Low Cash Options for Investing in Real Estate

Traditional real estate investments typically require a considerable upfront investment.

Mortgages for rental properties require a 20 percent down payment.

When you don’t have the cash on hand, breaking into real estate investment might take a more creative approach to financing.

Consider these options to avoid the cash requirements or obtain the financing through different avenues.

Avoid the Down Payment

One of the easiest, though not the fastest, ways to get into real estate investment without a large cash down payment involves buying a house for occupation.

Owner-occupied mortgages have options that include a zero down payment.

In addition to the low cash requirements for this type of loan, you also avoid the added cost of mortgage insurance.

Mortgages on personal properties rarely require the owner to carry mortgage insurance.

When choosing this method, keep in mind there are some restrictions, including:

  • Property must remain owner occupied for a set amount of time.
  • Longer terms may lead to slower equity.
  • Zero down loans may not be available after the first home purchase.

In most cases, loan agreements require the homeowner to live in the property for at least a year before renting out the residence.

Some require three years or more, so be sure to check on the residency requirements before selecting a lender.

Also, be aware that first-time home-buyer programs are not available on a second property.

You might still be able to find a zero down loan, but you need to be prepared to pay closing costs.

Cut Down on Closing Costs

Becoming a real estate agent is one way to significantly reduce the amount of cash you need to invest in real estate.

As an agent, you can handle the property sale and avoid paying the commission to a third party.

By removing the cost of commission to an agent, you can drop the cost of closing the sale.

Private Money Is Always an Option

If you are asset-rich and cash-poor, you might look into private lending sources.

Soft money, funds obtained from friends and family, might help you get started if you can guarantee a reasonable rate of return.

After all, a guaranteed 6 percent on a loan is often better than what someone might be earning in a CD.

Hard money, or asset-based lending, for real estate is another option.

These relatively expensive loans work in the short term by offering a 65-80 percent after-renovation value limit.

For example, if you used a hard-money loan to buy a house at $60,000 and the expected value after renovations is $120,000, you could secure financing of up to $96,000.

That loan amount will likely come with a term of a year or less, several points and a higher interest rate, but it allows you to close the deal.

Then, after the renovations, you might qualify for a refinance loan at the same loan-to-value ratio, allowing you to switch to more traditional financing without the upfront cash investment.

This is a relatively expensive way to get the money you need, but it works well when you come across a severely undervalued property, or you have the experience to do the renovation yourself.

Investing Without Assets

When you don’t have the money to invest directly, you need to either be prepared to invest time or cut into your profit margins.

There are many ways to find the funds, but these are some of the most direct. If you have the time, consider buying as a personal buyer and renting after meeting the residency requirement.

If you want to jump right in, work with private lenders to get the financing ready and dive into repairs.

Either method can help jump-start your life as a landlord with little to no out-of-pocket cash.

Benefits of a Mortgage Broker

If you’re the DIY type, you may wonder why anyone bothers using a mortgage broker when they could just talk to lenders directly.

For some people, the direct path really is the best option.

The majority of new real estate investors, however, can benefit from working with a mortgage broker.

Here are four reasons you should consider using one.

1. Using a Mortgage Broker Can Save You Time

Comparing mortgage offers is one of the most important things that you can do when buying investment property, as people often find that they can find vastly different offers from different companies.

Some lenders may decide that you don’t meet their expectations, so they don’t want to give you a mortgage at all.

Other lenders, however, may decide that you’re just what they’re looking for, so they will give you a low interest rate.

This may sound ridiculous if you haven’t worked in real estate or finance before, but it’s actually quite common because lenders use different criteria to measure how risky borrowers are.

If you don’t use a mortgage broker, then you will have to fill out applications for dozens of lenders. This takes a lot of time, especially since each company has its own set of documents.

Using a mortgage broker makes this process considerably easier.

Instead of filling out documents for several lenders, you just work with one person.

You will still have to provide plenty of documentation to prove your creditworthiness, but you will only have to do it one time.

That’s a big time-saver when you consider that most lenders will want:

  • W-2 forms from the last two years
  • A copy of your most recent federal tax return
  • Recent paycheck stubs
  • Canceled checks showing you have made rent and mortgage payments on time
  • A complete list of your assets and debts

If you own a business, then you will also need to supply loss and profit statements from your 1099 forms.

Renting property counts as owning a business, so you will need to give the lender this information if you already rent a property to tenants.

You will likely save hours of research on this issue by working with a mortgage broker.

2. Brokers May Have Access to More Loan Options

When you approach a lender, your loan officer will make certain assumptions about what you qualify for.

Even if you have a good credit history, the lender may choose to show you certain types of loans over others.

Mortgage brokers have enough experience to know what types of offers you can potentially use.

They also know what types of products lenders offer other clients. That could make it possible for you to access more loan options. They may not fit your needs, but at least you will get to consider them.

3. You’ll Likely Get Lower Interest and Other Costs

Since mortgage brokers have connections to a lot of lenders, they can often find loans with lower costs than the ones you would get by going directly to your bank. Having the option to look at more offers gives you an opportunity to lower the overall cost of borrowing money.

Lenders are also more likely to lower their interest rates and closing costs when working with brokers.

The lenders, after all, know that most mortgage brokers will work hard to find the best options for their clients.

This encourages lenders to compete with each other.

If they don’t lower their costs, then they aren’t likely to get much business from the broker.

In the long run, they can make more money by lowering interests, points and closing costs because that means the broker will get them more business.

Some real estate buyers worry that they will end up spending more money by using a mortgage broker. After all, the mortgage broker has to get paid.

However, this is unlikely to happen, especially since new regulations that went into effect in 2014 prevent brokers from making more money by selling expensive mortgages to their clients.

