Real estate investing seems so easy. In 2016, the United States had 44 billionaires that accumulated most of their wealth from real estate, according to Forbes. New York City real estate moguls are well-represented on the Forbes 400.
We don’t argue that real estate investing can be lucrative. But, it is not an easy path to riches. Like any other business, it takes hard work, intelligence, and some luck. We offer some tips for those starting out to make the path a little smoother.
While the housing market has its peaks and valleys, as a long-term investing strategy it can often have a more stable and better return than investing in the stock market. For beginning investors, real estate can be a great strategy for planning for a lifetime of returns. However, there are some important things that beginners should know when deciding to make real estate a part of their investment strategy. These considerations will help any first-time real estate investors get started on a path to success.
Investing in real estate is not a get rich quick plan. It should be a long-term investment strategy. The best returns are made for those who are willing to put a dozen years or more into their real estate investment. Like with any other investment, including one made in the stock market, there can be ups and downs in the housing market. Statistically, however, the housing market has almost always rebounded when waited out. When there is a decline, we can usually see it coming over a period of 6 to 12 months. Unlike a stock market crash, which can happen rapidly, the housing market usually has a slow decline. Unlike the stock market, where a company can go out of business or where you can lose your entire investment, you will still own your property through a housing slump with little to no effect on your investment if you are willing to ride it out.
Short Term Cash Flow and Long-Term Payout
Investing in rental property can have both short-term and long-term benefits. When you own a rental property, whether it is a multifamily townhouse, single-family rental apartment, retail space, or mixed-use commercial building, you are generating monthly income from the rental or lease payments that the tenants pay you. This is a great way to offset the monthly and yearly expenses that owning a rental unit can incur, such as taxes and repairs. Even more so, it’s an income stream, if you budget properly and bring in more than you are paying out.
As a long-term investment strategy, the money comes from the sale of the property. Over the years, you can almost always count on the appreciation of the value of your property as long as you are doing your job well and making upgrades and maintaining the rental units correctly. As the market changes, you can wait for a peak and sell when the time is right. When you are ready to put your kids through college or are looking for retirement income, you can begin selling off your investment properties to use as income.
Any real estate investor should take the time to learn about financing, take classes on acquisition and negotiation, and study their marketplace. Consider forming an LLC for your investments versus personally owning the properties. This protects your personal assets in the event of an injury, accident, or damage on, or to, your investment property.
Take steps to secure the needed cash flow, including minding your credit score and debt to income ratio. You wouldn’t open a business if you didn’t have the cash flow to maintain inventory or pay salaries to employees. Consider investments to be your businesses. There will be repair expenses, utility expenses for empty units, and times when updates and general maintenance will be needed. Be prepared, and you’ll have much better success than you would if you were to go in blindly.
Don’t worry about waiting for the right time. When you are planning a long-term real estate investment strategy, you’ll weather the market changes. As long as you are educated and have the money and a good deal, you should go for it. Start with one property and build your empire from there!
Flips are not quick and easy
It is tempting to make a quick buck buying a property, fixing it up, and selling it. The reality is typically much different, though. Real estate is not the most liquid investment, and it turns more illiquid in a down market. This means your property can sit for months while you pay the carrying costs, including the mortgage, taxes, insurance, utilities, and common charges.
Even in a seller’s market, the construction needs to go smoothly – on time and within your budget. Otherwise, this eats into your profit. Do not forget to factor in closing costs, including the commission, when you sell. If you turn a profit, there are also short-term capital gain taxes.
Do your homework
You need to know all you can about the building and surrounding neighborhood. This means reading the board minutes and financials. You should also visit at different times to understand the building and neighborhood dynamics. If this is a building you would want to live in, others likely will feel the same way.
It is in your best financial interests to have a complete understanding of your major investment. While you cannot predict the future, having full knowledge provides a certain level of reassurance.
Know who to trust
Your exclusive buyer’s agent is someone you can have complete faith in. There are others you can trust to provide you with unbiased and good advice. Providing you have done your homework, your real estate attorney is another invaluable advisor. In fact, both have a fiduciary duty to you.
There are plenty of other people who will offer you advice along the way. You should take these with a grain of salt. Friends and relatives are likely to offer you unsolicited advice. Unless they have undertaken similar ventures, it is best to remember the adage “that you get what you pay for” when they try to pass their guidance along.
Think outside the box
The time to make a lot of money in hot areas may have already passed. You can consider an up-and-coming neighborhood or one adjacent to the hot area. As people consider alternatives, these places will pop up on their radar.
You do not have to live through the bumps a neighborhood endures when transitioning since you are not residing there. Your patience could be rewarded. There are two ways to make money as a real estate investor. These are capital gains that come from price appreciation and the yield, which is the amount of income received annually compared to the initial cost. Both improve based on the price you pay.
Tips for Finding the Perfect Investment Property
If you’re in search of the perfect investment property in the New York City area, then there are some real estate-savvy pointers to keep in mind before you make your purchase. Besides, just because you think a particular property is desirable doesn’t mean future renters will. To help you get the best return on investment, here are four tips you should follow when searching for an investment property.
Put Yourself in the Renter’s Shoes
One of the best ways to find an investment property that will satisfy your monetary expectations is to look at properties from the renter’s perspective. Is the home or apartment worth the amount of rent you’re expecting to charge? Does the neighborhood justify the costs?
Everything from the area and the size of the bedrooms to the number of closets, the neighbors, and the neighborhood itself play a huge role in a renter’s decision. For an investment property, sometimes you have to put the renter’s desires ahead of your own if you want to achieve the best financial results.
Run the Numbers
Many buyers looking for investment properties often don’t run the numbers until it’s too late. A cost-effective way to look at a rental property is to assume that a considerable percentage of the rent you receive will go toward expenses — like property taxes, insurance, and common charges — before it affects your mortgage payment.
This means you have to get the monthly mortgage down to a reasonable price, so the rent covers mortgage costs while still putting some money in your pocket after expenses. With that said, buying the property in cash or with a large down payment of 50%+ can put the numbers in your favor to the extent of the investment.
Avoid a Fixer Upper
Although the price of an apartment or home that needs a little work is probably attractive, a fixer-upper could spell trouble down the road. So, instead of pouring your finances into a less-than-desirable property, raise your budget and find a home or apartment that will give you a return on your investment from day one.
Fixer uppers are great if you have the time and patience it takes to restore the property to its former glory, but there are a lot of strings to pull to make that happen, including finding the right contractor and pulling the necessary permits. If you want a lucrative property, find one that’s cosmetically ready, mechanically ready, and move-in ready — it’s worth the initial bump in the budget.
By keeping in mind the tips above, you’ll find an investment property that turns a profit.