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Real estate investing seems so easy. According to Forbes, in 2016, the US had 44 billionaires accumulating most of their wealth from real estate. In addition, New York 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. It takes hard work, intelligence, and luck, like any business. We offer tips for first-time real estate investors starting to make the path smoother.
Real estate can be an excellent strategy for planning for a lifetime of returns for beginning investors. While the housing market has its peaks and valleys, it can often have a more stable and better return than investing in the stock market as a long-term investing strategy. However, first-time real estate investors should know some essential things before proceeding. These considerations will help any first-time real estate investor get started on a path to success.
Long-Term CommitmentLong-Term Commitment
Investing in real estate is not a get-rich-quick plan. Instead, it should be a long-term investment strategy. The best returns are made for those willing to put a dozen years or more into their real estate investment. Of course, like 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.
Unlike a stock market crash, which can happen rapidly, the housing market usually has a slow decline. We can generally see it coming over 6 to 12 months when there is a 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 PayoutShort-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 a condo, multifamily townhouse, apartment complex, retail space, or mixed-use commercial building, you are generating monthly income from the rental or lease payments the tenants pay you. This is a great way to offset the monthly and yearly expenses when owning a rental unit can incur taxes and repairs. Even more so, it’s an income stream if you budget correctly and bring in more than you are paying.
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, making upgrades, and maintaining the rental units correctly. Then, as the market changes, you can wait for a peak and sell when the time is right. Then, 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.
Business MindsetBusiness Mindset
Any real estate investor should take the time to learn about financing, take classes on acquisition and negotiation, and study their marketplace. Then, consider forming an LLC for your investments versus personally owning the properties. It protects your assets in the event of an injury, accident, or damage on or to your investment property.
Consider investments to be your business. 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. There will be repair expenses, utility expenses for vacant units, and times when you need updates and general maintenance. 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 plan 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, it would be best if you went for it. Start with one property and build your empire from there!
Flips are not quick and easy.Flips are not quick and easy.
It is tempting to make a quick buck buying a property, fixing it, 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. 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 must go smoothly – on time and within your budget. Otherwise, this eats into your profit. When you sell, do not forget to factor in closing costs, including the commission. If you turn a profit, there are also short-term capital gains taxes.
Do your homeworkDo your homework
You need to know all you can about the building and surrounding neighborhood. It means reading the board minutes and financials. It would be best if you also visited 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 interest to thoroughly understand your major investment. While you cannot predict the future, having full knowledge provides a certain level of reassurance.
Know who to trustKnow who to trust
Your exclusive buyer’s agent is someone you can have complete faith in. You can trust others to provide you with unbiased and sound advice. Providing you have done your homework, your real estate attorney is another invaluable advisor. Both have a fiduciary duty to you.
There are plenty of other people who will offer you advice along the way. However, it would help if you took these with a grain of salt. Friends and relatives are likely to provide you with unsolicited information. 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.
Think outside the boxThink outside the box
The time to make money in hot areas may have already passed. So instead, you can consider an up-and-coming neighborhood or one adjacent to the heated area. As people find 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. Therefore, your patience could be rewarded. There are two ways to make money as a real estate investor. These are capital gains from price appreciation and yield, the income received annually compared to the initial cost. Both improve based on the price you pay.
Finding the Perfect Investment PropertyFinding the Perfect Investment Property
If you’re searching for the perfect investment property in the New York City area, 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. So, to help you get the best ROI, here are tips you should follow when searching for an investment property as a first-time real estate investor.
Put Yourself in the Renter’s ShoesPut 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 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. Unfortunately, sometimes you must put the renter’s desires ahead of your own to achieve the best financial results for an investment property.
Run the NumbersRun the Numbers
Many buyers looking for investment properties often don’t run the numbers until too late. A cost-effective way to look at a rental property is to assume that a considerable percentage of your rent will go toward expenses — like property taxes, insurance, and standard common charges — before it affects your mortgage payment.
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. That said, buying the property in cash or with a sizeable down payment of 50%+ can put the numbers in your favor to the extent of the investment.
Avoid a Fixer UpperAvoid 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 can be great if you have the time and patience it takes to restore the property to its former glory. Still, many strings are pulled to make that happen, including finding the right contractor and drawing the necessary permits. So 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.
Keeping in mind these tips for first-time real estate investors, you’ll find an investment property that turns a profit.