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Benjamin Franklin once said, “An investment in knowledge pays the best interest.” How does that apply to investing in real estate?
After all, you’ve been dreaming of being your own boss and growing your personal wealth. You’ve built up a healthy savings account, and you’re ready to take the first big step into real estate investment. Then … you falter.
Here’s the problem: You’re not certain where or how to start investing in real estate. There are dozens of ways you can park your money in real estate. It can be an overwhelming prospect, trying to work out what type of real estate investment you want to target.
You’ve likely heard that real estate investing is a great way to grow your money. Indeed, home prices in the United States have gone up by more than 5% annually for the past 50 years, according to the National Association of Realtors. That means the home you buy today could be worth significantly more in five years.
You’ve also probably heard horror stories about how someone sank all their money into some kind of investing and then lost it. That’s why it’s beneficial to educate yourself on all things investing before making a decision about whether it’s the right risk level for you.
If you’re interested in diversifying your investment portfolio and gaining an additional income stream, then investing in real estate is where it’s at. To help you decide the best way to make money in real estate that suits you, we’ve interviewed full-time real estate investors and agents who have shared their experiences and tips with us.
Here’s what you should know.
Flipping houses is just one of the many different ways to invest in real estate. HGTV has glamorized how to flip a house. It shows you the before and after… and not nearly enough of the nitty-gritty middle. So, if you have the notion that a fix-and-flip will be fast and easy money, go ahead and forget that right now.
On average, you can expect to spend around six months (or 180 days) to fix and flip a property. You’ll spend grueling hours looking for properties to invest in, then either hire contractors for repairs or take a DIY approach.
“The renovations we do range from simple $15,000 repairs to more complex fixes of up to $200,000,” says Mike Nuss. He’s the co-founder of Investor Lab, an online networking community for real estate investors. Nuss worked as an appraiser for more than 20 years and has been investing in Portland, Oregon, properties since 2003.
Nuss continues, “Simple repairs include things like the countertops, fixtures, and cabinetry. If I can, I try to avoid re-doing the electrical and plumbing, because it’s expensive and more trouble than it’s worth.”
When you’re looking at multifamily units, however, the cost of renovations can increase substantially. However, the potential return on investment also increases.
Nuss likes to buy old, historic multifamily units in Portland. “These big units sometimes have inefficiencies in their floor plans. We try to maximize the use of space to get a better return on investment.”
According to Nuss, he was able to purchase a duplex where both units had a large single bedroom and bathroom. Through massive renovations, he gave each unit additional bedrooms and a bathroom. This type of remodel, in turn, translated into a huge return on investment.
The buy-and-hold investment strategy is drastically different from a fix-and-flip. You’ll buy a property and hold onto it so that you can rent it out either long-term or short-term (for example, as a vacation rental). This form of investment is slightly less risky than flipping and can generate a more consistent income stream.
A long-term rental will involve a year-long lease. You can take this approach with both single-family homes and multifamily units. The type of property you decide to target comes down to your own personal preference and funds.
“Large apartment complexes with over a hundred units can provide stable cash flow and have a value-add opportunity,” says Matt Nusbaum, who teams up with other investors to purchase these properties (known as syndication investment). Nusbaum is the founder of Erich Martin Group and The Corporate Investor.
“We’ll renovate interior units in order to increase rents, which results in a higher net operating income (NOI). This in turn increases the value of the property,” he explains.
“Most of the time we’ll rebrand the property with new signage, new exterior paint, updated pool area, and take care of any deferred maintenance.”
Nusbaum notes that they also typically “update the interiors to bring them to a modern finish,” replacing the countertops with granite and adding new cabinets, new lighting, new backsplash, and stainless steel appliances to the kitchen in particular.
Nusbaum states that typically these types of investments have a five-year hold period. During that time, they renovate the property, raise rents, increase value, and then finally sell for a profit.
A buy-and-hold investment of this nature can reap an exponentially larger return on your initial investment, but it also requires more patience. The advantage of a buy-and-hold multi-unit is the stable and predictable monthly cash flow distributions, states Nusbaum. The downside is that the investments are long term and not liquid.
