Why should I start building an investment property portfolio?
Rental properties can be an awesome investment that allow you to retire early if you take the time to educate yourself about the process and the best ways to get great returns. It is not a get rich quick scheme and it is not easy to do. Real estate investing takes time, flexibility and ambition to make it work well. However, most people who are interested in buying rental properties or real estate as an investment never do so. The sooner you get started, the easier it will be and the better off you will be later in life.
People who don’t take the time to learn about investing in rental properties are missing out on a great opportunity.
It’s always good to start with comparing rental properties to the stock market, because the stock market is the investment vehicle we are all taught to use. Whether it is individual stocks, mutual funds, index funds, or REITs, we are told the best way to save and invest is to put our money in the market. The major problem with investing in the stock market is that we are depending solely on stocks to increase in value. Even retirement calculators are based on the stock market. They make us guess when we will die to determine how much we should save. We run out of money if we live too long or save too much money if we die to soon. Some people invest in real estate for appreciation, but smart investors invest for cash flow. Cash flow is the money you make from rental properties every month after all expenses are paid. The great thing about cash flow is that it increases over time without ever eating away at your principle investment. It is like a stock where the dividend is so high that you never have to worry about the stock increasing in value to make great returns. Cash flow will also increase over time because rents will go up with inflation while your mortgage payments stay the same. Eventually you will pay off your loan and your cash flow will increase significantly.
The minute you decide to take the plunge and buy stocks, you will find yourself as the partial owner of a respective company – regardless of how small your share may be. As the company’s earnings improve, so will your stock. Savvy investors may be rewarded in the form of appreciation and dividends. In fact, since 1945, the average large stock has returned close to 10 percent a year. Stocks really can serve as a long-term savings vehicle. That said, stocks could just as easily depreciate. They are by no means a sure thing. Not unlike real estate, playing the stock market has become synonymous with high returns for those that know what they are doing. However, it is just that: playing a game. The stock market is as much out of your control as anything can be. If you invest in stocks, you will be at the mercy of a relatively volatile market. That said, real estate is the polar opposite in regards to those aspects. Net earnings in real estate are reflective of your own actions. You are really in control of your own money. Any money gained or lost is a direct result of what you do.
Stocks and bonds, while often lumped together, are fundamentally different from one another. Unlike stocks, bonds are not representative of a stake in a company. As a result, the return on a bond is fixed and does not have the opportunity to appreciate. Bonds function as a loan that is paid back by a company over time with interest. This, of course, makes bonds less volatile than stocks. However, bonds are not liquid and do not offer the same returns as most other investments. While bonds are relatively safe, they do not offer impressive returns like other investment strategies. Typically, the safer the bond, the lower the interest rate of return. However, by taking a long term approach, real estate can rival the safety of bonds with a much higher return. The real advantage real estate holds over bonds is the time frame for holding the investments and the rate of return during that time. Bonds pay a fixed rate of interest over the life of the investment, thus purchasing power with that interest drops with inflation over time. Rental property, on the other hand, can generate higher rents in periods of higher inflation.
Most people invest in gold for its popularity. There will always be a demand for the precious metal, as “Fifty percent of the world’s population believes in gold,” according to Chris Hyzy, chief investment officer at U.S. Trust, the private wealth management arm of Bank of America in New York. According to the World Gold Council, Gold peaked in summer 2011 and demand has softened since 2013. As a result, gold hangs around $1200/oz. Recognized as a relatively safe commodity, gold has established itself as a vehicle to increase investment returns. However, there are those that don’t even consider gold to be an investment at all, rather a hedge against inflation. The precious metal acts as a way to protect wealth against the risk of loss in select asset classes. Of course, as safe as gold may be considered, it still fails to remain as attractive as real estate. Here are a few reasons investors prefer real estate over gold:
• Unlike real estate, there is no financing and, therefore, no room to leverage for growth.
• Unlike real estate, gold proposes no tax advantages.
• In contrast to real estate rental, there is no income potential.
• If gold does go up in value, the gain is nominal rather than an actual increase in buying
Certificates of Deposit (CDs):
Certificates of deposit, or CDs if you will, operate a lot like savings accounts. Seeing as how they arebacked, they are virtually risk-free. Of course, unlike savings accounts, CDs offer a specific, fixedtermand interest rate. This form of investment is intended to be held till it matures, which can beanywhere from three months to five years, typically. When the CD matures, you can collect theoriginal investment, along with some interest. Certificates of deposit do not appreciate in value, andthey’ve had a historical average return of 2.84 percent in the last eleven years. Real estate, on theother hand, can appreciate in value.
