Many times, potential real estate investors feel they need to have a large amount of money to invest in real estate. While in some cases this can be true, but in most other cases – not! If you want to invest in a Real Estate Investment Trust and purchase a percentage of say, a skyscraper then yes, it might mean you need a large start-up. But for the majority of meager investors, you can invest and gain a comfortable return. The two most common form of investment are the REIT and the other, the most common form, is Direct Ownership.
This blog will look at the direct ownership leg of investment. I’m not referring to someone who buys a second home for a vacation home and finances it as an investment weekend getaway, or buys in advance of their retirement. While worthy purchases, these are not the type of investment homes that get you the highest cash-cash return, well leveraged, properties I’m referring to.
A good investment property is one in which you pay little in and get the highest return in a relatively short period. For most, this type investment means buying good rental properties that pay out on a consistent monthly basis, ie: good tenants!
Here’s an example: You buy a small townhome for $100,000. You put down 20%, ie: $20,000. Your closing cost are (based on 5%) $4,000, so your cash-in is $24,000. Assuming you’ve done your due diligence and not purchased a lemon, if your area would command a $900 a month rent plus their own utilities, then your Net Operating Income would be $10,800 a year. That is a 45% cash-on-cash (CCR) return! If you only put down 10%, then your CCR would be 77%! This means in 15-1/2 months, you’ll have recouped your initial investment. (Do not count your note buydown with your computation of CCR.) Can you think of another investment that gets you a solid rate of return at this rate?
Use financing vehicles that allow you to put as little down as possible therefore reducing your cash in. It may also be helpful to invest with a well groomed partner, splitting your cash in and reducing your individual risk. The downside to this is you also split the end-game profit when you sell and your monthly intake is halved, or percentage split depending on your agreement.
Don’t overpay for a property. You’ll need to connect with a trusted Realtor. One who knows the local market and can find those gems with high potential. While syndicated sites such as Zillow, Trulia, etc, may give you some basic information, only the MLS will provide the most detailed platform, and only your Realtor can negotiate for you like a fierce lion on a feeding frenzy!
Be sure to screen your potential tenants. They can either be fantastic or a nightmare. Vet them well, background check them to the nth degree, and don’t fall for hard luck stories just to fill a vacancy. Watch (and listen for) for those red flags when interviewing prospective tenants. A well placed tenant can be a total win-win for you and the tenant. A hastily placed tenant can create havoc and prove runniness to your investment. And don’t forget, a tenant you take care of today could well become your ultimate buyer tomorrow.
Once you’ve got the hang of landlord tenancy, look for multiplex properties, then those with amenities. Consider hiring a property management company to take care of the mundane (albeit necessary) day-to-day business of rent collection, maintenance, vacancy reductions etc. Start small and grow with success.
Be frugal, but be fearless. Expect a few failures, but learn from each purchase as you go. Investment real estate purchases are not as scary or as unattainable as some believe them to be.