The new rules have also decreased the number of mortgage brokers. Considering that those brokers left the industry because they could only make good incomes by fleecing their clients, you should consider that a benefit.

4. A Mortgage Lender Can Give You Expert Advice

All investments come with some level of risk. Rental properties aren’t excluded from this.

Considering that you will likely spend $100,000 or more on your investment property, you will probably feel a little nervous about it.

Even if you know you can make money from the opportunity, it’s scary to hand such significant savings over to someone.

A mortgage lender can give you expert advice that will help you avoid common mistakes, and if nothing else, a good mortgage broker will help you feel more at ease. Sometimes, that’s all you need to move forward with an acquisition that will earn you steep profits.

Mortgage brokers aren’t right for everyone.

If you have a lot of experience in real estate and finance, then you may feel that you can do the job well on your own.

For most people, though, a broker offers experience and advice that can help them make smarter decisions when buying investment properties.

Interest Rate Outlook

Real estate investment is heavily tied to and dependent on lending interest rates, so a rate hike could unlock the door to lower property prices.

When rates go up, so do monthly mortgage payments, making it more difficult for you to find properties that will generate positive cash flow until prices correct for the new market.

When rates drop dramatically, more people buy and fewer people rent.

It can also drive up property values, as home buyers often look at the final monthly payment, not the price of the property.

With that in mind, it is crucial to keep an eye on mortgage interest rates when investing in real estate.

Recent Interest Rates

Since 30-year mortgages have the longest recorded history, you’ll want to look at this number to get an idea of what interest rates are doing and to follow trends.

In October 1981, according to Mortgage News Daily data collected on Freddie Mac, interest rates hit an all-time high of 18.45 percent. Since then, they have been on a fairly steady decline with a few peaks along the way.

In 2010, rates on a 30-year fixed mortgage dropped to 4.23 percent with fluctuations up to a little more than 5 percent the following year. After the increase, interest rates dropped again.

Where Interest Rates Are Today

Today, interest rates are almost back down to the incredibly low rates of November 2012.

Rates are holding steady at around 3.5 percent.

What is unusual is the length of time rates have remained low. For the past six years, interest rates have been at or below 5 percent, with typical rates sitting below 4 percent.

Why Have Interest Rates Stayed So Low?

The Global Financial Crisis, also known as the Credit Crunch, hit in 2007, leading to thousands of foreclosures, bankruptcies, and a long recession.

To help combat the effects of the recession, the Federal Reserve Bank responded by lowering interest rates to help spur economic growth.

With the economy in a slow but relatively steady period of recovery, these historically low interest rates may not last for long.

Low Interest Rates and the Real Estate Market

The GFC hit real estate hard. Creative lending tactics led to the issuance of many adjustable rate mortgages with balloon payments.

When homeowners failed to make the payment or refinance the loan, many lost their homes.

While this was tragic for the individual, it opened up a wealth of possibilities for real estate investment. After all, a flood of houses hitting the market depressed property values from the sudden highs seen leading up to the GFC.

Combined with low interest rates, investors had a sudden opportunity to expand their property portfolio at a time when more people needed to find rental accommodations.

At the same time, loan regulations became more strict, making it harder for lenders to find qualified buyers.

Those real estate investors with a higher credit score faced less competition for desirable properties. When fewer borrowers qualify for a mortgage loan, it reduces the number of offers per property.

Enter Government Mortgage Programs

Falling mortgage numbers spurred government action in the form of a variety of homeowner grant and tax relief programs.

First-time home buyer programs were designed to help new buyers get into a home.

Existing homeowners were offered a half dozen different programs designed to help them afford their existing mortgage or refinance to get out from under water.

Foreclosure rates are now at an eight-year low, bringing up the question of an interest rate increase.

Will Interest Rates Go Up?

Interest rates are cyclical.

Rates go down, and then they go up. The only real question is when, not if, the rates will rise.

The Federal Reserve did put through a small increase to the prime rate, but that does not directly impact mortgage rates. These are more closely tied to bond activity.

Also, as long as the Federal Reserve continues to buy up mortgage-backed securities, it is likely that mortgage rates will remain low.

Low Interest = Higher Prices

Even if the mortgage interest rates do start to rise, that may not be a bad thing for you.

If you plan on buying into real estate, a rise in rates usually translates into a drop in prices.

Buyers tend to look at the bottom line, and what they can afford on a monthly basis is limited.If rates go up and prices stay high, properties fail to sell.

Sellers may not move on the price right away, but, eventually, higher interest rates will drive down prices.

Why Higher Interest Could Mean Better Real Estate Returns

When you are buying real estate as an investment, the goal is always to buy at the lowest possible price and sell at the highest.

If high interest rates drive down property values, you could pick up some units at well below the current market value. Then, when the rates fall again, driving prices back up, you are in a prime position to sell at a significant profit.

When to Look for Rate Hikes

Experts predict that interest rates will stay fairly flat until 2019.

Increases will be phased in slowly, so if you watch the market you should see the trend.

When rates get up above 5 percent, it might be time to start looking for discounted properties.

Of course, if the market pushes back against the increase, you might see rates drop right back down.

Top 4 Things That Can Cost You Money in Real Estate Investments

Investing in real estate might be a great way to build lasting wealth, but it has its share of pitfalls.

Property is one of the single most expensive purchases you can make, giving you a lot of liquid tied up in a single investment.

When you start investing in real estate, you are taking a risk, but there are ways to minimize the risks and avoid unplanned expenses.

You want to enjoy the profits of your real estate portfolio, not spend everyday stressed about cash flow. Here are some of the most common mistakes and some tips to avoid them.

1. Underpricing Repairs

A property that comes with an asking price that’s too good to be true probably needs significant repairs.

If you can’t see the issues, it means they could be hiding behind the walls, carrying a massive price tag.

