Tag Archives: real estate investment

Flip, Rent, or Hold: What’s the Best Path to Real Estate Riches?

Maybe you’re addicted to those home-flipping shows on HGTV where glam couples buy grim shacks, spend 22 minutes smashing down walls and adding funky kitchen backsplashes, and then make tens of thousands selling the refurbished places on the open market. Or perhaps you’re jonesing for a steady stream of extra income and feel certain you’ve got what it takes to be a landlord.

Or just maybe you’re on the prowl for a hands-off way to make serious real estate money with financial investments that don’t require laying down new flooring or screening prospective tenants.

Whichever option floats your boat, you’ve got plenty of company. After the epic boom-and-bust of the speculative home-flipping market in the aughts, everyone again seems to be looking to make a quick buck by becoming a real estate investor. But these days, there are a dizzying variety of different takes on the once-simple idea of property investing—all requiring varying levels of blood, sweat, tears—and risks. Which one might be right for you?

“Over the generations, real estate has proven itself to be a pretty good, time-tested investment,” says Eric Tyson, who co-authored “Real Estate Investing for Dummies.” “Like investing in the stock market, people who follow some basic principles and buy and hold over long periods of time should do fairly well.But, of course, there’s no guarantee.”

And that’s why the thrill-a-minute world of real estate investing isn’t for everyone—especially when life savings are involved.

OK, now that we’ve gotten that out of the way, let’s go shopping.

 

1. Home flipping: Not exactly like reality TV

First half of 2017 gross returns: 48.6%*
2014 gross returns: 45.8%
2012 gross returns: 44.8%

If the Property Brothers or Chip ’n’ Joanna can do it, why can’t you? Real estate reality TV has made the “fixer-upper” flipping market seem fun, very sexy—and mostly foolproof. But becoming a successful home flipper is a lot harder than it looks on television. And it isn’t always as wildly profitable as you might think.

The returns appear deceptively high, as they don’t account for hefty renovation costs, closing costs, property taxes and insurance. Flippers should figure that about 20% to 30% of their profits will go straight toward such expenses, say experts. The median returns above only reflect sale price gains—not net profits.

Newbie investors need to make sure they’re thoroughly familiar with a neighborhood before they consider buying a potential flip in it, says Charles Tassell, chief operating officer at the National Real Estate Investors Association, a Cincinnati-based investors group. This means looking at what kinds of homes are located nearby, what sort of shape they’re in, and how much they’ve sold for. Wannabe flippers should pay attention to the quality of local schools, transportation, and the job market—just as they would for their own home. Those are the things that can make or break a sale. And an investment.

A market where homes are still affordable but appreciating rapidly is ideal. Once they’ve settled on an area, flippers need to focus on the basic structure of prospective homes. Special attention should be paid to a home’s heating and cooling systems, foundation, and roof—the things that are most expensive to fix.

Then they need to create a realistic budget. Experts recommend setting aside 10% to 20% to cover any unknowns—like what’s inside the walls. Costly surprises are par for the course.

“The biggest hurdle of flipping is: The costs are never what they seem to be on HGTV,” says flipper and landlord April Crossley, co-owner of Crossley Properties in Reading, PA. She owns the business with her real estate agent husband, and they do 8 to 10 flips a year. “In fact, they’re always way more.”

Flippers are gambling that the housing market stays strong in their target area—at least long enough to resell their investment home.

“You’re constantly anticipating what the market will be doing 6 to 12 months in the future,” says Daren Blomquist, senior vice president at ATTOM. So if you miscalculate, and it drops, you could lose a lot of money.

2. Investment (rental) properties: You, too, could be a landlord

First half of 2017 returns: 13%*
Three-year returns: 9.9%
Five-year returns: 11.67%

Perhaps flipping homes, and all the varied costs and stressors associated with it, isn’t for you. But you’d still like to be a hands-on real estate investor. Why not consider buying investment (rental) properties?

One big advantage is the tax deduction folks get for their rental properties. They can write off their mortgage interest, property taxes, and operating expenses, as well as repairs.

Like home flippers, landlords-to-be should look at growing areas with new jobs moving in, says Steve Hovland, director of research at HomeUnion, an Irvine, CA–based company that helps smaller investors buy and manage properties.

“I’m very bullish on high-growth markets, like Texas, the Southeast, Arizona. You’re always going to have new renter demand,” he says. But coastal cities can be tough for aspiring property owners because they’re just too expensive.

First-time investors may want to target middle-class neighborhoods near top-rated schools, where stability rules and tenants are more likely to hold steady jobs. These homes often require less maintenance—a boon to landlords who don’t live nearby.

Landlords who aren’t local or don’t want to deal with 3 a.m. calls about an overflowing toilet will want to consider hiring a property manager who will find tenants and coordinate (but not perform) maintenance. But that eats into profits, costing about 7% to 12% of the monthly rent.

