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 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 clients 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.
It’s important to understand that the way these funds go differs from typical mutual funds that are based on stocks and bonds. These funds’ 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 mortgage 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.
Some investors think that the best way to get mortgage 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 that are about to creep up on you. Bringing in an inspector to take a look at a multi-unit building can be expensive, but it’s a lot cheaper than realizing that you need to tear all the electrical wiring out and have it replaced three months into your time as the owner.
Some investors worry that they don’t have enough money to buy a house, and they also worry that they don’t have the credit score to qualify for a loan. This is where the rent-to-own process kicks in. Instead of renting that apartment while continuing to try, year in and year out, to qualify in that small window before you have to renew your lease, you make that next lease your last one by entering an agreement that puts a percentage of each month’s rent into escrow for you to make that down payment while you work on your credit.
Some people start by purchasing a duplex or a smaller building with apartments, and they plan to live in one of the units and lease out the others. This is becoming particularly popular among millennials who want to get in early on the investment possibilities. They don’t have a lot of cash, but they qualify for credit with a small property with multiple units. This means that they get to experience two difficult novelties at once: owning a home and becoming a landlord.
If you think that this is the right investment opportunity for you, it’s important to remember that while rents 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 connect you with the right realtor for your property search needs and to find you the right deal for your financing. We’re ready to help you!