Most of us don’t really think of accumulating investment properties. It’s just not something that we’re programmed to do, but it is an area that more GEN Y should start taking seriously. Don’t get me wrong it’s not to be taken lightly, but real estate offers common benefits and challenges to investors.
In terms of buy and hold properties, benefits may include:
- Passive Income: Monthly income to pay the mortgage and more.
- Capital Appreciation: Rising home values for potential sale in the future. Equity can be leveraged for additional investments.
- Tax Benefits: Interest expense and other items might be deducted when filing taxes.
However, there are several barriers to entry, which include:
- Financing: Small investors may have trouble qualifying for a second mortgage.
- Liquidity: Renovations and closing costs require cash reserves. Cash buyers have an advantage of those needing financing.
- Market Savvy: Negotiating skills, knowing local trends and real estate analysis may take time to acquire.
First time investors in particular may lack the experience and resources to make informed decisions. Thankfully, you can better manage risk and boost profits with a few tips.
Here are some things to consider:
Know the Sub-Markets of a City:
Cities are often thought of in generic terms. Sunbelt cities in the U.S. are gaining population, while the rust belt has an exodus. Population gains are a positive factor, but only one aspect of a city’s dynamics. There are thriving neighborhoods in cities such as Pittsburgh, where population as a whole is declining. Meanwhile, pockets of higher vacancies are apparent in towns with growing numbers.
Localize Location Risk:
Localizing location risk to neighborhoods helps make better investments.
3 factors that strongly correlate with positive rental performance/demand are:
These positives should be readily seen and backed up with data. You can see construction of the new university buildings. Local coffee shops and retail have begun to buzz, as locals feel comfortable coming to the area. Families with young children have started moving into the neighborhood.
New property investors should consider what is already taking place, rather than hearsay or forecasts. Unlike flipping homes, your buy and hold investment doesn’t have to focus on large amounts of instant equity. You want a fair price with a property that will consistently rent and rise in value.
Don’t Forget about Seller Financing:
Negotiating terms with property owners no longer indicates unqualified borrowers. The rigid criteria of banks have spurred growth in non-traditional financing, such as venture capital and crowd funding.
Executive Producer Elliott Broidy brought attention to crowd funding this past summer. He turned to Indiegogo for funds to feed homeless youth during production of his movie, ‘Sugar’. Banks would not likely include such costs into financing a movie. Similarly, banks will not likely roll closing costs into your mortgage.
Owners may choose to be your mortgage banker for reasons such as:
- Move a property quickly: If potential buyers continue to be denied mortgages, seller financing helps the owner move a property.
- Investment return: The interest from the loan has a better risk/reward than other fixed income investments.
Investors who understand why a home is not selling or owner motivation can leverage seller financing. With seller financed property, you may enjoy:
- Lower down payments. (or none)
- Removes the need for jumbo loans that disqualifies many buyers.
- May cover closing costs, which requires liquidity many buyers lack.
Investors should still expect due diligence such as verifying income and credit checks, etc. A property owner with multiple homes is also more apt offer financing.
Check Relevant Data and what it indicates:
You should evaluate hard data for added insight. Your realtor or multiple real estate sites offer information. Remember, we’re focused on cash flow properties in attractive areas, not fix and flips.
Some numbers to consider are:
- Sale Price to List Price (SP/LP): This ratio tells us how close to list price that homes in the area are selling for. A ratio trending up or near 1to1 may indicate an attractive area. You will find areas of booming cities with downward SP/LP and surprising pockets of upward SP/LP in other towns.
- Average Sale Price per Square Foot: A stable or upward trend is preferred.
- Average Time on the Market: For an individual property, be sure to understand why the property has not sold. This ratio also reflects the demand for an area.
The total return of real estate has many benefits. Taxes can be trimmed, cash flow improved and equity gained. By understanding a city’s sub markets and location risk, you can buy properties that consistently perform. This research may reveal chances for seller financing, which removes a common barrier to investment.