You’ve always dreamed of owning your very own investment house, and now the keys are in your hands and you’re ready to turn a profit. …Or are you?
Investing in real estate is not for the faint of heart, and if you make a mistake with your offer price, don’t choose the best property for your strategy — or don’t have much of a strategy at all — then your goal to profit is doomed well before you even begin.
For the smart investor, an investment house can be a stepping stone to financial freedom. But where should you look for an investment house, and what qualities or features are important? Here are five tips to get you started.
1. Understand your options
Before you make any decisions regarding your first investment house, it’s important that you understand your options and the job that you are undertaking.
There are two main ways in which you can make money with an investment property:
- Fixing and flipping it
- Buying and holding it
On average, a flip takes at least 180 days to complete. However, this doesn’t mean that a six-month timeline is ideal — quite the opposite.
“If they can hold the house for three or four weeks, get it on the market, and then maybe get it in contract and sold,” that’s ideal for them.
The number of days that it takes a property to sell makes a difference in a flip, too. While Montuori believes that the “sweet spot” of 90 days is reasonable, he emphasizes that each market, area, and time of year is different.
With a buy-and-hold strategy, you’re not on a specific timeline to sell the house, but you do want to rent it out. So it’s important to choose a home that’s attractive to potential tenants and that you can keep occupied.
2. Pick the strategy that’s best for you
Every investment strategy involves some speculating, “and that always has another level of risk,” says Montuori.
Fixing-and-flipping and buying-and-holding a house are very different, even though they both involve real estate, and investors choose one strategy over the other for a reason. It’s best to pick the one that best fits your timeline, goals, knowledge, and resources.
The fix-and-flip investment house
This is the strategy that shows on HGTV have made popular. It means purchasing a home, performing all necessary repairs, often upgrading the aesthetics, and then reselling it for a profit.
In Q4 2018, the average return for flipping a house was $65,000. This strategy requires a short-term mindset as well as the confidence to take some risks, such as timing the sale at the right point in the market.
The buy-and-hold investment home
The second way to make money with an investment house can be a lower-risk strategy. It involves buying the property and holding onto it, renting it out either short-term or long-term.
In other words, this means purchasing a home, fixing it up to make it rentable, and maintaining ownership while using it to bring in a steady stream of income. Most buy-and-hold property owners intend to sell the property at some point in the future.
This is a less-glamorous but more cash-flow-positive way to generate income with an investment house. Examples of this strategy include renting out a house to tenants under a year-long lease, or renting out a house to guests on Airbnb from week to week or even nightly.
Investors who are interested in accumulating more wealth, and using their real estate investments to create a steady income stream are usually better off buying and holding real estate for longer periods of time. They can then use the equity from the property to finance other investments.
3. Secure the proper resources
Before diving in headfirst, you want to make sure that you are prepared. It’s important to understand the resources you’ll need for each strategy and to line them up before you start actually shopping for a house.
Conventional lenders won’t offer loans with mortgage insurance on rental properties, so you’ll probably need to put at least 20% down on the house. If you need to borrow money in order to complete the renovations, you may want to consider a Fannie Mae HomeStyle Renovation mortgage or an FHA 203(k) mortgage.
A market where home prices are rising is an ideal one in which to flip homes. However, you must be careful because it’s not guaranteed that home prices will continue to increase at the same rate, or at all.
You must ask yourself what needs to be done to the house in order to land big returns. Once you know what the house needs, you must then figure out what you can do on your own and what you’ll need to outsource to professionals.
You probably won’t be able to fix and flip a house all by yourself; It’s a large job even for professional contractors. By assembling a team of specialists whose strengths counterbalance your weaknesses and vice versa, the process can be much more affordable, less time-consuming, and higher quality.
In order for the buy-and-hold investment strategy to work, you will need enough in savings (or enough income) to cover a down payment, closing costs, and at least six months of expenses for the home (including the mortgage loan) in the event that you can’t find a tenant.
It is also extremely important that you save up for necessary maintenance, taxes, and insurance. Taxes and insurance rates are different for investment homes than for your primary residence; the only exception is if you buy a multifamily building with four or fewer units and live in one of them. This can be an excellent strategy, as it allows you to earn back your monthly expenses and then some, but not every buyer is in a position to purchase a multifamily building.
The buy-and-hold investment strategy works best in markets where home prices are relatively low and rent prices are relatively high. In such market environments, you will be able to recoup your down payment and start turning a profit more quickly.
Knowledge and/or a team
With a fix-and-flip, you need a team to help you get the house ready to sell. In buy-and-hold, however, you’re going to be hanging onto the house for longer, and your team might need to be bigger as a result.
Will you manage the property yourself? Does the home require only minor repairs, or will you have to make any significant updates? Can you make those minor repairs or updates yourself? Do you understand your state’s landlord-tenant laws?
SmartMove reports that more than half (54%) of apartments will turn over each year, leaving you to search for new tenants annually. If you do background checks, credit checks, or income screening, finding qualified new tenants can take weeks to months.
Some landlords don’t want to deal with these logistics and use a property manager. Hiring a property management company is more convenient than managing the property yourself, and it will cost you. While some people love being landlords, others can’t say the same.