And the payoff you get, as compared with flipping a home, isn’t in one lump sum, and isn’t always steady. For example, landlord and flipper Crossley rents out multiple single-family homes, duplexes, and apartments in the Reading, PA, area, and once had a couple stop paying their rent for six months after they went through a divorce. She had to eat those losses, as well as attorney fees, while she went through eviction court to get them out.

Landlords also need to have insurance on their properties and set up their rental companies to protect their personal assets, in case they get sued.

And like other investors, owners also run the risk that home prices—along with the rents they were counting on—could plunge. “You have to be prepared for the worst. When something goes wrong in a tenant’s life, you’re the last person to get paid,” Crossley says.

3. U.S. REITs: Buying shares in real estate instead of companies

Year-to-date returns: 2.75%*
Three-year returns: 8.39%
Five-year returns: 9.79%

Those who’d like to own apartment and office buildings like a legit mogul but don’t have the bank balance to do so may want to turn to Real Estate Investment Trusts. Don’t worry if you’ve never heard of REITs. You don’t need a fancy finance degree to understand how they work.

Most REITs are publicly traded corporations that investors buy and sell shares in—just like stocks. Only instead of buying shares in Apple, you’re buying shares in real estate. Shares can range in price from just a few dollars to hundreds of bucks. Investors can buy into them on certain exchanges.

As with stocks, investors can make money by buying shares at a low price and selling them at a higher one, and by collecting quarterly dividends (payouts are made every three months).

There are two main kinds of publicly traded REITS. Equity REITs own rental properties ranging from homes to business space, and make money collecting income on them. Residential and commercial mortgage REITs allow investors to buy mortgage debt where investors profit from the interest.

4. Crowdfunded real estate: Like Kickstarter for property

Year-to-date annualized returns: 8.72%*
Two-year returns: 8.89%

Crowdfunded real estate is like the younger, cooler cousin of REITs. Simply put, it allows ordinary folks to pool their money to invest in things like apartment complexes, office buildings, and shopping centers. It’s like a Kickstarter for buying real estate—instead of funding your college roommate’s feature-length documentary about Furries.

Previously available only to uber-wealthy accredited investors, crowdfunding only became open to the general public in March 2015. That’s when the government enacted new rules opening up the investments to folks without ginormous bank balances. So there isn’t much data available yet on how these investments perform over the long term.

While REITs can hold tens of thousands of properties and be worth billions of dollars, crowdfunding companies are often significantly smaller, holding just one or a handful of properties. And they often require a long-term commitment from investors.

As with REITs, the two main options in crowdfunded real estate investing are equity or debt. Equity, the riskier of the two, involves investing in a fund connected to commercial or residential development. It makes money from the income the property generates and the increase in the value over time. The investment is usually tied up for about five to seven years. Debt is the loan used to get the project off the ground and continue to finance it through the life of the project.

“These are long-term investments, so if you pull your money out early, there’s usually a financial penalty,” Ippolito says. That’s a big difference from REITs, which can be sold at any time. “Retirees who need the money soon probably should look elsewhere.” Debt is a bit safer, but the payouts may not be as high.

5. Home appreciation: The investment you can live in

One-year appreciation: 10%*
Three-year appreciation: 26.7%
Five-year appreciation: 44.8%

Folks don’t need to flip homes or pour money into crowdfunded projects to make money as a real estate investor. Instead, they can search hard for the perfect home, get their finances in order, negotiate smartly, and close the deal for the best possible price.

And then live in it.

Real estate typically appreciates over time. That means that buyers who buy a home in a decent area and keep it in good shape should make money when they decide to sell. Depending on the market and the home, sometimes a lot of money. But they should plan on being in that home for at least five or so years, so they can build up enough equity in the home to net a profit once real estate agent fees and closing costs are accounted for.

“In general, buying a home is a good investment and a way to build wealth and equity over a lifetime,” says Joseph Kirchner, senior economist at realtor.com®. “[But] even if you’re buying it to live in the house for the next 30 years, it is always better to buy when prices are low.”

And as folks build equity in their home, through appreciation and paying down their mortgage debt, they can take out home equity loans or home equity lines of credit against their property.

But of course, just as with the other investments on this list, there are risks. The country could enter into a new recession, or there could be a local housing market crash if a big employer leaves the area. Or homes in your area could simply be overvalued.

However, when home prices fall, they do generally rebound—eventually.

“Good markets aren’t going to last forever,” says real estate investment author Tyson. “Even the best real estate markets go through slow periods.”

Post courtesy of realtor.com

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Buying a Short Sale: 4 Tips to Make Yours the Winning Offer

Bargain shoppers know that buying a short sale can score you a sweet deal on a home. Since the sellers are set on avoiding foreclosure, buyers can jump in and nab a house below its market value. It might even sound like the easiest transaction ever: The seller is determined to sell a house and you have the means to buy it. It’s good as gold, right? Not necessarily.

