Best Strategy for New Real Estate Investors

 

Throughout my adult life, I’ve thought over and analyzed whether or not to start investing in real estate. I always knew it was a good investment when done right. Growing up in a country with high population density like Taiwan, real estate was a very valuable commodity. The people that owned tall apartment buildings were the ones driving Porsches, Mercedes, BMW’s. Our own landlord became a millionaire by building a 7 story apartment building which we lived in. He had no past experience but enough determination to learn how to get it done. 

Owning real estate always looked like a great investment vehicle but I wasn’t sure if I wanted to be a landlord and deal with difficult tenants. Funny how your perspective changes at different stages of your life. I had a serious health scare last thanksgiving that put me in the hospital for four days. Was on IV Fluids and pain medication for 3 days before the Doctors cleared me to eat. This scare inspired something in my head to click. It clicked the real estate investment switch on for me. Things at work are going great, I’m making enough money to buy most luxuries and live comfortably. Let’s be real, nothing is permanent. What could I do to protect myself with something if there are changes to my main source of income at my job? Further, how was I going to add other streams of income to allow us to retire early? Millionaires average 7 streams of income and that’s what I want to be. 

So I saw much more upside to starting my real estate investment portfolio than downside. Next, I contacted my real estate agent (make sure you get a referral from a reliable source if you don’t already have one), discussed my strategy, and were off to the races. For our first property investment, outside of our primary residence, my wife and I decided to find a garden style condo at a good price, relative to comparable properties, in an up and coming neighborhood. 

Pro Tip ** Search towns and cities that have hipster, boutique coffee shops, restaurants, and stores opening up. It’s a great indicator to identify where millennials are moving into. Millenials are much more likely to rent than own. **

I actually don’t recommend that you start your real estate portfolio with a garden style condo (more on that later) but this works best for us now because we have a toddler and a newborn. Don’t want to burn myself out by managing a multi family rental property or taking on a renovation project in addition to working my full-time job and taking care of my family. 

Ultimately, you have to look at your life situation and decide what real estate investment strategy works for you. 

If I could talk to the 25 year old version of myself, here is what I would say to do:

  1. Read as much as you can about real estate investment strategies. Read about raising money for your investment, negotiating the best purchase price, how to manage rental properties, and how to decide what properties to buy. 
  2. Get approved for a FHA home loan and go to appropriate seminars on purchasing property. 
  3. Figure out how much you can afford. Your annual cost of housing should not exceed 30% of your gross income. Also make sure your credit score is above 700 for the best possible interest rate. Takes steps to do so if it’s not. 
  4. Save money for a downpayment. You qualify for a FHA loan since it is your first real estate transaction, you can buy a property with as little as 5% down for a 30 year fixed rate mortgage. This is a great opportunity to use other people’s money (mortgage) to build your wealth. 
  5. Find a great real estate agent. This is an underrated part of the process. Make sure you find someone who knows the area, specializes in the property type that you’re looking to purchase (multi-family, commercial, condos, etc.). Interview a minimum of 3 and pick the one that you vibe the best with. Keep in mind that this will hopefully be a long term relationship as you build your empire. Great real estate agents can find you opportunities that you may not identify on your own, protect you throughout the transaction, and negotiate the best deal. 
  6. Find properties in desirable neighborhoods that are undervalued because they need cosmetic updates. Make sure you’re not looking at any properties with major repairs needed. Your mortgage lender will not lend you money on something that is broken but they will lend you money for ugly properties. This strategy of buying a property to remodel and update will force increased equity value in your property. Simply, if you buy a property for $250,000 but comparable properties  (in size and neighborhoods) are selling for $350,000. Invest $50,000 in cosmetic updates to give your property the same features and quality as the $350,000 homes. Resulting in $50,000 in forced equity.  $350,000 (avg. sale price of comparable property) – $250,000 (initial price) + $50,000 (updates) = $50,000 Forced Equity 
  7. The best property type to get the most bang for your buck is a multi-family. Specifically, find a 3 or 4 multi-family property that you can move into and rent the other units. To me, this is the best strategy for someone starting out because you’re buying a property for short money and having other people pay down the mortgage (building equity for you!). 
  8. You may want to start a family and move into a single family home. Save up enough for a downpayment (no FHA loans available anymore) and rent out the apartment that you’ve been living in. By now you’ve forced equity into the property from your initial cosmetic updates, have renters in all units paying market price, and have positive cash flow (bringing in more money than you dole out). Since we are buying to hold, hopefully the up and coming neighborhood develops into the desirable area it was meant to be, thus adding to your overall equity. 
  9. Once you’ve built enough equity and have a consistent backlog of paying renters (a couple years), you can go to your bank / mortgage broker to use equity from your multi family property to borrow enough money to buy another one. This is a riskier play because what if something happens and your renters aren’t paying anymore or the real estate market crashes, along with it your property value. However, I feel that this is a brilliant play to make if you can minimize your risk by the thorough vetting of potential renters buying at a great price. You’ll have your current renters pay down the equity you took out as a downpayment on your 2nd property. Repeat the process of forcing positive equity by cosmetic updates and buying at a great value for your 2nd property. 
  10. Rent your units at market level or higher. You’ll have to balance this a little bit because sometimes it’s worth having rent a little lower if you have a great long term tenant that pays on time and doesn’t give you any headaches. That being said, don’t lose out on potential earnings by not keeping up with the market rates. 
  11. Do this as many times possible and watch your empire grow. Eventually, you may not be able to get conventional mortgages anymore (lenders will cap you based on your debt/income ratio). When this happens, research the other ways to raise capital to buy real estate. 

Hope this was helpful to you. Let me know your thoughts in comments below. 

Layupforlife 

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Author: layupforlife

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