income from investment properties is between 6% and 8%. Therefore, you should consider rental income as a method of diversification versus income from other investments such as stocks. If equity markets slump or downturn, rental profits are affected less, at least in the short term. Of course, as a landlord, you will be potentially impacted by the housing market and overall economy. If the market slips into recession, it could be tough to find a suitable renter, or existing tenants may not be able to pay due to a loss of employment.
How Does Real Estate Investing Return a Profit?
When you buy stock, you are looking for the stock value to go up. You also look at how much of a dividend the company offers to its investors. Investing in bonds means you look at the income yield for interest. Real estate investing offers far more ways to see a good return on your investment. A rental property can provide a steady income from rental payments, just like stock with dividends. However, most rental property returns will typically exceed most stock dividend payouts. Beyond the income, real estate investors also have more control over their cash flow risks. Although there will be slumps in the real estate market, residential can go on for many years without experiencing any measurable or even actual decrease in rent.
Real estate has historically shown to be a reliable source of income and profit. This is because investment property values have very reliably increased over the last 100 years. Although we cannot predict real estate trends, the statistics are clear even though some areas vary throughout the United States.
Investment Property Improvements
Cash flow is king, but you can also make improvements to your investment property and earn even more profit when you sell. Upgrades to appearance and functionality can increase value as well as keeping up with trends and style changes. By ensuring the property is attractive to renters, you are also providing it is appealing to a potential buyer.
For maximum return on your investment, you should become aware of improvements that will ensure there is an increase in the property value. Installing new energy-efficient windows, adding another bathroom, or remodeling a room can all increase your investment properties value.
Inflation and Rent
You may wonder how inflation matters; after all, you have a fixed mortgage payment that will remain constant. However, inflation can drive up new home construction costs as well as affect rental rates. Beyond these considerations, population growth can also create a boom in demand, which can quickly increase rental prices. In Colorado, massive flooding a few years ago damaged homes driving homeowners into the rental market. When this occurred, rental rates went from $1500 per month for a 3,000 square foot home to over $2300 per month. Rental properties were so scarce that when a property was up for rent, there would be a hundred or more people fighting to rent it.
Making Use of Equity
As we have discussed, as you pay down your mortgage, your equity will increase. Equity means profit when you sell, but real estate investors can also take equity loans out when loan terms and interest rates are favorable. The funds can then be used to fund other real estate investment projects.
Finding that Awesome Deal
Finding a property that is an excellent value is the quickest way to increase net worth. However, these deals are not easy to come by. You have some stiff competition, and savvy investors are doing their homework. There are tons of investors who are hawkish in browsing property listings to jump on excellent opportunities.
Investors wishing to increase their portfolio value should ensure they have a financial solution when they are ready to jump. Depending on the lender, good credit scores may not be as crucial as equity or cash in the deal.
Investing in Real Estate Without Cash
Many would-be investors aspire to get in the game, but they don’t have cash for a down payment. However, it is shocking to some investors to discover that they start investing with a desire to do so and a lot of leg work. There are numerous methods taught by real estate gurus online and on television. You should always be leary of expensive courses or mentoring, but there are techniques to be learned here.
After you figure out what they are doing, it still rests in your lap to use that knowledge and being motivated enough t go out and implement the strategies. Here are a few techniques that can make you money without a lot of cash, or maybe, no cash at all.
Bird-dogging primarily refers to a real estate wholesaler. There is no cash required to get started, except maybe some business cards and a lot of effort and can become a full-time business for someone with not little money.
Bird dogging works because the less an investor pays for a property, the higher their return on investment and equity. This is the reason they may want a wholesaler or bird dog to seek out and find the deals.
Bird Dogger’s seek out homeowners who need to sell due to various reasons including a looming foreclosure. They try to find homes that are not yet listed, or real estate agents feed them leads when a property hasn’t been able to sell. If they are successful, a bird dog delivers a profitable investment to an investor, and the investor pays the bird dog a pre-arranged percentage when the sale closes.
Assignments and Their Pros and Cons
Assignments are another money-making strategy for real estate investing without any money out of pocket. They are not very complicated or hard to understand. You line up a cash buyer, and then you initiate a purchase contract with the seller. In this scenario, you make up your deal with the home seller. The agreement identifies the buyer is your name and or your assigns, which allows you to assign the contract to someone else. Once signed, you don’t need seller consent to sell the property, you inform them that the transaction will proceed as normal according to the purchase contract terms with your buyer.
Negatives of Assignments
After locking yourself in contractually, you will be required to pay an earnest money deposit. The money will be deposited with the title company that will handle the closing. Be aware that you will lose your earnest money if the deal goes south for any reason. However, if the deal closes successfully, the deposit money will be transferred to your buyer.