As their names suggest, mutual funds consist of finances that have been pooled together. The moneyis then invested into a variety of asset types: stocks, bonds, similar mutual funds, and commoditieslike gold or fine art. It is one of the easiest ways to diversify any portfolio. The performance of amutual fund is always measured in terms of total return, or the sum of the change in a fund’s netasset value (NAV), its dividends and its capital gains distributions over a given period of time.However, much like stocks, you have little control over the performance of your assets. Futureinvestment performance is subject to many variables. In fact, placing money into a mutual fund isessentially handing one’s investment decisions over to a professional money manager. While you canpick and choose your investments, you have little say over how they perform.
Why is real estate better than other investments (benefits)?
1. Tax Advantages: Taxes are one of the biggest expenses for anyone, let alone a real estate investor. However, there are ways to combat the loss of money in taxes with real estate. Rental houses, apartments, vacant land, commercial buildings, industrial, shopping centers and warehouses all offer their own variation of tax incentives.
2. Cash Flow: Perhaps everyone’s favorite benefit, cash flow is essentially profit. Cash flow is what is left over after you collect the rent and pay your mortgage, taxes, insurance and any repairs.
3. Hedge Against Inflation: Inflation is defined as a sustained increase in the general level of prices for goods and services. In other words, it causes every dollar you own to buy a smaller percentage of a good or service over time. Stocks, for instance, require more money to purchase with the increase of inflation. Essentially, inflation prevents your money from going as far as it would have. Real estate, on the other hand, serves as a hedge against inflation. Unlike almost every other form of investment, real estate reacts proportionately to inflation. As inflation increases, so too do rents and home values.
4. Leverage Funds: When purchasing a property, you have the ability to do so with leverage. It is entirely possible to purchase a $500,000 property with $100,000. You don’t even have to use your own money. Stocks, on the other hand, require 100 percent of the investment up front. Leveraging money also allows you to initiate more than one real estate deal at a time because all your funds aren’t tied up in one project.
5. Equity: In the event, you borrow money to complete a real estate deal, you will be required to pay it back with interest. However, each payment also gets you one step closer to paying down your
principal payments. You are simultaneously building equity and wealth in the same property.
What are the risks of real estate investing?
There are definitely some risks and work involved with owning rental properties. The biggest mistake most investors make is buying for appreciation with negative cash flow. You see that a lot in the West Coast market. It is great if a property appreciates, but the key word is Cash Flow. With cash flow, you have money in your pocket that you can use to buy more properties, invest in different portfolios, or replace/supplement your earnings. Don’t work for your money, make your money work for you! The problem with negative cash flow is most investors underestimate the money they will have to spend on their rental properties. There is also no guarantee prices will rise or when they will rise. Given enough time real estate will most likely appreciate, but it could also go down in value before that happens. How long can you continue to pay money into a property every month? Eventually people run out of money and are forced to sell, sometimes for less than they pair for that property. If you have positive cash flow, then you won’t have to sell and you won’t want to sell, because it is putting money in your pocket. Don’t work for your money, make your money work for you! Another issue that people forget about is maintenance. You have to budget for maintenance items every month, as much as 10 to 20%, depending upon the age and condition of the property. If you don’t account for maintenance you might not make any money on your rentals over the long run. It takes time to manage a rental property as well. You will have to find tenants, create a lease, account for expenses and income properly, and make sure everyone pays on time. You can also hire a property manager to do all this for you for about 8 to 10 percent of the monthly rents, which you will have to budget for as well.
How much do I need to get started with RE investing?
Realistically you will need $25-40k on hand for a single family investment. It should be 25% ofproperty value, as your lender will put up the other 75%, as well as closing costs.
Can I do Real Estate investing myself, why do I need KANAM?
It is not easy to find rental properties that will generate the returns you want without putting in a lot of time and effort learning the market, learning about real estate and learning about rental properties. The older you get, the less time you have with more job commitments, more family commitments and more hobbies you discover. As agents, we have access to MLS listings, real time COMPS for pricing and leasing, and knowledge of the sub-markets to target for maximizing returns. We can vet properties faster and minimize the multiple offer cycle that investors experience.
What kind of properties should I consider for investing?
Single family 3-2-2, under 2000 sqft, healthy rental market, cashflow $300-500, COC 10-20%, with a bit of flexibility thrown in the mix.
Just Like We Tell Our Kids, Do Your Homework!