Though they might appear simple, short sale transactions are different from traditional home sales. There are a number of pitfalls and extra costs that can arise with a short sale.

What is a short sale and how does it differ from other sales?

Simply put, a short sale is when a home sells for a price that won’t cover the cost of the outstanding mortgage.

Short sales are different from both traditional home sales and foreclosures. In a traditional home sale, you work with only the seller and the seller’s agent to make an offer. In a foreclosure, the lender has already bought the property, so you’ll make an offer directly to the lender, without a buyer involved.

In a short sale, the home is being sold at a loss. So, while the seller still owns the property, the lender must approve any offers.

Below are tips on what to expect and how to have your offer stand out from the crowd.

1. Have your finances sorted

Solid financing always makes an offer appear stronger, but this is especially true in a short sale.

According to Mark Ainley of GC Realty Investments in Chicago, “You can increase your chances of having an offer accepted by either being a cash buyer or having a pre-approval letter from a lender. The pre-approval will carry more weight than a pre-qualification letter because it shows that a lender has already vetted your finances and approved you for that loan amount.”

In addition to the pre-approval, being prepared to put down a sizable earnest money deposit can help move your offer to the top of the pile.

2. Be ready to wait for approval

The approval process is a bit different with short sales. The seller first has to approve your offer, as usual, but then it must be sent to the lender for review before the sale can move forward.

“Be patient. Banks take their time approving a short sale,” advises, Kathryn Bishop, a Keller Williams agent in Los Angeles.

Several individuals, including the lender, will need to look at your offer before a consensus can be reached. The lender must decide how much of a loss it’s willing to take on the loan and it’ll likely vet your finances to make sure you are financially sound enough to buy the home.

This process could take weeks, but in most cases, it will take three to four months.

3. Don’t expect contingencies

In a typical home sale, you can negotiate contingencies with the seller to reduce closing costs, cover fees, or make repairs before you finalize the deal. However, in a short sale, the lender also needs to be taken into consideration, and it is less likely to approve your contingencies.

Keep in mind that the lender is already taking a loss on the loan and won’t want to lower its profits any further.

The lender “is the one making the final decision on whether or not to accept your offer,” says Karen Hanover, a former short sale negotiator with a major lender. “They are going to look at the net after all costs of sale, not just the asking price. They also want to see the properties sold as is.”

4. Don’t navigate a short sale alone

The bank will be trying to recoup as much of its investment as possible, and the seller will be focused on unloading the property before it’s foreclosed. So who has your interest at heart? It’s important to have someone in your corner who can advocate for you and make sure you leave the negotiating table satisfied.

“The buyer must be able to control who does the short sale negotiation and have the legal right to communicate with that negotiator and receive status reports,” says James Tupitza, a real estate lawyer with Tupitza & Associates in West Chester, PA.

Before you even consider making an offer, make sure to bring on a real estate agent—or even legal council—who specializes in this type of transaction.

Post originally found on realtor.com

5 Tips Real Estate Investors Need to Know to Find Good Deals

With real estate prices reaching ever-higher highs in large swaths of the country, the availability of deeply discounted properties is drying up. And that means it’s getting tougher for real estate investors and home flippers to find great deals worthy of their time and cash.

“There are fewer foreclosures to buy, but there’s more interest in buying foreclosures,” says Daren Blomquist, senior vice president at ATTOM Data Solutions, a real estate data firm. “Competition, even at the foreclosure auction, is pushing prices up.”

Bank-owned property sales, foreclosure auctions, and short sales still made up 16.9% of single-family home and condo sales in the first quarter of 2017, according to ATTOM. But that’s down from 20.3% of sales a year ago.

“Back in 2007, you were getting 20% off the actual value” on bank-owned property sales, Leland DiMeco, owner and principal broker at Boston Green Realty, told ATTOM’s Housing News Report. “Now you have them selling for 5% off, if that.”

So how can established and aspiring real estate investors and home flippers find a real deal?

Tip No. 1: Be proactive and look for off-market properties

Some landlords prefer to quietly shop around their properties to investors instead of listing them publicly. This way, the owners don’t upset any tenants currently living there.

“There is quite a bit of the pie that does get moved around, legitimately, but just off-market,” DiMeco told ATTOM.

So would-be investors shouldn’t wait for property owners to find them—they should find these folks themselves.

“If you like a neighborhood, you can go knock on doors,” Blomquist says. There might be “homeowners who may want to sell and don’t even know they want to sell yet.”