Keeping the deposit as small as possible is key to controlling the amount of risk that you will be taking should the deal not go through. You should also be aware that you will not receive any funds until the deal closes. However, if you work with your investor regularly, you could collect fees when you do the contract assignment. If this is the case, you might even be able to get the earnest money upfront. The bottom line is that the more you have aligned with an investor the more opportunity you can get a verbal commitment upfront.
Assignments and State Laws
There are a few states that will not let you transfer a liability in this way. Because of this, as with everything in this article, you should check with your attorney to understand the laws before you invest.
HUD homes and real estate owned properties or foreclosures generally aren’t open to assignment in any state.
Before the housing and mortgage mess in 2007, title companies would do double closings and fund one deal with money from the other, however, this is not typical as of today.
Transactional funding implies getting a very short-term loan to fund one deal so you can sell the property the same day, or within 24 hours. A transactional lender then wires the title company the funds required to close the first deal. Once received, they can move on to the second deal. The closing statement will show the lender’s re-payment of the loan proceeds from the first deal along with their fees. In the end, you would get whatever is leftover as your profit.
Lease options are a strategy that couples a lease with monthly payments, along with the opportunity to buy the property when the lease expires. As an example, let’s say you want to buy a rental property. However, you have credit issues or lack money for a down payment. So, all you have to do is tap into a highly motivated homeowner who hasn’t been able to sell for whatever reason.
An Example of a Lease Option
In our example, the property is worth $400,000. The mortgage balance is $350,000, and the homeowners’ payments are $1,800 all in. The wife got laid off, but the other located a great job, and they need to move soon. You could present them with an offer to lease the home for one to three years, with lease payments equal to their mortgage payment. The lease option gives the right, but not the obligation to purchase the home at the end of the lease for $350,000.
Now you need to get a renter willing to pay $1,800 a month to rent it. The tenant sign a one-year lease.
The idea is to control the sale of the home while locking in a profitable purchase price that you can take advantage of at the end of the lease. Because of the owner’s distress, you may be able to buy the property for less than the current value. On top of that, it should appreciate during the lease period, which all sets the stage for a significant return on your investment.
The Sandwich Lease
A sandwich lease sort of matches its name in that it is two lease options between the investor and you, and between you and the owner. Once again, you should ensure your option allows for you to purchase the property at a discount when the lease ends.
They are similar to the lease option, except your lessee is an investor who wants you to give them a lease to sublease and purchase option rather than renting to a regular tenant. The math is the same. However, the investor would own the home at the end of a three-year lease period. Both the lease option and sandwich leases are used to add properties to build on their monthly cash flow and add a property to their portfolios.
Other Creative Rental Options
You could buy a duplex and live in one of the units. You could then rent out the other unit and use the rental income to offset some, if not all, of your mortgage payment. Because you need a roof over your head as you start your real estate investment career, you might want to think about this as an initial strategy. It requires some money out of your pocket, but you could benefit in the long term as you start your investment portfolio.
Double Down 1st Investment Property
Getting started can be as easy as buying a house and physically living there for at least one year. The VA offers loans for no money down, and FHA loan starts as low as 3.5%. The property has to be your primary address, but after a year, you can rent out your home and buy another one. You can stay for a while, and then you can move out and rent it out. As your renter pays down your mortgage over time, you build equity, and your net worth will increase as does appreciation.
Analyzing and Understanding the Costs Associated with Real Estate Investing
Real estate investors need to understand the costs and do analysis before they invest. Many investors will have a number of homes in their portfolios, and there are innumerable factors that can lead to their success. The more of these factors you learn, the more chance you will have in being a successful investor. Having the knack of buying right is the most natural part of being successful and can ensure solid cash flow years. However, failing to do your due diligence could be your undoing, leaving you with an investment property with problems or even getting in too deep.
Net Operating Income
Your analysis should begin with understanding your Net Operating Income or NOI. NOI is the income you receive from a property versus the expenses. As a basic calculation, you take your total expenses and subtract that value from your total income, and to break that down to a monthly number, divide that by 12. However, you should always remember that NOI does not include your loan payment or costs, so NOI equals cash flow only if you paid cash for the investment property.
Cash flow identifies the money left over after you consider the cost of the mortgage on the property. Calculate cash flow by subtracting your mortgage costs from your NOI. You could also consider this as your profit. It may seem obvious, but the more you have to borrow, the less your cash flow or profit you will have.
Cash flow has many inputs, many influenced by market conditions and even the economy. Rental property demand can increase or decrease rapidly. This happens when there is a change in the community. Let’s say a significant employer shut down, laying off thousands of people, or the Federal Reserve raises interest rates, driving up the cost of money. These changes can dramatically affect your ability and the cost of buying new properties. Although you can’t really control these things, you can be aware of and avoid them by thoroughly understanding things like health, as well as the plans of surrounding employers. You can be mindful of economic news or potential changes in interest rates.