Buying a property without doing your homework is a recipe for disaster. You need to look at the localrental market and find out who’s renting properties, how much they’re paying for them and whetherthere’s a high enough demand. What is the demographic of people in the area? Is it an area full ofstudents and young professionals who might prefer a large apartment, or is it the perfect place forfamilies to settle down? Without looking into the facts and figures you could buy a property which isof no interest to the local pool of potential tenants.
This is Not YOUR Home, It’s an INVESTMENT
This is probably the mistake made most often by those new to investing. When you look atinvestment properties you need to view them as a landlord, not as an owner. Don’t think of thisproperty as a back-up in case you downsize, or for a cousin that might relocate to your town. Youneed to consider whether it’s attractive for people looking to rent, rather than to buy. Your personaltastes and desires shouldn’t come into the equation. A good rental property will be in a centrallocation with access to different amenities. It needs to be relevant to the target market of the localarea. You want a property that allows the largest pool of possible tenants to put in an application foryou to choose from.
Don’t Lowball Your Costs
It is very easy to underestimate the amount of time and money it will take to get your property rentalready. This mistake often leads to new investors running into serious cash flow problems. It is safe toassume that no matter how well maintained a property is when you purchase it, there will always bea few touchups or fixes that need attention. You should budget at least $2-3k for properties 10 yearsor less. Properties older than that may require even more for budgeting, and don’t be surprised ifsmall rehab jobs cost 50-100% beyond budget.
Keep Some Left in the Tank
It’s good practice to have a “backup fund” set aside for your investment portfolio. If an expensiverepair is needed and you don’t have the cash on hand, you could end up getting the job done toocheaply. This may lead to bigger problems down the line and even worse, angry tenants. One of thebest ways to build up your fund is to take some of your rental profit each month and get it depositinto a completely separate account. Keep these funds separate from your normal bank accounts andyou won’t be tempted to use it up.
Put Down the Hammer and Pick Up a Pen
Running investment properties requires more work than you may think and some new investors tryto save money by doing everything themselves. It’s almost impossible to be your own repairman,salesperson, property manager, or accountant and stretching yourself too thin leads to costly errors.
Your biggest strength comes from building yourself a team of reliable experts to outsource the workto, so that you can spend your time more productively. In most cases, professionals know how tosave you money, so try to think of them as partners and tools of your investment.
Measure Twice, Cut Once
Entering the property investment market is very exciting and can be very lucrative and rewarding.
However, jumping into things without taking the time to research several potential properties, knowthe local market, and interview a number of partner professionals can cost you dearly. It is essentialto identify a property that fits your investment criteria, but once you have, it’s even more essential topull the trigger and put in a competitive offer that you are confident submitting.
Stretch Your Boundaries Beyond Arm’s Reach
It is common for investors to want their investment properties to be right down the street. Doing thatonly limits their choices of potential high cash flow properties. A lot of investing is about comfortlevel. Go drive the areas, in the day and night, to make sure it is a right fit for your investmentcomfort. Also, don’t be tempted to buy property too far, like in another state or country, unlessyou’re prepared to travel to the site yourself and have a reliable estate agent to manage the propertyfor you. Setting up an investment property without seeing it with your own eyes is a recipe fordisaster.
Pay the Right Price
Don’t ever be afraid to make a low offer on an investment property. Your portfolio is a business andthe idea is to make a profit. The worst that can happen is they say no and you try tonegotiate…sometimes. In a strong seller’s market you stand the chance of constantly spinning yourwheels, if you don’t submit a swift competitive offer. The key is to have an agent that is an advocatefor you and can present the offer price confidently, while garnering information about the prospectiveproperty and seller. Of course, offering too much is what every investor is trying to avoid. Again,having the right agent to get you the best COMPs for your market and a good Inspector to check outthe property is your winning formula. Also, including an Option Period, as well as a Financing Clause,in the contract will insure you get as close to your target price as possible.
Don’t Ignore Your Competition
Don’t overlook what other landlords in your area are doing. Find out how much they are charging forrent, how long it took them to find tenants, and how well their properties are maintained andpresented. If you see FOR LEASE signs in the neighborhood, call the agent or owner and get details,even if you already have a tenant occupying your property. You can get some very useful tips fromstudying the competition.
Always Get Insurance
As a Landlord you must protect your investments, and the best security for that is complete landlordinsurance. Renter’s Insurance protects your tenant, but Landlord or a Personal Umbrella policyprotects your assets. It covers you should something major go wrong with the property. A goodpolicy will also cover you for lost rental income and can even pay to temporarily relocate your tenantsif your property is damaged and needs repairs. As with any coverage you purchase, compare applesto apples and make sure you read the fine print so you understand what’s protected and what’s not.
The less you pay for coverage, the less protection you will normally have.