Renovating a property to rent or sell is a great way to earn equity and add value, but only if your repairs come in on-budget. An unexpected issue costs more for the repair and leaves the property vacant for a longer period of time. Underestimating repairs costs is one of the biggest mistakes new real estate investors make.

Avoid breaking the bank on repairs by:

  • Getting the property inspected by an expert. Let the inspector know you want every detail about needed repairs. Some inspectors may gloss over issues to help you line up financing, but that won’t help when you are underwater on your mortgage.
  • Don’t skimp on your contractors. There are plenty of places where you can cut costs, but the contractor you choose should not be one of them. A good contractor will do the job right the first time.
  • Research average costs of materials and repairs in your area. The more you know about the cost of repairs, the more you can negotiate the price with your contractor.
  • Expect to overshoot the estimate and build a slush fund into your budget. Even with a good inspection, you might run into surprise repairs, so have the money on-hand to cover any last minute additions to the construction plan.

2. Buying the Wrong Location

Where you buy an investment property might be even more important than what you pay or the condition of the property.

A beautiful house in an area with a 30 percent vacancy rate could sit empty for several months each year.

A more expensive property in an area with virtually no vacancy will stay tenanted, keeping your cash flow stable.

Before you pick a property, zero in on an area.

For a new landlord, you’ll probably want something that is close enough to commute to fairly regularly, and in an area that has appeal. Look for some of these signs, which indicate that you can find and keep tenants.

  • Easy access to shopping and transportation.
  • Low unemployment rates and big local employers means there should be a fairly stable source of potential renters.
  • Find something near, but not next to, a popular luxury apartment building. If an apartment complex can keep full, you should have no trouble finding tenants.
  • Check the crime rate and school statistics. These numbers can affect a tenant’s willingness to live in a particular area.
  • Track selling prices for a period of time. If sales are rapid and prices on the rise, it might be a prime time to invest. Another set of sales figures to watch for is a stable price after a drop. If prices have gone down and stabilized, the neighborhood could be ripe for another price increase. If all other signs point to revitalization, buy low, sell high definitely comes into play.

3. Failing to Check on Cash Flow

When you buy an investment property, you don’t want to have to reach into your pocket to make mortgage payments.

From day one, you should strive for positive cash flow.

Avoid operating underwater with a little investigation.

  • Look at properties near your prospective purchase. Even if total area vacancy rates are low, empty houses near your investment can make it more difficult to find tenants.
  • Track population changes. As more people move into an area, the need for housing grows. If you can catch an area at the start of a population explosion, you can rake in solid returns.
  • Check the property math before you put in an offer. Sometimes, a property that makes sense as home just doesn’t work out as an investment. You’ll want to total up all your expenses (taxes, mortgage, insurance, maintenance, etc.) and compare that number to average rental rates in the area. If the numbers don’t work, walk away.

4. Missing Compliance and Regulatory Issues

Different areas have different laws surrounding landlords and tenants.

Before you buy, make sure you understand all of the regulations that could affect your investment.

For example, Maryland has strict requirements regarding lead paint.

  • Know the safety regulations inside and out, and factor the expense of compliance into your cash flow plan.
  • Find out about licensing and leasing. The rules are different in every area, and a legal lease in New York may not be enforceable in California.
  • Adhere to livability standards. These change based on your area and may affect the number of tenants allowed to reside on the property and the amenities you must provide.

Making Real Estate Investments Profitable

Buying an investment property is exciting, but it can also be full of anxiety.

If you do your homework, stick to the numbers and obey all of the local ordinances and regulations, you could find a property that will enhance your monthly income.

Top 5 Questions to Ask Your Lender

The amount of profit you can earn from a rental property depends heavily on the terms of your loan; however, the better your loan is from the beginning, the more you can potentially earn.

Choosing the right lender is often difficult, especially for people who only recently developed an interest in becoming landlords.

Before you decide to accept a loan, make sure you ask the following five questions. They should help you choose an option that matches your needs and lets you earn more income from your rental property.

1. Which Types of Loans Do You Offer?

Keep in mind not all lenders want to work with landlords, so you might as well get this question out of the way as soon as you meet a company’s mortgage loan officer.

Some lenders also have stipulations about the types of properties they will fund and where those properties are located.

Don’t assume a lender who’s willing to lend you money to purchase a single-family home in California will also lend you money to purchase a multifamily home in Florida.

Each lender has its own concerns about giving money to landlords; make sure you ask for details that will help you choose the best company for your needs.

Ultimately, you want to work with a company willing to help you fund your investment property; otherwise, you could commit a lot of time and energy to a deal that falls through at the last moment.

2. What Down Payment Amount Do I Need?

It’s unlikely you can receive private mortgage insurance (PMI) for an investment property, so your lender will require a down payment that equals at least 20 percent of the home’s value. In some cases, lenders may ask for even larger down payments to protect themselves from risk.

From the lender’s perspective, an investment property is riskier than the house in which you live. While people obviously don’t want to lose their rental properties, their personal homes are more important emotionally and financially.

This slightly higher risk encourages lenders to ask for larger down payments, since the more money you have invested in the property, the less likely you are to walk away from it.

3. What Interest Rate Will I Pay?

Since lenders see investment properties as high-risk, landowners may have to pay a higher interest rate or more points.

Lenders usually choose one or the other, but this amount depends on your credit history and the size of your down payment.

The specific amount you pay often differs from lender to lender.

While one lender may choose to charge 2 percent more than its standard interest rate for a mortgage, another may charge twice that.

The same goes for how many points they charge.

This discrepancy makes it crucial for you to talk to several lenders before you accept a loan.

If you haven’t received offers from at least three banks, credit unions or other types of lenders, you won’t really know what your best option is.

