Real Estate Strategies - Residential Properties
Finding properties
Investment 101 has been and will always be, "Buy Low And Sell High". But how do you find real estate that can be purchased at a discount and sold at a premium? You can purchase distressed properties – those in need of extensive repair and/or with significant liens levied against it, at public auctions or foreclosure sales.
Another is to develop a network of professionals who can help you identify inexpensive properties. Such a network would obviously include some brokers, but might also include other real estate professionals, such as appraisers, home inspectors, contractors, and marketing specialists; divorce and estate lawyers, who can inform you when divorce proceedings or deaths are likely to result in a home sale; and moving men and trash haulers, who can inform you if their jobs are at properties for sale. Bankers can also inform you of foreclosures and/or short sales.
A third strategy is looking for properties in markets undergoing falling housing prices. This might be due to a weak job market, rising crime, changing demographics and/or a surfeit of available housing. You should buy in these markets if you anticipate that either the market will soon undergo an upswing or that you can otherwise find interested parties willing to buy from you at a premium.
Lastly, you can become a residential real estate developer, and work with a construction firm to build residential housing prices inexpensively to be sold at a premium. There are often tax credits and financial incentives when building properties in local real estate markets suffering from slow or negative economic growth.
Strategies for Residential Real Estate Investment
One of the key decisions to make when investing in residential real estate is how involved you will be. Will you be a passive or an active investor? An passive investor is one who owns, operates, and/or sells the property, making any necessary repairs and assuming relevant liability. They may purchase the property using leverage from traditional lenders, and leave the daily management of the property to a paid property manager or a property management firm. Or they purchase properties jointly with others as a part of a limited partnership, leaving the management of the property to the general partner. The typical return for passive investors is usually between 3% and 10% appreciation and 2.5% to 8% income. By contrast, an active investor is one who uses unconventional financing methods and employs tactics involving more effort and resources, such as renovation, and more risk. Their return is typically 5-25% appreciation, and 8% yield.
Another key decision to make is whether to invest for the short-term or the long-term. In general, this is heavily dependent on your financial goals and your risk tolerance. If you want to get hands on, will not stay up all night worrying about your investment’s performance, and make a significant return on your investment in the short-term, then flipping – buying and trading houses within a 30 to 60 day period, may be the strategy for you to pursue. You will want to look for houses in need of minimal repair and make the needed repairs as quickly as possible. Further, to maximize your return, wait for a period when the rate of inflation is forecast to exceed current interest rates, other real estate investors, interested in residential real estate speculation may enter the market, willing to purchase your properties with leverage and, once inflation increases, pay off the mortgages with less valuable dollars. This is a strategy that you, in fact, can take advantage of, albeit a risky one.
If, by contrast, you are looking to be minimally involved, and are willing to sacrifice a potentially higher rate of return for minimal volatility, then investing in a portfolio of residential properties and paying for the services of a property management firm, may be the route to take.
When assessing a property, one of the most important considerations should be cash flow. With residential property, this usually means rental income, which should be evaluated against going expenses, such as utilities, and both current and long-term related liabilities. If you calculate a negative cash flow, you may want to stay away from the property. The property should also be evaluated in terms of long-term potential for capital appreciation, but this means little if you cannot pay the associated bills in the interim. You should also have/save funds to be held in reserve in case unforeseen circumstances increase expenses.
Beyond flipping and buying-and-holding and renovating, other strategies include purchasing property jointly with other investors, and/or property development. These are entry strategies. You should always enter a real estate investment with one or several exit strategies in mind. Plan for what you will do if housing prices suddenly drop or you have difficulty finding a viable tenant. With real estate investments, ongoing expenses are guaranteed, while income/capital appreciation is not.
Another well proven strategy is named BRRRR. Understanding current real estate investing methods can turn a mediocre real estate investment into a successful source of passive income. After purchasing a house, Alex, a real estate investor, with Buying Nevada Houses, repairs or rehabs the property; once the repairs or rehabs are completed, Buying Nevada Houses then rents out the house (as opposed to selling it for a profit). Buying Nevada Houses is a real estate solutions company that buys Las Vegas houses at a discount from distressed homeowners.
B (Buy)The first step in making money with the BRRRR strategy is to buy a house. The key is to buy, not just any house, but one that is a great deal. Look for a house in need of repairs that is in a good neighborhood. Note: Because of the extent of the needed repairs, some traditional lenders will not finance houses in need of major repairs. Be prepared to pay with cash in those situations. Regardless of how you pay (cash, traditional lender, etc) the BRRRR strategy will work as long as you buy the house.
R (Rehab)Under the BRRRR strategy, the rehab work is completed with the rental process in mind. For example, appliance and flooring choices are chosen with cost and durability in mind. While a house flipper intending to sell might choose top of the line appliances and hardwood floors, an investor looking to rent might choose standard appliances and linoleum or carpet flooring.
R (Rent)The next step of this process is to find tenants. Be careful not to quickly accept the first tenants who inquire about the rental unit. Choosing the right tenant goes a long way in creating a solid tenant-landlord relationship.
R (Refinance)As mentioned earlier, most fixer upper houses will not qualify for a conventional mortgage. However, after the rehab and appraisal, it is possible to refinance the house and get your money back. Always refinance on the appraised value of the house - not what you paid for it. Let's take a closer look.You bought a house for $25,000 in cash.After spending $50,000 in rehab, you now have $75,000 invested.You rent the house for $700/month.The appraised value of the house is $100,000.Refinancing gives you a net of $25,000 ($100,000-$75,000). That $25,000 gain is key for the next step.
R (Repeat)The secret to passive income is to repeat this process. You can now apply that $25,000 towards the purchase of another house. What about the mortgage payment of the first house? Part of the tenant's rent will pay for the mortgage payment and you will have cash flow from the remaining money. While you will not have a large amount of cash flow from one house, the key is repetition. The more houses you buy, rehab, rent, and refinance the more passive income you will create.
The top 3 benefits of using the BRRRR strategy reduce the risk of major repairs early on in your investment: Because you spent the time and money to rehab the house right away, you have reduced the risk of needing to complete major repairs for the first few years of owning the house. In addition, fixing or replacing appliances, roofs, and siding all increases the ability of charging a higher rent. Location independent investing: While you can certainly buy homes near you, the BRRRR method for real estate investing is location independent. Thanks to property management companies, you can live in California and purchase homes in Ohio, while a private company manages the property on your behalf. Passive income: Because a portion of the rent pays for the mortgage, you do not pay for the mortgage out of your pocket. The remaining rent money is now available cash flow for you.Investing in real estate can be overwhelming particularly because of the steps, paperwork, and legalities involved. However, with careful and thoughtful planning, investing in real estate and creating rental properties can be a powerhouse of passive income.
Advantages and Challenges of Being an Entrepreneur in Residential Real Estate
One of the many advantages of being an entrepreneur in residential real estate is that because there is a fixed supply of land, and existing residential houses, there will always be a demand for residential real estate. The level of demand in each local real estate market may fluctuate in accordance with local and national economic trends; however, there will always be demand for places for individuals and families to live.
Compared to investing in commercial real estate, it is generally cheaper to begin investing in residential real estate; there is also less risk in the latter than the former. Residential real estate is, generally speaking, less complex and requires less due diligence. Residential real estate investments are also typically less risky than stock market investments and can serve as hedges against both inflation and deflation.
There are many challenges to invest in residential real estate as well. Properly forecasting what housing prices will look like in a particular market can be challenging, as there are many variables.
Being a landlord, if you should choose to do it, can present its own challenges. Identifying a good property management firm, critical if you choose to be a passive investor, can also present difficulties.