Depreciation and Investing
Investing in real estate provides for tax benefits such as property depreciation deductions, which are essential to consider as part of your property analysis. Depreciation will reduce the overall taxable income, especially for those in high tax brackets. This is because you can probably use any leftover losses to offset other investment income.
Depreciation does not come directly out of your pocket, so it is not an actual cash loss. It is, however, treated as an expense for income tax purposes. By using depreciation, you could still have positive cash flow while having an operational loss for tax purposes.
Landlord insurance helps cover the property, much like a standard homeowner policy. However, the differences being, it will cover damage from tenants. In addition to landlord insurance, high-risk areas such as those in flood, earthquake, and wildfire areas should have appropriate policies to cover your investment. However, if you do lose property after an event, the Small Business Administration Disaster Assistance program can provide low-cost loans to help repair the damage.
If you own an investment property, you must pay property taxes. However, you can deduct these taxes for income tax purposes. Property taxes are assessed on real estate in the same manner as for a homeowner. You should also remember that, when buying a property, any taxes due for the year will be distributed between you and the previous owner. The split is based on how many days of the year the previous owners had the property before closing.
Real Estate Investing Buyer List
If you are interested in flipping homes, you should build a contact list of real estate investors. In the end, your buyer could end up being an investor. Regardless of your strategy, at some point, you will need a buyer. This is why it is so essential to maintain a list of buyers. Having ready buyers can help get a quick buyer on the hook, which will reduce holding costs. A useful buyer list should have retail and investor prospects.
Keep in mind that other investors have their requirements and goals, which can create opportunities. Many investors will be less aggressive when they are out locating deals. If you can bring them homes that are ready to rent and have positive cash flow, they will be interested in you. It may even benefit you to get a tenant before you sell. This offers a buyer a rental unit that is already occupied, thus bringing in revenue. Let’s take a look at some other tactics to build your buyer list.
Classified ads in a local newspaper are inexpensive and make it possible to run repetitive ads for long periods. Ad repetition is essential because responses will likely come from people who have seen you’re ad over many weeks and decided to reach out. Running ads targeting buyers with credit issues or low down payments will bring calls, but be aware, you will be doing a lot of qualification of these leads.
Business Cards and Flyers
Business cards or small flyers are also still working whether you are handing them out personally or if you put them on community bulletin boards. You can even put them in local business waiting rooms like those for oil change businesses where people can pick them up.
You have seen them, the signs stuck in yards or on a street corner saying We Pay Cash for Houses, or Buy A Home With No Money Down. Any relatable short statement that identifies that you buy homes or you have homes for sale is a good sign.
Craigslist is like the printed classifieds but free! The difference is that people can search Craigslist for related keywords. However, there is an alternate way to build a buyer list using Craigslist. You can use it as a research tool and search for people who need a home with a low down or credit score.
A great marketing tool is to go to places where buyers congregate. This is why knowing about investing clubs is essential. Getting into conversations with members of these clubs allows you to pick out buyers to add to your list.
No matter what method you use, your real estate investor buyer list can become one of your most valuable tools for real estate investing profits. Build it, maintain it, and use it.
Fix & Flip Investing
When an investor buys a property that needs to be updated or requires repairs, then they sell that property after they are done, we call that a fix-and-flip. You have seen this strategy on TV. There are numerous TV reality shows focused on fix-and-flip properties. In these shows, they document a project from a selection of the property and concludes with a sale after the rehab process is complete. To be successful with a fix-and-flip, you should become knowledgeable about repair costs and contractors. Let’s discuss the different factors that will come into play.
Estimating the Cost of Remodel and Repair
Having the ability to calculate remodel and repair costs is a critical skill for real estate investors. You should bring in experts when you are not confident is a repair or remodel cost. However, if you call contractors to help you look at a property but do not hire the will result in their unwillingness to help you in the future. This is why having knowledge and tools to determine the basic feasibility of an investment before you call in a contractor can be much more efficient.
You can also research to help figure things out. There are tons of websites focused on estimating remodel or repair costs. Evaluating the costs to repair or remodel can help you determine whether to do more research or if it is better to move on to another property. Here are some of our pro home repair estimating tips.
Always Error on the High Side
Be liberal with repair cost estimations. If your estimate is a bit high, that is probably a good thing. This protects you from costs and expenses you might have overlooked.
Estimate Without Sweat Equity
Do estimations for everything, even if you plan on doing some of the work yourself. If circumstances prevent you from doing the work, you will still need to pull off the deal. If your investment is profitable with estimates from contractors, then being able to do some or all of the work yourself is a huge bonus.