Also, keep in mind these points will require you to pay a higher amount now while interest is paid throughout the course of the loan. If you have limited capital, you may want to choose a higher interest rate to avoid more points.

4. Do You Offer Non-Recourse Loans?

If possible you should choose a mortgage broker that offers non-recourse and recourse loans.

By taking a non-recourse loan, your home and other assets are protected from seizure even if you cannot repay your debt; instead, the lender can only seize the rental property you purchased with the mortgage.

Despite the advantages, there are some potential downsides to keep in mind before accepting a non-recourse. For instance:

  • Lenders often charge higher interest rates because non-recourse loans are riskier for them
  • Your credit score will still suffer if you fail to repay the non-recourse loan

Many landlords prefer using non-recourse loans because they want to protect their personal property from seizure.

The option you choose, however, will depend on factors such as how much investment capital you have and whether you’re willing to pay a higher interest rate.

5. Is There a Prepayment Penalty?

Some lenders include prepayment penalty clauses in their contracts to ensure they earn enough money from loans. If a lender insists on a prepayment penalty, it will charge additional fees if you try to repay the loan ahead of schedule.

This is important to know should you plan to use rent money to repay your loan as quickly as possible: By repaying ahead of schedule, you can potentially spend less money on your rental property. As long as there isn’t a prepayment penalty, you could save a lot of money to repaying the loan before the term ends.

For instance, if you use a 30-year loan with a 4 percent interest rate to borrow $100,000, you will spend a total $171,869.51 by the end of the 30th year.

If you repay the loan in 15 years, though, you will only spend $133,143.83. That option presents a saving6s of over $40,725.

A prepayment penalty will likely cost you several thousand dollars, which may affect whether you decide to pay ahead of schedule.

Lining Up Your Real Estate Financing: Cash vs. Loans

The biggest barrier to entry in real estate investment is usually the money.

Buying property requires a large chunk of bills. If you have the cash on hand, you can buy property outright. If you don’t, you must obtain a loan.

Both paths take you down the road to investment property ownership, but there are definite pros and cons to each purchasing decision.

Tax benefits, loss shelters, and liability issues are a few of the factors to consider when you are deciding how to make a property purchase.

Cutting the Tax Burden

One of the best reasons to get a loan when buying a property is the tax benefit.

Not only can you write off the property tax, you can also write off any interest you pay on the loan. Of course, if you pay cash, you avoid paying interest entirely.

The tax write-off helps reduce the cost of the loan but does not eliminate it.

Managing Investment Risk

A big part of any investment is the risk.

Typically, the riskier the investment, the more the potential payoff. In real estate, the same is true.

If you buy a property using cash, you can develop immediate cash flow. Every rental dollar you collect — minus taxes — is pure profit.

Of course, if the property sits vacant or the market drops out, you are left holding a worthless investment.

If you take out a loan to buy an investment property, you pay the bank most of the free cash coming from the property, but you don’t put your own dollars at risk.

One of the first things you learn in investing is to use someone else’s money whenever you can. That keeps your cash available for further investment opportunities.

Leveraging Your Assets and Cash

When you buy a property using cash, you limit your ability to buy additional investment properties. More of your money is tied up in the single purchase.

In the short term, you can generate more income from a property when you don’t have a mortgage.

In the long term, leveraging your holdings to close on additional properties will generate more wealth.

The more properties you own, the more rent you collect and the less a vacancy will affect your cash flow.

With the money you spend to buy one property outright, you could leverage the funds to own as many as ten investment properties.

Avoid Over-Leveraging

Using loans to buy properties allows you to buy more, but it can also encourage you to over-leverage.

Owning more properties means that you will eventually enjoy a comfortable income solely from rent, but you need to be cautious. The more mortgages you have, the more vulnerable you are to market shift.

f a property sits empty for too long, you could face foreclosure.

Before you choose to max out the number of loans available (typically 10 mortgages), you’ll want to take a serious look at your cash flow.

If every property is showing positive cash flow, and you can sustain the loans even if you face a high vacancy rate, you should be in good shape to continue expanding.

If your cash flow fluctuates and you pull money out of your pocket to pay your mortgages, it’s not the time to keep buying.

Over-leveraging and expanding too quickly are some of the risks associated with using a loan to build your property portfolio.

Quick Pros and Cons of a Cash Purchase

Buying with cash has some clear benefits and potential negatives.

Pros:

  • You own the property outright, so there is no threat of foreclosure.
  • Less pressure to keep the property occupied.
  • No mortgage loan that must be paid, even when the property is being repaired.
  • All rent collected, after taxes, is profit and can go into property maintenance.
  • Potential long-term property appreciation, increasing the value of your investment.

Cons:

  • You must have the cash in-hand to make the purchase.
  • Almost every dollar you collect is subject to income tax.
  • Reduces cash flow, which also reduces your ability to diversify and grow your portfolio.
  • Risk of property depreciation is entirely yours.

Quick Pros and Cons of a Mortgage

When you either don’t have the cash to buy outright or would simply prefer to dilute the risk, you need to understand the benefits and negatives of financing the purchase.

Pros:

  • You don’t have to have the entire purchase price in free cash.
  • The bank’s money is at risk, not your own.
  • Tenants pay off the mortgage, tying up cash flow in exchange for equity.
  • Greater financial flexibility with less of your free cash tied up in property.
  • You can deduct the interest paid on your loan, reducing your tax burden.
  • Potential property appreciation in the long-term increases the value of your investment.

Cons:

  • A big chunk of rental income goes right to the mortgage payment.
  • Foreclosure is a risk if you can’t meet the financial obligations of the mortgage.
  • Must fill vacancies as quickly as possible to avoid missing mortgage payments.
  • You pay interest to make the purchase, adding to the price of the investment.
  • Risk of property depreciation that could cut into your earned equity.