Tip No. 2: Act fast and pay with cash

There are still deals to be had—if you act quickly, says real estate investor Brandon Turner, author of “The Book on Investing in Real Estate With No (and Low) Money Down” and “The Book on Rental Property Investing.” He owns 52 rental units in 18 properties and has flipped about a dozen homes in Grays Harbor County in Washington.

“You have to work faster than everyone else,” he says. “I try to make an offer within 24 hours of a new listing coming on the market—the same day, if possible.”

Paying all cash can also sweeten the deal for sellers who might have multiple offers, he says.

Tip No. 3: Don’t ignore potential tear-downs

Real estate investors might not initially see the value of buying an overpriced, small, or run-down home within the city limits. But many of these homes in desirable locations can be sold to a developer to be torn down. Then a multifamily building or larger home can go up if the zoning permits it. And that can translate into some serious moolah.

It requires some vision and a bit of a leap of faith. With a potential tear-down, “it may not be a good deal to buy it as a single-family home. But if you can buy it for what it could be, it can be an excellent way to find value and deals,” Turner says. However, this approach is not without risks and obstacles.

“If you’re going to build a new house, it takes a good while to get all the permits,” he adds. “The danger is if the market begins to decline, you might be unable to sell it.”

Tip No. 4: Seek out nasty, smelly homes

Investors shouldn’t shy away from hardcore fixer-uppers and “nasty” homes, says Turner. That’s because there is not as much competition for these potential diamonds in the rough. Many lenders won’t issue loans on these properties if they’re in really bad shape.

“The stinkier the house, the better,” Turner says. “Smells are easy to fix. A good coating of oil-based primer, new carpet, and cleaning will take care of almost any smell.”

He typically looks for the “nastiest house in the nicest neighborhood,” he says. Even homes in need of serious TLC can be profitable if they’re in the right location.

“You can’t fix a neighborhood, but you can fix the house,” he says.

Tip No. 5: Look in another city or state

Many would-be property investors living in pricey parts of the country would love to become landlords—but can’t afford to do so in their own cities. So they can consider buying in lower-priced markets such as the Midwest.

“Look in other geographies that aren’t in your backyard,” Blomquist says. Focus on places that are growing “that still have a lot of lower-priced inventory available.”

But they should make sure to do their homework first to make sure they understand the neighborhood they’re buying in and who their potential tenants or buyers would be. This includes how much they can realistically charge.

Landlords might need to hire property management services if they can’t afford to get there quickly if something breaks. And that eats into profits.

———

Remember, becoming a real estate investor is still risky

Despite the stinky homes, investing in real estate might seem like a glamorous way to make a little extra cash—just look at all of those home flippers on HGTV! But in reality, it’s not risk-free.

Landlords sometimes have tenants who trash homes or don’t pay the rent on time. Flippers might encounter permitting problems or find costly structural issues in homes that cost quite a bit more than expected.

“We’re in a booming housing market. Everyone’s confident if they buy a piece of real estate it’s going to go up in value,” says Blomquist. “That’s true for the long term.

“This housing boom is on a lot more solid foundation than what we saw 10 years ago,” he says. “But you have to be very cautious because, in the short-term, we have seen … that prices sometimes do go down.”

Courtesy of realtor.com

5 Properties to Pursue When Investing

Photo credit: Billion Photos / shutterstock.com

One effective way of improving your wealth is to carefully consider the homes and properties you purchase, and to reduce your potential risk.

Here are 5 types of properties that have low risk involved:

Properties that are in very good shape

A lot of people buy fixer uppers in hopes of inexpensive remodeling and potential opportunity for wealth building. However, some don’t realize the immense amount of time, work, and risk, that goes into purchasing these types of properties. Buying homes that are in great shape reduce the risk by ensuring your value is there and you won’t have to work for it.

Properties in average priced areas with ample cash flow

When considering real estate one of the most important determinants in reducing risk is location! The most appealing locations such as beach areas and downtown neighborhoods are likely to be high-risk because of their negative cash flow. Working class area homes are generally less risky since the cash flow is much more positive. It is important to look at any deal with more conservative rates.

Communities with thriving HOAs

When you are buying a property in a common interest development you are also buying into the Homeowners Association. If there happens to be any trouble with legal or operational issues, then you will have to pay the cost. When considering low-cost and least risky properties you must take into account the health of the HOA. Be prepared to research and identify the state of the HOA in order to really determine the risk of investing in this community.

Properties from areas with low vacancy

Neighborhoods and communities with low vacancy are often poor choices when considering a potential home or property to invest in. These areas are more likely to experience burglary and vandalism. When looking at locations with a majority of unoccupied units be aware of the potential risk factors associated with these low occupancy areas.

Potential long-term properties

Whenever you are looking into investment opportunities the whole goal is to look down the line at the potential long-term return on investment. This is the same when investing in a home or property. Take your time to research and discover properties of high quality that provide opportunity for long term gain. You must always consider future variables that may affect your investment.