Building Your Real Estate Success Investment Team
Successful real estate investors will all have a carefully selected team to help them get projects and deals done. Once you have your team you have an incredible leg up over someone trying to d everything themselves.
Having a good real estate agent in your corner will bring value beyond locating properties and writing contracts. You may find that you need to work with multiple agents that are focused on particular niches, area, or property types. By approaching the realtor in this way, you can pull in specific skills to ensure success.
Real Estate Attorney
An attorney does more than advice about real estate transactions. They can also help you structure your business correctly to protect you and your assets. Haring an attorney upfront is better than hiring one to defend you in a lawsuit.
Lenders, Bankers, and Brokers
Buying and selling properties will typically require a mortgage of some type. A mortgage broker or banker can help make sure that you get the money you need to invest. We all know that funding issues kill more deals than anything else. An aggressive broker could also be an excellent resource in locating qualified buyers. Specialty lenders are also very critical to have in your pocket because they often get deals financed when a bank or broker fails. Nothing is more frustrating than blowing a profitable deal because you have no access to short-term funding.
Banks have the most strict lending requirements because they are subject to federal and state lending guidelines. This means that qualifying for a bank loan as an investor will likely require good credit, firm financial footing, lots of cash reserves, extensive experience and credentials, and other considerations.
Brokers are essential because they have access to various lending sources. They can help you locate a motivated bank or other lenders that fit your lending needs.
Private and Hard Money Lender
A hard money lender will loan money to fund real estate deals on a short term basis. You need cash to purchase and do rehab work, but you only need it for a short period. The property guarantees a hard money loan, so there must be considerable equity or down-payment. Private lenders are typically individuals or small groups. Both hard money and private money lenders will come with s higher interest rate. They may also charge up-front fees and add points that are due at closing. Although these sorts of loans are expensive, if a deal is profitable, they are worth it and are often the only way to get an investment deal done. These lenders can also close fast, as fast as five days.
As an investor, you are likely to find deals that are too good to pass up, but a bank will not loan money on it. You should not be afraid to move forward with hard money or private loan provided there is enough profit to offset the higher loan costs. Having the right private lender, like Abbey Mortgage on your real estate investing team, is very important.
Do your research and contact several hard money or private lenders. Don’t wait to find your partner until you need one. Great deals often have a short window of opportunity. Don’t miss a great deal, have your financing done upfront.
No one wants to spend money on insurance, but we have to. Liability, property protection, and landlord coverage are all critical elements that make the right insurance agent of great value.
As a new investor, you may think of an accountant as a down the road need. However, complex deals can complicate taxes. A proper accounting professional offers much more for your investing business. The bottom line is, you need to structure your business to maximize your profit while minimizing tax liability.
After the mortgage and housing meltdowns of the mid-2000s, title companies were forced to become much more cautious. They now operate under more restrictive regulations. However, a good title company can help you to avoid surprises after purchase. Title research and title insurance coverage are critical and required by most lenders.
Whether you need to clean out a foreclosure, or you plan to renovate a home for a quick flip, you need to have contractors and reliable tradespeople lined up and ready to help you. If you frequently invest in fix-and-flip deals, you should work on building relationships with various contractors. If a contractor can get work from you and you pay them, they will be happy to provide you with estimates to get the job done.
You can work with contractors in various ways. As examples:
1: You can buy the materials yourself and pay them for labor.
2: Give the contractor a material budget and specifications and let the contractor select the materials for approval.
3: Let the contractor purchase materials as a part of their hard job bid.
Things to Avoid When Investing in Real estate
Do Not Count on Huge Appreciation
Even expert investors can get stuck in their thought processes and get themselves into trouble by thinking what has happened before is going to happen again. Just because the real estate market has been outstanding does not mean it always will be. To our knowledge, there is no predictor for the future, and you should not expect to see the same results in future market trends. This is called gambling, not investing.
Huge Monthly Payment
So, you look at the numbers and see a significant return on investment due to low upfront cash outlay. However, high payments go hand in hand with higher leverage. You will likely have to make monthly mortgage payments, and the more you borrowed, the higher the monthly payment. This is especially bad if the market softens or your property, or if you have vacancies or credit losses. You could easily find yourself unable to pay the high mortgage payments, and if this occurs, your investment will be in jeopardy.
Excellent Financing Does Not Mean a Good Deal
Just because you can buy an investment property with a low down payment does not mean it’s a good deal. As we have discussed, you should be looking at a lot of factors, not just the finance option in front of you.
Never Forget That Cash Flow Is #1
If only one thing sticks in your mind, this should be the one. Slight errors could have a lower impact if all of the decisions and evaluations were focused on cash flow.