Deciding Between Cash and Loan Purchases

Ultimately, both cash and financing options have clear benefits. I

f you already have a well-diversified property portfolio, you might not need to finance.

If you have enough cash on hand to buy a rental property, consider the benefits of leveraging that cash to purchase several rentals. The amount of risk will influence your decision.

If you are comfortable taking moderate risks to increase your eventual return, financing is a great option for investing in real estate.

How to Make Top Dollar on a Real Estate Investment

If you are buying property as an investment, the first priority is profit. You want to make as much money as possible, in the shortest amount of time.

With real estate, you have several options for ensuring positive returns on your investment.

You can buy, renovate, and sell; buy and rent; or buy, live and rent. Endless variations on these themes exist, and there are many more possibilities.

When you first start investing in real estate, you will probably want to start with one of these basic practices. To get the most out of your property investment, keep these things in mind.

Real Estate is NOT a Short-Term Investment

The only way to turn a quick profit on real estate is through a renovation model.

You buy a distressed home at below its market value, improve the property, and then sell it.

This model can give you some quick gains, but unless you plan to do most of the renovation work yourself, it can also be a very expensive way to turn a profit.

If you are planning on doing the rehab, you need to know what you are getting into. Rehabbing a home takes a lot of work, a big investment in time and materials, and may not go according to plan. If the renovation takes too long, you could see property prices dive, leaving you selling at a loss.

The buy, renovate, and resell business model works best for those with a lot of experience in construction and the real estate market. Plus, it only generates a one-time return. Looking at real estate as a long-term investment gives you more flexibility in how you deal with a property.

Becoming a Landlord

Renting out a property is the way to generate consistent income.

Mixed-use and multi-family dwellings are often the best way to get the most income with immediate returns. It is easiest to line up financing for owner-occupied buildings, so finding properties in which you can live and rent space makes a lot of sense.

They also offer benefits during renovation periods.

If you need to do repairs to one unit, you can still draw income from one of the other units.

As a landlord, you can get many of the same benefits as someone who renovates and resells, without the risk.

Because you plan to keep the property for several years, you do not need to rush renovations or worry about temporary price fluctuations.

Building Wealth with Property Appreciation

One of the most common ways to earn a good return on real estate is by gaining appreciation on the property.

A building you buy now might be worth considerably more in a few decades.

On top of that, you can collect rent every month, giving you income as you wait for the property value to go up.

Like with any investment, you should set some hard and fast targets before you buy.

When buying stocks, you can set up sell thresholds, and you should do the same when buying a property. Waiting too long can leave you struggling to sell after the market corrects.

Instead, commit to specific targets and act as soon as you reach them.

Expanding Your Property Portfolio

A few small units can give you a regular income, but to make real estate your primary source of income, you need a fair number of units.

That is where small apartment or office buildings come into the picture.

You’ll want something that has less than 50 units and more than five.

More units mean more income per property, and if you can buy the property outright or pay down the mortgage quickly, most of that money goes right into your pocket.

The reason why most new real estate investors don’t dive into an apartment building is due to the more complex financing requirements. Commercial lending on that scale has more limitations.

Buy Low, Sell High

Ultimately, making money on real estate comes down to the simple concept of buy low and sell high.

You want to find undervalued properties or areas you think are likely to experience a renaissance.

For example, in Maryland, the addition of the Rt. 200 toll road made property further from Washington D.C. more valuable. With quicker access to the Metro and other major highways, homes further from the city could commute in a reasonable time.

Find areas with similar construction plans in the works or new businesses coming to the area.

If you get in before the property values start to rise, you can make a real killing.

Diversify and Wait

When you are in real estate for the long haul, you have the potential to earn a lot.

Each property in your portfolio represents a significant capital asset. By renting units, you get someone else to pay the mortgage, leaving you with a valuable investment and direct income.

Don’t invest in property expecting to see rapid appreciation, and don’t spend all of your time on renovations.

To get the most money out real estate with the least stress, invest in properties that will give you positive cash flow from day one. If you do, you can rapidly expand your property portfolio and gain capital assets.

The 4 Secrets To Estimating An Accurate ARV

So, you have completed your comparative market analysis and research and finally decided on a location in which you would like to purchase your rental property.Image courtesy of SellingUp.com You have decided on the amount that you can afford, and arranged provisional financing – and now the fun begins!

It is time to go shopping for your investment property. You can search using online real estate sites, such as realtor.com and zillow.com. Sites such as these allow you to search hundreds of properties in your chosen area and also set up alerts, which let you know the minute a property which meets your criteria comes onto the market.

It also makes sense to meet some real estate agents in person, as they have a wealth of knowledge that can prove invaluable. They may also have access to exclusive properties that have not been shared online. The best tactic is to widen your search using as many angles as possible, to give you the greatest chance of finding a bargain.

Looking at properties is a case of checking your wish list against the reality that exists beyond every front door. Perhaps your research has shown that the majority of renters in the area are families with 2 school-aged children, which means three bedrooms is ideal. Maybe the demographic leans more towards young professional couples, which means two bedrooms is plenty, but the living space should be open for entertaining friends at dinner parties.

Plus, the bottom line for most successful rental properties is that the decor is fresh and neutral, with a modern and attractive bathroom and kitchen fitted.

No property will be perfect, and that will mean that you will need to make numerous changes and upgrades in order to achieve the overall outcome and renter appeal that you have hoped for and banked on.

Keeping all of this in mind while you are visiting potential new properties can be difficult. The asking price for a property has to be coupled with the cost of repairs and upgrades. Of course, the upgrades should add value to the property, which will hopefully exceed the cost of the work. This equation provides a figure known as the ARV, or after repair value.

