Buying Real Estate as an Investment
If you are interested in adding an element to your portfolio that is significantly lower in risk than the stock market or the commodities markets but leaves savings accounts, Certificates of Deposit and money market accounts in the dust when it comes to reward, then a real estate investment is definitely something for you to consider.
Buying real estate investment property has made a ton of sense for many of our Real Estate Investors at HOS Financial. For years, it was the institutional investors that held the lion’s share of the market, but by the end of 2014, cash real estate sales had dropped to historically low levels, which meant that individual real estate investors had more openings at properties lower in the price range that were ready to renovate and then rent out.
So if you’re new to real estate investment, there are two different roads that you can take. First is purchasing shares in an investment trust dedicated to real estate. This is the same process as buying into a mutual fund or buying a stock. What you end up doing is purchasing shares within a portfolio of real estate properties. There are three different metrics for value: the management and the cash flow supporting the trust, the fund that rests on the trust, and the property itself. For people who cannot go out and buy a tiny fraction of a new apartment complex or a high-rise building, this is another way to get into real estate investing.
It’s important to understand that these Trust Funds differ from typical mutual funds which are based on stocks and bonds. Real Estate Trusts performance will vary both with the gains that come from periodic property sales as well as ongoing cash flow, so this works a lot differently than the indicators that will generally drive bond and stock funds.
If you have the money, you can get a Real Estate investment property through direct ownership. It’s true that once you have a property purchased and renovated, and you have a tenant living in it, you should be able to expect regular rent receipts each month, to provide a regular cash stream.
Best way to get into a real estate investment property
Some investors think the best way to get into a real estate investment property is to purchase a small building that has apartments in it. Others purchase a house (or several houses) and rent those out to tenants. In either case, it is crucial to do the research to find a situation that generates regular, positive cash flow and does not have any maintenance nightmares about to creep up on you after closing. Bringing in an inspector to take a look at a multi-unit building can be expensive, but it’s a lot cheaper than realizing you need to tear all the electrical wiring out and have it replaced three months into your time as the owner.
Some investors want to own a property and want to make some money from renting it out, but they decide that they don’t want to hold onto it for the long term. So, they find a tenant who wants to buy in the future, and are willing to pay a Rent to Own rental payment while they work on fixing their credit. They do so by entering into a rent-to-own (RTO) program. The investor collects rent each month and agrees to set some of it aside to save a down payment for the purchaser. At the end of the term, if the purchaser (tenant) has secured mortgage financing from a bank or other lender, then the sale takes place at the price they agreed on at the start of the lease. If the purchaser hasn’t found mortgage financing, the investor can extend the lease term with that tenant buyer or indicate that he wants to move on to a different tenant or purchaser..
Some Real Estate Investors start by purchasing a duplex or a smaller building with apartments with a plan to live in one of the units and rent out the others. This is becoming particularly popular among Millineals who want to start Real Estate Investing at a young age. They don’t have a lot of cash, but they qualify for mortgage financing on a small cheaper property with multiple units. This means that they get to experience two challenging novelties at once: owning a home and becoming a landlord.
If you think this is the right investment strategy for you, it’s important to remember that while rental rates are on the rise now, they may not do so indefinitely. The tight rental market is what is driving up rents right now, but as more projects come online, they should ease rent costs. When you are looking at cash flow projections from your rental unit, it is best to think conservatively. You’ll want to set 10 percent of your rent receipts aside for savings, half for maintenance costs and half to keep you in the black if a tenant has to move out.
Still interested? Get in touch with one of our real estate investment experts at HOS Financial today. We have the tools and the expertise to look for Real Estate Investment Opportunities and to find you the right Mortgage Financing Program. We’re ready to help you!