4. Consider your goals when looking at possible investment houses
The next thing you need to do is to select which property is going to help you turn a profit.
What makes a house a good investment home for your strategy? Ask yourself what property will help you to achieve the highest return on your investment and which one has the best options for making a profit in the future. This will differ from one strategy to the other.
Montuori advises taking a holistic view of the local housing market and factoring in any unique considerations.
“People in the colder areas are not very optimistic in the wintertime. So sellers might sell a house for less; There’s not as many buyers out there.”
The right size
The standard-sized house for the neighborhood in which it’s located will likely be the most popular and desirable with buyers. Therefore, it’s best to avoid going too big or too small with the home you flip.
How do you know what size is standard in the neighborhood? A local real estate agent can help you understand what’s “average” and what’s considered an outlier in different parts of town.
The right price
Most flippers ideally want to pay no more than 70% of the home’s ultimate sales value when they buy it. Otherwise, with repair costs and carrying costs, it can be difficult to sustain a large enough budget to fix the home up. However, there is no “right” amount of money to spend.
“[The] amount of money depends on the condition of what you’re looking for,” says Montuori. Remember that not only are you buying the house, you’re also buying the neighborhood itself — specifically, you’re buying the neighbors. What are they like? Do they have loud dogs or young children? These things will affect the ultimate sales value and therefore the price you should be willing to pay upfront.
Don’t forget about the costs to repair the house, too. Are you able to fix things yourself, or will you need to pay for help? Do you have access to materials? What permits will you need? All of this should be factored in when contemplating price.
Additionally, although home value appreciation is typical, it is not always guaranteed. The last thing that you want to do is to lose money on what is supposed to be an investment because the housing market has taken a turn while you were fixing your flip.
Not in the best shape…
If you’re getting a steep discount on the home, it’s not going to be perfect — and that’s good, because you want room for improvement. When you get the home at a lower price, you will be able to spend your remaining budget on making it more desirable.
…But not falling apart
Although you can’t expect a discounted home to be in the best shape, it’s also best to ensure that it’s not falling apart.
Montuori recommends staying away from buying something that will require a lot of work. If the home that you are looking at is going to require a major renovation, such as a new roof, it’s unlikely that you’ll pull in as much net profit — assuming you’ll make your money back in full at all.
Most flippers have the best luck with homes that haven’t been updated in a long time and may have minor issues, but the problems should be largely cosmetic. Homes with problems in the foundation or one of the major systems are not a good choice for a fix-and-flip investment.
The right size
Some home sizes will be more attractive to renters than others. One-bedroom homes generally appeal to single tenants; When single tenants couple up, they typically move to two-bedroom homes. When couples have a family, they require more space and usually move again into a three- or four-bedroom house.
Therefore, if you are looking for a house that will help to cut down on vacancy expenses by finding you long-term, reliable tenants, a three- or four-bedroom house is worth considering. Additionally, when it comes time to sell your house, houses with at least three bedrooms are usually the most popular.
The right price
When considering what price is acceptable to pay for your rental home, you must factor in a variety of expenses, such as your monthly mortgage payment, taxes, insurance, and the amount you can reasonably command for rent.
There are some software programs that can help you do this, and an experienced real estate agent is also an excellent resource for buy-and-hold investors who are trying to price a possible investment house.
Adjustable in the right ways
When figuring out which home to invest in, it’s best to take the community into consideration in order to ensure that it’s able to accommodate the highest-quality potential renters.
Can you build a fence in a pet-friendly area? Should you really buy a split-level or two-story home in an area with a large aging population? There are additional factors to think about, and some of these problems are more fixable than others. You can remodel and add on to many homes, but completely changing the layout is a different story.
Standardized in the right ways
It can prove really difficult to buy additional homes and scale your investment business when you purchase homes that are too quirky. This is not to say that each of your properties should be a cookie-cutter copy of the next, but you should consider certain concerns around the layout and try to standardize where you can.
Is the kitchen a standard layout? Are the bathrooms? Are there any anomalies with the attic or basement? What appliance hookups are available? Do all of your homes have similar heating and cooling systems? Can you replace appliances in an investment house so that it’s uniform with your other properties?
5. Hire a qualified real estate agent with experience in investment properties
Unless you already have your real estate license, it’s in your best interest to hire a qualified real estate agent who has experience with buying investment houses. They can help fix-and-flip investors time their purchase and sale, put it on the market for the right price, and find the right buyers. Or alternately, they can help buy-and-hold investors pick the best property, find renters, and advise them on landlord-tenant law. However, a knowledgeable and experienced real estate agent can also help with many other invaluable things:
- Helping you to understand your local housing market
- Keeping you apprised of current market trends
- Finding the best properties for investing
- Helping you secure competent contractors
- Utilizing legally appropriate lease language (for buy-and-hold investments)
- Ensuring that you abide by Fair Housing laws
You’ll definitely want to find someone who will not only walk you through the various steps of the process but who will also act aggressively on your behalf.
Be sure to do your own research on any potential agents. You may want to check their reviews on places such as Google and Yelp and ask them for references, especially from other investors. Just remember that there is no substitute for hiring a local agent who not only understands the local market, but also has experience working in it.
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