ARV – The value that the property is worth after you have completed repairs and upgrades.

It goes without saying that it is vital to estimate this figure as accurately as possible, as it is one of the most important determinants of the profit you will make with your investment. Fortunately, you don’t have to come up with this figure blindly. We are sharing the 4 top secrets to estimating an accurate after repair value, which will help you to choose your investment wisely.

Secret 1 – Make The Realtor Your BFF

Image courtesy of cache2.asset-cache.netThe first secret to estimating an accurate ARV is to build a good relationship with your realtor. Always be honest with them about your motives and goals with investing in a rental property, and they will be more than happy to share their thoughts on the value of a property, as well as expected value increases based on their experience. They will be able to tell you specifics on other properties that appeal to renters, whether a new kitchen will be a better investment than upgrading the double glazing, for example.

They will also know of comparable properties currently on the market that may already be closer to the ideal that you are looking for.

Secret 2 – Find Three Good Contractors

Once you have shortlisted a couple of potential investment properties, it is wise to invite three contractors to take a look inside and provide you with a written estimate for completing the work that you would like to have done.

Three contractors will offer you a broad enough idea of what the average cost of the work should be, plus you will be able to see immediately if one is considerablyImage courtesy of CasaandCompany.com higher or lower than the others. The written estimates will enable you to compare the quotes fairly, so that you can be sure that they are like for like.

Be honest with the contractors that you are obtaining three quotations, and explain that you are trying to estimate an accurate ARV at this stage. Building a good relationship will pay dividends in the future. Any reputable contractor expects to spend some time providing quotes in this way, and even offering advice on upgrades that may be more cost effective in their opinion.

You can also take your efforts a step further and research the costs of supplies and parts that you will need to complete your upgrade from local hardware and building depots. While contractors will usually receive a discount when purchasing these items, it is useful to have an idea of the figures that you should expect to pay.

Secret 3 – Research The Market

Image courtesy of NCSL.orgOnce you have compiled the quotations from your ‘team’ of realtors and contractors, you should have a good idea of what you will be paying out in total, and what other similar ‘fixed-up’ properties are selling for. This is the time to brush up on your knowledge of what is selling and renting well in the area.

It is not uncommon for people to pose as tenants in order to visit rental properties and speak to existing landlords about what is offered. This kind of investigation provides insider knowledge that could make your investment a real success, showing you exactly what other landlords are offering, and the amount of rent that they expect in return. It could give you the edge in offering extra value to your potential tenants, ensuring that you will never be left with an empty rental property.

Secret 4 – The Word On The Street

The final secret is to take a close look at comparable sales in the area, with a comparative market analysis. This is the actual sales value of homes in the local area, Image courtesy of BoomerBenefits.comand is usually limited to sales within the last 90 days, as fluctuations over a longer period of time can make the figures useless. The radius to use in order to compare sales prices would be around 1/4 to 1/2 a mile from the property that you are considering.

When looking at comparable sales, it is important to look at properties with a similar square footage, which are a similar age and in a similar condition. If you can find a property to meet these requirements, it will give you a very accurate idea of what you should expect to pay – and this will help to make your overall ARV more accurate. Your real estate agent should have access to this information and will help you to make sense of the specifics.

Knowledge is Power

Once you have these 4 secrets covered, you will have a wealth of information at your fingertips with which to make a measured decision about whether a property will be a useful investment for you. An accurate ARV can make or break the profitability of a rental property venture.

However, even with your figures compiled so carefully, it is still wise to be conservative and work with the worst-case scenario. Markets change quickly with little or no warning, and it is always best to give yourself a margin to work within. If you find that you are unable to make a worthwhile profit with anything but the most optimistic ARV, then it may be wise to let a property pass, no matter how much you have fallen in love with it.

Finally, do listen to the team that you build around you. It is true that they will make money from your decision to purchase, but they have experience that money can’t buy. If you trust your real estate agent and contractors, then be grateful for their expert advice. After all, they have no emotional investment in your decision and the ARV can make all of the difference to your final figures.

Why Real Estate Crowdfunding Should Be on Your To-Do List Today

So, you have made the decision you want to get into the real estate business, but not necessarily by becoming a landlord. It is no surprise that this is a popular choice when investing in property is a decision that is bringing financial freedom to many, but the first obstacle can be a tricky one.

How are you going to afford to finance your new business venture?

Image courtesy of oneaim.euOne creative route that is starting to be used for this very reason is real estate crowdfunding. As surprising as it may sound, this method of investment is redefining the world of real estate, and is proving to be a very lucrative method of earning a passive income.

Crowdfunding is rather different from the traditional route of investing in property, and has leveled the playing field to such an extent that people with a moderate budget are able to invest and diversify their portfolio, something that would be unheard of in recent years. Real estate investment via crowdfunding is quick and easy … it takes only minutes to sign up on a site that offers investment properties to choose from at your fingertips.

Justin Pierce from The Washington Post is passionate about the concept as we can see here:

“Through crowdfunding, iFunding has opened the opportunity to invest in private real estate to millions of individual investors by lowering the minimum investment to $5,000. Crowdfunding is the future!” [source]

The opportunity to invest and make money is easier than ever with this route, but there are some important points to understand in order to remain informed about just what you are financing and how to protect your investment.

What Exactly Is Crowdfunding for Real Estate?

Real estate crowdfunding is the pooling of finances in a real estate project by multiple investors. The types of property available to invest in are varied, Image courtesy of crowdsunite.comwith everything from family residences to commercial property on offer in a broad geographical region across the various platforms. It works in two ways:

  • Equity Investment – Each investor holds a stake or shares in the property (commercial or residential), and in return, receives a portion of the rental income. This is typically paid out on a quarterly basis.
  • Debt Investment – Each investor pays towards the mortgage loan for a particular property. The loans are paid over time with interest, and the investors receive a share of the interest as the loan is repaid. This may be received on a monthly or quarterly basis.

