So a lot of people have been asking how to get started in the world of real estate investing. The truth is, it’s an art. However, it’s not an unattainable goal. Whether you’re just beginning to think about investing or are planning to start your journey, there are several things to educate yourself about. We caught up with HomeCity investment experts Jonathan Bane and Greg Saunders to give you a beginner's crash course.
Breaking into Real Estate Investing:
You may be wondering when the best time to start investing is. “It is always the best time to start in real estate,” says Greg Saunders. “What makes the difference is the strategy that you're going with. So, if you're in a low-interest-rate market, as we are now, it makes a lot of sense to do acquisitions for the long-term, such as rentals. When interest rates go back up, then exit strategies like seller financing and flips become more profitable.”
After you’ve determined the best strategy for your market, you need to plan how to execute. “The first thing is to isolate the type of property you want,” adds Jonathan Bane. “Are you looking for single-family residences? They are always a good bet. There are also the multi-family, the duplex, and four-plexes. It really depends on what your long-term solution is.”
Many people, when first starting out, choose to buy and hold. They purchase a house, live in it for two to four years, and then they move to a larger/different house. This ensures they get to reap the benefits of an owner-occupant situation. “If you buy a house as an investment property outright, you typically need to put down 20 to 25% as a down payment; then your interest rates are going to be somewhere between four and five percent, typically,” continues Bane. “If you take out a personal mortgage, you’d usually get between 2.8% and 3.2% interest. Once you lock in this rate, you can keep moving up and moving up, all while keeping the same low-interest rate on all of those properties. The only thing that’s going to change on it is your taxes because your homestead exemption moves, which makes this a great strategy.” Remember: you will need to live non-stop in each house for two out of the last five years to get homeowner tax benefits, and always consult your CPA – because everyone’s situation is different.
Think about it, if you were going to buy a car, you’d do as much research as possible before setting foot on the lot. If you were going to invest in the stock market, you’d want to have a basic understanding, even before hiring a broker. Well, it’s the same with real estate investing. You’re going to want to learn as much as possible about the different strategies, methods, and vehicles for acquiring, holding, and leveraging a property. This is in addition to finding the most knowledgeable real estate advisor you possibly can.
“My biggest thing is just to get educated,” advises Jonathan Bane. “There’s two ways to do it: to learn on your own and then get with an agent who has experience with it.”
“Learn as much as you can - read books, go to investor meetings (not the free seminars by the airport), watch webinars, talk to people who already invest in real estate. The best way for you to feel more comfortable is to know the process and what to look for. Many people watch a show on HGTV and think, ‘Wow that was easy, and they made so much money - I can do that!’ which is not the case. There will be ups and downs and costs. Those that stay the course for the long term will reap the benefits.”
Make an attack plan:
Learn the five types of investment strategies. The investor classes at CIAS identify five major types of investors.
- First Time Homebuyer : This one is pretty self-explanatory. These people realize the value of owning real estate and are planning to buy their first property. Most times this property will be for them to live in themselves.
- Move Up Investor : “Move-Up Investors are looking to move, but instead of selling their primary residence they decide to rent it out. Investors who employ this strategy can build equity and generate cash flow from their rental, while expanding their real estate portfolio with a new primary residence. This strategy can be repeated and lead to a growing portfolio of rental properties over time for this investor type.”
- Portfolio Investor : “The Portfolio Investor is probably the most common investor type. The typical Portfolio Investor purchases a property every one to three years and already has a solid understanding of investment terms and calculations.”
- Performance Investor : “The Performance Investor is heavily involved in real estate as an investment and usually purchases more than one property a year. These are typically high net-worth individuals who understand the value of large cash flow real estate portfolios and are almost always looking for a deal.”
- Rehab and Resell Investor : “The Rehab & Resell Investor is also known as a “flipper.” This is an investor who isn’t purchasing property for a long-term hold, but seeks to buy a property at well below market value, make some material improvements, and then resell the property quickly for a profit.”
Decide what avenue is best for you and define your long-term solution. Treat it like a business, and make sure that it’s something that’s separate from your personal life. In real estate investing: you’re the CEO of your own company.
Be sure to learn about all of the vehicles for acquiring, holding, and leveraging property. “I started by purchasing ugly homes to live in,” said Greg Saunders. “I was renovating them overtime, and the refinancing to get my cash back out after six months. If you do that every 1.5 – 2 years, you can build up a great portfolio for literally nothing.”
There are also ways many people don’t realize you can invest, like self-directed IRA’s. “A self-directed IRA is similar to a traditional and Roth IRA that you get from a major brokerage,” continued Saunders. “The big difference is that you decide how you want the money allocated. So, instead of having stocks and bonds appreciate, you can direct your funds to invest in real estate for flips. It gives the best possible tax advantages in real estate for short-term gains.”
Consult with your agent to learn more about what your options are, as they vary from situation to situation significantly.
Start scoping properties with your trusty agent:
After you’ve done your research, found a great agent, planned your strategy and have the necessary means, you should begin to search for good investments in your area.
“A good investment property is one that you understand,” advised Greg Saunders. “If you're someone who understands cash flow and how to implement management then multi-family and commercial properties make sense. If you're just starting out and have no experience then going with a single-family residence is going to be your best chance of being successful.”
“There are five things every investor should look for when it comes to property, everything else is cosmetic,” adds Jonathan Bane. “That’s the foundation, the plumbing, electrical, HVAC, and roof.” Keep these in mind when you’re looking at properties, especially if you plan to fix them up for resale.
Your agent should be able to help guide you once you know what direction you want to go. “Work with a qualified real estate agent,” concludes Bane. “Not only can a real estate agent help show you how to avoid certain pitfalls with ownership, but they can guide you to building a long-term portfolio of properties. They also have connections to find wholesale properties that may otherwise not be on the market.”