Of course, renovations are not always necessary.
Sarah Singh is a foreign investor based in Australia. “Since I live overseas, the buy-and-hold investments I have in the United States are turn-keys.”
A turn-key property is move-in ready. You might pay more upfront for the property, but the benefit is that you’re able to skip out on home improvements.
In many instances, turn-key rentals may already even come with tenants and property management in place. If you live a long distance away from your property investment, as Singh does, this can be particularly beneficial.
On turn-key rental investment, Singh advises, “Do your research and really understand the numbers before jumping in.”
Your other option for a buy-and-hold investment is a short-term rental, like hotels and vacation rentals (think Airbnb). What you decide to choose will largely depend upon the style of investment you’re interested in getting started with. Some people choose to diversify, either because of their living circumstances or because they want to add property to their financial asset portfolio.
Singh states, “In my portfolio in the U.S., all of my properties are long-term rentals. However, over here in Australia, my whole portfolio is all short-term rentals.”
While Nuss specializes in long-term rentals and prefers those, he still maintains a diverse portfolio to have varying revenue streams. In his case, he has a single small four-unit hotel that’s on Airbnb. In addition, he also does land development, new construction, and even small retail investments.
Other types of investments
Investing in physical real estate may offer a high return, but it also has a higher barrier to entry. You’ll need more money upfront to purchase it and it can also have ongoing costs. If you’re interested in an alternate path, then you might consider real estate investment trusts (REITs) and crowdfunding platforms.
Both REITs and crowdfunding have a lower financial barrier to get started. This can allow you to invest in multiple types of real estate for less.
Real estate investment trusts are companies that own commercial property, such as hotels, malls, and so on. You’re able to invest in shares of these companies through a stock exchange. When you invest in a REIT, you’re investing in the company-owned real estate. This type of investment poses fewer risks than traditional real estate investing.
Crowdfunding platforms can offer high returns, but they also pose a greater risk than REITs. You’ll find that some crowdfunding platforms require you to be an accredited investor to take part.
What does it mean to be an accredited investor?
An accredited investor is a person who has the financial means to handle risky investments. Based off the guidelines set by the U.S. Securities and Exchange Commission, an accredited investor must either:
- Have an earned income that exceeds $200,000 for the past two years and expects to make the same for the current year
- Possess a net worth over $1 million
There is no certification that you must receive to be an accredited investor. Instead, the burden of proof falls to you. You will likely be required to provide W-2s, tax returns, and bank statements to show you qualify.
What’s right for you?
You’ll need to take stock of your personal preferences and decide which style of investment suits you best, though this doesn’t mean you can’t diversify! Each type of investment comes with its own advantages and drawbacks.
“The most requested type of investment is the two-unit, or duplex, long-term rental,” says Ryan Ogle, a real estate agent in Grand Rapids, Michigan, who has more than 18 years of experience and ranks in the top 1% of his field. “They feel like cash flow is more.”
From Nuss’s recounting of the duplex he heavily renovated, it’s clear why investors favor duplexes. If you have the time and funds to put work into a duplex and maximize floor space, the return on investment can be well worth it.
However, you have to be willing to do renovations yourself if you want to maximize your profits.
Ogle adds, “New investors want move-in ready. Seasoned investors like fixer-uppers because you can buy the property cheaper and are able to create equity that way.”
Whichever type of investment you decide to pursue, you owe it to yourself to do your due diligence and research your options.
Nuss advises that you network in the market where you want to invest. “There’s a huge difference between book smarts and street smarts,” he adds. “I’ve found that sometimes, something you’ve read in a book may not work in your market. By networking with people in your market, you can better understand how to utilize tools that are meant for your market.”
There are many different ways to invest in real estate, and it continues to be an excellent way to grow your wealth. Anyone can get started in it, so long as you do the legwork, embrace rejection for when offers inevitably fall through, and push forward no matter how tough the going gets. And working with a top agent who’s experienced with investors can help you avoid pitfalls as you get started.
Header Image Source: (Clark Van Der Beken / Unsplash)