The two options vary in their degree of profitability and risk. Equity investments tend to result in bigger returns, but they can be riskier and take longer to pay off. On the other hand, debt investment is limited by the interest rate set on the loan.

What Are the Benefits of Real Estate Crowdfunding?

Real estate crowdfunding, using either of the two methods (debt or equity investment), is considered to be a lower risk investment compared to other methods of financing property. This is because it is possible to spread funds across a variety of options, rather than pooling all of your available resources into just one property. With a Real Estate Investment Trust, also known as REIT, for example, investors are required to pay 25% upfront of the property’s value. When compared with real estate crowdfunding, which often stipulates a minimum investment in each property of just $5,000, you can see that the scope for diversifying your portfolio is huge.

When compared with REITs, real estate crowdfunding brings greater benefits to investors in many ways:

  • Crowdfunding deals are vetted thoroughly, offering increased transparency for investors. Take a look at what Patch of Land have to say about their due diligence in this regard: We ensure that borrowers and projects meet our stringent risk profiles and high underwriting standards using our technology, data analytics and vast real estate experience. [source]
  • The financial barrier to entry is far lower with real estate crowdfunding.
  • Through real estate crowdfunding, investors may enjoy certain tax benefits (including depreciation) that are not applicable to investors in REITs.
  • Thanks to the affordability, investors can diversify their portfolio, combining equity and debt investment, across commercial and residential properties.

The following except from RealtyShares explains the benefits in further detail.

“Commercial real estate investing in other contexts often involves large investment amounts and limited regional opportunities. RealtyShares, on the other hand, allows accredited and institutional investors to invest for as little as $1,000, all from the convenience of an investor’s laptop or tablet computer. This means that investors have the ability to participate in opportunities that historically may have been available only to large institutions. You’ll also be investing “passively” — similar to stocks and bonds — so that you don’t need to directly be concerned with the management headaches associated with a property.” [source]

Image courtesy of thenextsiliconvalley.comDo Real Estate Crowdfunding Investors Actually Own a Piece of Property?

This is a good question, and the answer isn’t exactly straightforward. The truth is, investments are structured differently across the various crowdfunding platforms – and, therefore, what an investor actually owns, can differ, too.

In some circumstances, a crowdfunding site will create a separate limited liability company for each investment opportunity – and investors own shares within this, which reduces their liability and provides certain tax benefits too.

It is important to read the terms and conditions of any real estate crowdfunding site that you choose to be a part of, so that you are clear about what you are purchasing and how that will affect you, before you go ahead and invest your money.

How to Choose a Real Estate Crowdfunding Platform

As we always reiterate, it is vital to thoroughly research your options before investing in real estate, as there is always risk involved when it comes to money. While it is true that crowdfunding can offer a simple solution to becoming involved in real estate investment (without the need to become a full-fledged landlord with 100% responsibility for a mortgage), it is vital you know exactly what you are getting into, before you start financing a project.

You need to remember that each and every platform for real estate crowdfunding is different. They are individual companies, with differing terms and conditions. Some may suit your needs better than others, so take the time to find out the finer details and identify the strengths and weaknesses of each option.

Remember to call on expert advice for specific information on the viability of investments. The crowdfunding platforms themselves are there to offer you a service, and they want you to sign up, so don’t forget that they are not investment advisors.

Take note of the ‘lock in’ periods for each investment, this is a very important factor to take into account when deciding on deals to finance. The liquidity schedule can have a big impact on the profitability of a project for you.

Be aware that there is always risk involved in any investment, and while real estate crowdfunding may seem like a safe option, it is important to consider the options, and the benefits of diversifying with a combination of properties spread geographically, for example. Take a look at the following FAQ from Realty Mogul, to keep your feet on the ground.

“Are these investments risky?

Yes. Similar to investing in the stock market, there is no guarantee when you are investing in real estate. The real estate market has economic cycles and it is difficult to know how and when the economy will change.” [source]

Summary

Image courtesy of crowdfundattny.files.wordpress.comIn conclusion, real estate crowdfunding has opened the industry and leveled the playing field, allowing more and more people to invest in property than ever before. Yes, there are still risks involved, but the great news is that lower barriers to entry mean that investors can diversify their portfolio to such a degree that these risks are largely minimized.

The important points to remember are that each crowdfunding real estate platform comes with its own set of terms and conditions that you should read carefully to ensure you understand exactly what you will own, as well as how long you are committed to any deal.

Be sure to check out the particulars of any deal with a professionally qualified financial adviser, too, and don’t be swept up in the emotions of a “great deal.” The real estate crowdfunding platforms are offering a fantastic service, but we must remember they are there to sell investments. So, keep your head straight and don’t let emotions run wild.

Once you have your information straight and are ready to invest, you can celebrate the fact that investing in real estate crowdfunding offers more transparency than other options, allows greater diversification and, best of all, has been producing greater returns. It seems that this could be the answer many individuals have been waiting for to become involved!

6 Common Real Estate Pitfalls to Avoid

Purchasing real estate is thought to be one of the wisest decisions when it comes to investment of money, and becoming a landlord is one way to ensure you are able to receive an ongoing income from your investment, while your capital wealth continues to build.

Of course, it is not as easy as the last paragraph describes! Investing your hard earned cash should not be done lightly, any decisions should be made after substantial research and consideration. However, many individuals take the time to research their purchase carefully, enlisting the advice of experts in the field and still make mistakes that can be extremely costly in the long run.

For this reason, we have compiled six of the most common pitfalls that landlords tend to stumble into when it comes to investing in real estate. Once you know what these mistakes are, which frequently cause problems for landlords, you will be aware of what to watch out for, and you can make your investment decisions wisely.

