Real Estate Investing 101
The economic outlook for some industries has not been too good lately, however, one sector that is doing very well and gaining traction is real estate. The Urban Land Institute released a report called the 2016 Emerging Trends in Real Estate which talks about “18-hour cities” and the increase of millennial parents that are moving to the suburbs from the urban areas, indicating the strength of real estate with every passing day in of 2016. Some in large financial institutions have gone on to say that “the next 24 months look doggone good for real estate.”
Real Estate is a smart place to make an investment and grow your wealth is what these trends are showing. With the rental market in San Diego showing a huge increase in demand and a housing shortage, finding a tenant is a breeze and homes that are being flipped are selling quickly and for high prices.
With this being said, the San Diego Real Estate Market is highly competitive right now. If you are thinking of investing in Real Estate, you will need to be strategic in who you work with, where you look for investment opportunities and educate yourself. Read on for out 101 of Real Estate Investing.
Get your real estate team in place before you buy
Getting a team in place requires research and relationships. Once you have found your key players you will feel empowered and will start to get your feet wet by putting serious offers on properties. Here are some of the key players that you should have in place.
- A mortgage broker or banker, who will help you get the financing needed to purchase a property.
- An Experienced local Realtor that knows the area and knows about the types of homes in the area.
- An Accountant that is well versed in real estate investments
- A good contractor, for repairs and for rehabbing.
How to find rehab or wholesale deals
This is not for the nervous-nellie. This can be costly and devastating if you jump in and don’t know what you are doing so please, make sure that you have done your homework and are ready to go.
You can buy properties in San Diego to fix up and flip (resell) or if you are lucky enough to find a property that you can rent out for a monthly cash flow, then, this is amazing.
The advantage of flipping properties is that you can end up with a good return on investment (ROI) in the short term. For example, you buy a property for $500,000, and invest $100,000 into repairs. Once it’s rehabbed, your property is valued at $750,000, and you sell it for a $150,000 profit.
This is an extremely simplified version of ROI. There are many other factors that you need to determine to see if the numbers work in your favor — that is, you’re not overpaying initially when you buy the properties or for the renovations or holding costs.
Flipping properties mean that you will need to spend more time looking for fixer uppers that may be under market value. These may be more difficult to find in San Diego’s hot market with rising property prices. Beyond the actual purchase price, you will also need to factor in fixed purchase costs for inspections, closing, and lender fees.
You’ll also need to factor in holding costs. Your budget should include funds for making repairs, whether you are doing them yourself or hiring contractors. While you’re upgrading the property, you’ll need to carry mortgage payments, property taxes, utilities, and insurance.
Because of rising property values, fix-and-flip deals in good neighborhoods can be hard to find. But once you know where to find rehab opportunities, you can easily repeat the process by reinvesting proceeds from a previous flip into the next property, which can be bigger, in a more desirable neighborhood, or finished out more luxuriously, and therefore sold for more cash!
Working with the right real estate professionals will help you learn which neighborhoods to consider and determine where you should focus your search. We can help you find the right fixer-uppers that may be under market value. Also, a Realtor will have access to many properties that may not be publicly available.
Finding buy-and-hold rental properties
A buy-and-hold rental property is one that your purchase with the intent of renting it out to tenants. If you find the right long-term buy-and-hold rental property, you can earn consistent cash flow each month, which can be a great source of supplemental income.
You’ll need to carefully review the operating expenses on the property and what tenants are willing to pay for the space to know if you’ll make or lose money each month. For example, say your total costs to buy a duplex was $60,000, including down payment and closing costs. You can rent each of the units for $1800. Assuming your building is 100% occupied, you’ll make $3600 per month in income. Your expenses include mortgage payments, taxes, insurance, utilities, and management fees, and you want to set aside some cash each month for capital expenditures and routine repairs. You calculate that your expenses add up to $3100 per month. Once you subtract your expenses from your income, you’ll have a positive cash flow of $500 per month.
Of course, this is a very simplified example, and it doesn’t take into account that problems will inevitably arise. Emergency roof repairs, heating system breakdowns, broken windows that need replacing, and other unexpected expenses can eat away at your profits. One of your units may be vacant for a month or more — or you could have a tenant who fails to pay their monthly rent.
The more you can anticipate problems before they happen, however, the easier it will be for you to recover from setbacks! Moreover, rent isn’t the only way to make money on a buy-and-hold property. You can also add amenities, such as coin laundry and vending machines, to increase your potential monthly income. If your property has space to add a billboard, you can earn advertising revenue from renting that space, too. And when you decide to sell, your property’s value will likely have increased both from the overall rising property values and by the improvements you made to increase the cash flow.
Once you find and invest in your rental property, you’ll need to decide how you want it managed from month to month.
Getting the right property manager
Do you want to manage your own property or hire a manager? Property management can become a full-time job. As a property manager, you’ll have to deal not only with maintenance, repairs and tenant issues, but also with insurance, fair rental regulations, and building code compliance. So if you’re not an expert in these areas, managing your own properties may not be worth your time and effort.
Hiring a professional manager can save you headaches over the long term. While you’ll have to factor in management as a fixed expense, your property manager will likely know how to better take care of routine repairs, tenant issues, and keeping your property near 100% occupancy.
Your real estate professional can refer you to reputable property management companies to help you take care of your investment.
Where should I start investing in local real estate?
Work with a knowledgeable real estate professional who knows about the different neighborhoods. We can help you find properties that will fit into your budget and your overall goals. Whether you’re seeking a duplex or multifamily property so you can maximize your rental income or whether you want a condo or single-family home to improve for resale, we can guide you to the best property to suit your needs.
Contact the McT Real Estate Group to learn more about investment properties in San Diego area.