How to get started in residential real estate investing
Not everyone dreams of being a landlord, but investing in residential real estate can be a lucrative addition to an investment portfolio, and a great income stream generator in retirement. With an abundance of opportunities to enlist a competent property management team to deal with the day-to-day responsibilities of maintaining rental properties, real estate has become a particularly alluring option for investors.
However, many aspiring investors have no idea where to begin. If you want to invest in this lucrative market but unsure about where to start, here are some tips to get you started:
Trustee Auctions
Real estate trustee auctions are gaining popularity, especially for investors looking for a bargain. Experienced investors routinely buy property through trustee auctions, and advanced technology has made the process simple and less daunting to new investors. The key to successful trustee auction investing is to do your homework.
Trustee auctions offer all types of properties to suit all types of buyers. The housing crisis of 2008 created a burgeoning market for foreclosure properties, many available at bargain prices. While the rules vary according to the state offering trustee auctions, generally a trustee is assigned by the lender or an officer of the court to perform a foreclosure sale. The aim is to assist lenders looking to recover the balance of a loan from a borrower who defaulted on their mortgage payments. In March 2015, close to 850,000 homes in the U.S. were in some stage of foreclosure, and nearly 42 percent of them were up for auction.
Contrary to popular belief, “distressed” properties aren’t the only type of assets available at auction. An ever-growing number of non-distressed properties are being sold at auction today, including luxury homes, new-builds, and apartment buildings.
Two types of real estate auction make investing in residential properties easy: live auctions and online auctions. Online trustee auctions are gaining prevalence as investors have become accustomed to the convenience and opportunities available through digital platforms.
New investors should keep in mind that buying real estate is sometimes a complicated venture regardless of where and how the investments take place. Companies like Gentry Real Estate Group/BuyLowAZ in Arizona help make the process more efficient and transparent, and less intimidating. Still, investors must be prepared to contend with long contracts, escrow, disclosure documents, and other paperwork required by law.
Real estate auctions still conjure images of small groups of investors clustered around an auctioneer on the county courthouse steps. While many foreclosure and trustee auctions are conducted live in a courthouse setting, a number of states only require a publicly accessible space like a hotel ballroom or room a convention center. Some venues auction hundreds of properties in a single day.
Some larger counties make online auctions available for tax lien sales, in which homes are seized by the government due to unpaid taxes.
Live foreclosure auctions are open to the public to maximize the potential recovery for lenders and the smallest deficiency for borrowers. While anyone can attend an auction, investors who intend to bid need to register and be prepared to prove they’re in possession of sufficient funds to pay for the property in full.
The steps for bidding in a property in an online auction are similar to live auctions.
Take advantage of online real estate platforms
Brokers offering online real estate platforms connect developers to investors looking to finance projects, either through debt or equity. Investors wishing to receive monthly or quarterly distributions in exchange for taking on a considerable amount of risk and paying a fee often leverage the opportunities real estate platforms offer. As is the case with many real estate investments, online platforms are speculative and illiquid, which means investors cannot easily unload them.
Another snag with platforms is that you may need money to make money. Many real estate platforms are open only to accredited investors, defined by the Securities and Exchange Commission as people who’ve earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. But there are alternatives for investors who don’t meet that requirement.
Fix-and-Flip properties
Although television programs featured on HGTV make flipping look easy, it’s usually not. This strategy is ideal for investors with plenty of time, energy, and DIY experience.
The real element of risk in fix-and-flip investment properties is not doing the math ahead of time. Investors need to be able to establish very accurate estimates of repair costs, including the materials they purchase and possess a solid understanding of what features buyers are looking for in that particular market. Some fixes carry more weight in different markets than others, and one mistake new investors often make is spending too much of the budget on renovations that aren’t priorities among buyers.
Another risk to consider with flipping is that these properties need to sell quickly if they’re going to bring in a profit. A flip that goes beyond a pre-determined schedule for renovations to be complete, or sits on the market unsold for weeks (or even months) on end can be financially crippling because you’re carrying the mortgage and paying marketing expenses with no income stream.
For a new investor to make fixing-and-flipping work, finding an experienced contractor with a track record of successful flip expense estimating and project management is essential.
House hacking:
House hacking is a good way for new investors to dip their toes into the profitable waters of real estate ownership. House hacking for people who want to live in their investment property while renting out rooms or units in a multi-unit building. Investors. As an added bonus, house hacking investors can buy a property with up to four units and still qualify for a residential loan.
Another house hacking option is renting part of your home out through a site like Airbnb. This might be a good solution for easing yourself into landlord readiness. Without the need to take on a long-term tenant, potential renters are somewhat prescreened by Airbnb, and the company’s host guarantee provides protection if tenants cause any damage to the property.
Still another option is to buy and rent out an entire investment property. Look for a property with combined expenses that are less than the amount you can charge for rent. A property manager or management team can take care of all the day-to-day responsibilities of maintenance, rent collection, tenant screening, marketing, and more if you’re too busy or hesitant to manage it yourself.
Real Estate Investment Trusts (REITs)
REITs, or real estate investment trusts, are shares offered to the public by a real estate company or trust that manage income-producing properties and/or mortgage portfolios. Most REIT profits must be distributed as dividends. Companies that offer REITs own portfolios that contain properties such as apartment buildings as well as commercial real estate. REITs generally pay high dividends, which makes them an appealing investment in retirement.
REIT investment opportunities can be diverse and complex; some REITs are traded on an exchange like a stock, while others are not publicly traded. Your individual risk tolerance will help determine the amount of risk you can take on, so the type of REIT you invest in will be a significant factor in the in the amount of risk involved.
New investors are usually advised to look for publicly traded REITs, which carry fewer risks than non-public REITs and can be purchased through an online broker. Publicly-traded REITs are not without risks. For instance, rising interest rates that reduce demand for REITs can have a negative impact on your investment. While rising interest rates indicate a strong economy and translate to higher rents and occupancy rates, historically REITs don’t perform well when interest rates go up.
Non-traded REITs cannot be researched by investors which makes them hard to value. Non-traded REITs are also illiquid, which means, in many cases, you can’t sell for a minimum of seven years. Some allow investors to retrieve a portion of their capital after one year, but there will most likely be a fee to do so. New investors are often advised to steer clear of non-traded REITs and look for publicly traded REITs instead, which can be purchased through an online broker.
One important factor that investors should be aware of is that REIT dividends are taxed as ordinary income.
Entering the real estate investor world boils down to your risk tolerance and your personal comfort zone. What are your financial goals for investing in residential real estate? Are the long-term benefits right for you? There are no right or wrong answers to these questions. Respect your comfort zone, and find the approach agreeable to your lifestyle and budget. Investing in residential real estate can put your future financial security in a great place.