Mistake Number One – Deciding As You Go

The most serious mistake many landlords make, is not putting a full plan of action together before they start. Instead, they simply make decisions as they go along on the journey of choosing and investing in real estate – and all of the aspects that go along with that.

It is a far better idea to have a complete plan in place before financial decisions are made, and that should cover the location, type of property, budget for offer price, renovations and so on. By failing to adequately research their options and plan for all eventualities, landlords leave themselves more vulnerable to risks.

This mistake can be extremely costly when issues arise that landlords hadn’t considered, for example, unexpected problems with the structure of the building that has been purchased.

Mistake Number Two – Allowing Emotions to Rule

The second pitfall that tends to swallow landlords whole is allowing emotions to take the reins with regard to decision making. While it is easy to say that real estate should be regarded as a business with everything considered calmly and rationally, we all know how it feels to be “sucked in.” In some circumstances, the heart tries to rule the head.

But while we are all human, real estate is one situation where landlords must consciously control emotions, and consider decisions carefully from all angles. The “get rich quick” schemes, for example, can be tempting, especially when they are marketed in a shiny must-have package, but often these schemes really are too good to be true and are little more than a scam.

Another example in which landlords must watch their emotions, is in submitting an offer for a rental property. A sizable part of the long term profit is made at the point of purchase, so landlords must stay strong and stick to the budget that has been set. Paying below market rate for a property should be the goal.

Mistake Number Three – Ignoring The Advice Of Experts

Landlords are required to excel at a number of roles in order to make their real estate business a success, but the great news is that they don’t have to do it all alone! Unfortunately, many landlords fail to depend on the experts for advice in certain specialized areas of the rental process, and as a result, costly and largely avoidable, mistakes are made.

There are many experts that can help landlords with various factors, such as a real estate agent to provide details about recent sales values, a broker to explain the finer details of a mortgage and an attorney that can advise you on legal matters. While certain aspects can be completed without the input of an expert, it is always valuable to ask questions and complete research with the help of individuals inside the industry. The best case scenario is to build a team around you, of professionals that you can trust.

Mistake Number Four – Relying on Inaccurate Estimates

When it comes to making plans in real estate, numerous decisions are based on estimates that are made along the way. These include an estimated purchase price for a property, plus the cost of renovations, the final rental fee and even the health of the local economy on the whole.

It is impossible to assess the cash flow of a real estate investment accurately in advance due to the number of estimates that make up the foundation of the financial plan.

While this has to be accepted to a certain degree, it can be a pitfall for landlords when they rely on the estimates too heavily, taking the figures that have been drawn up as fact. The best way to handle the uncertainty of the estimates is to input accurate numbers into financial forecasts as soon as they are established. It can also be useful to build strong relationships with contractors and tradesmen, so that any quotations for renovations can be viewed as solidly reliable. This will be extremely useful when it comes to deciding on the viability of a property that needs work done to it. Always overestimate costs, and underestimate profits to a certain degree, this will provide a margin of error that could make all of the difference to your budget.

Mistake Number Five – Forgetting The Importance Of Cash Flow

Another mistake many landlords make is in focusing on the bigger, long term picture of their investment and forgetting the importance of cash flow. This can crop up in several ways including:

  • Failing to prepare for unexpected costs
  • Paying too much for property/tenant management
  • Failing to plan for vacancy

The costs of owning a property are constant, including the mortgage, taxes, insurance, maintenance and advertising for a tenant. Of course, it is necessary to balance the incoming cash with the outgoing costs, otherwise the landlord will find themselves in trouble very quickly, and the long term gains can be lost due to short term mistakes, which may eventually damage credit ratings and even lead to losing the property. Long term gains need to be balanced with short term needs in order to make the deal a success.

Mistake Number Six – Failing to Complete Due Diligence

With the real estate market becoming increasingly competitive, deals often move quickly and investors can feel rushed through the process, cutting essential corners such as signing contracts and conducting research. This is one pitfall that can be disastrous for landlords and can result in losing substantial amounts of money.

The key is to take time to complete adequate due diligence regarding the real estate deal in order to minimize the risks of the investment. Nothing should be taken for granted. For example, it should not be assumed that newly constructed buildings will have no defects. Unfortunately, the opposite is often true due to pressurized deadlines on the builders.

Summary

There are many common mistakes that landlords make time and again, and they can be extremely costly to rectify. Fortunately, these can largely be avoided, simply by taking the time to research decisions thoroughly, reaching out to experts for advice as much as possible.

We recommend that landlords plan ahead in their real estate decisions, and avoid making decisions as they go, in order to be fully prepared for the investment business, completing adequate due diligence along the way.

This leads us perfectly to the reminder that the business should be run rationally and not controlled by emotions. While it can be easy to be carried away by how we feel around a deal, the viability of decisions should always come first.

Landlords should turn to the advice of experts to help them with this, working with a team of individuals across the industry is the best way to conduct business. A real estate agent can offer insights into properties coming onto the market in the best locations at a price that is right for you. In addition, a broker can walk you through the confusing array of loans that are available for landlords, and an attorney can save you a fortune in the long run, by keeping you inside the law in your choices.

Within your team, it makes sense to have a contractor that can help to provide accurate estimates of any work that is required. This will help you avoid the mistake of relying on inaccurate estimates of costs. The best way to handle this pitfall is to always remember that estimates are just that – inaccurate figures that should not be taken for granted.

This should help to keep the cash flow in check, which is something that landlords should have a close eye on at all times. Remembering that the short term cash health of the business is as important as the longer term profits. With this in mind, it should help landlords avoid the most costly financial mistakes, so they can save money and make their real estate business a success.