When Seychelle VanPoole of a top-selling real estate team in Dallas, TX, first got involved in real estate investing, she and her new husband tried a unique tactic to purchase their first flippable house: They registered for everything they possibly could for their wedding, made a spreadsheet of every gift they received, wrote thank-you notes, and then returned everything on that list for cash.
The funds from the returns financed the 5% down on a $155,000 house. That was in 2006. Now, in 2019, VanPoole and her husband only owe $50,000 more on the purchase—and the property is worth $325,000.
VanPoole was young, only 23, when they bought the house. But no matter your age, whether you’re like VanPoole or about to head into retirement and looking for an income property to rent, you can potentially make a killing with smart real estate investment strategies. Keep these ideas in mind when you’re first venturing out into the investment world. They could help you save—and make—a bundle of money.
1. Learn how to detach yourself from a property
If you’ve been through the buy-and-sell cycle for personal property such as the family home, you’ll naturally have a leg up on some of processes involved in real estate investing. But newbies can also learn real estate ins and outs on the job, as long as they have the right mindset for it.
“One of the big mistakes new real estate investors make is they buy a house as if they were going to live in it,” said David Hicks, the CEO of HomeVestors, a well-known national real estate investor franchise founded in 1989 famous for its promise to buy “Ugly Houses.”
“They have to remember they are not buying it for themselves. In fact, we tell people that if you drive up in front of a house and say, ‘Wow, I can live here!’ you probably want to drive around the block because you are about to make a mistake.”
Charles Tassell, the chief operating officer of the National Real Estate Investors Association, agrees, and warns that it could take a few cycles of flipping or renting homes to completely get over the emotional attachment and instead see them as income sources. You need to be business-minded, he says, not emotionally involved.
“From a monetary perspective, you want to make sure you’re really looking at this and asking if it makes good financial sense,” Tassell said.
For VanPoole, though, she suggests initially starting out by living in a house you intend to rent. Stay there for a year, then rent it out and buy another. Stay in that new place for a year, rent it out and again buy another. And then, after you’ve done that two or three times, buy a home you intend to stay in for the long haul.
“It gives you an appreciation of the homeownership aspect,” VanPoole said, “and also allows you to get more competitive interest rates and lower down payments since you lived in it first.”
2. Start with one property to flip, or multiple properties to rent
The type of real estate investing you want to do will determine how many properties you should buy to start out. For those looking to flip properties, Hicks recommends buying just one house to start, and going through the entire process to learn the ropes.
“You’re going to find there are a lot of moving parts,” he said, noting that not only will you have to go through the purchase and sell process, but you’ll also need to assemble a team to help you rehab the home. Having just one property at a time will stop you from feeling overwhelmed.
For rentals, Hicks says it’s a bit different. It’s easier in that case to have several rental properties, because it’s less trouble than having only one.
“If you have one and it’s vacant, you lose all your income,” he said.
Just be sure those properties are all relatively close to one another—you don’t want to drive forever every time you need to visit the buildings.
3. Get the right insurance for your current project
Just as important as buying the right property is buying the right insurance for it. During one of Tassell’s first-ever home purchases to flip, the house (which originally had the plumbing ripped out, but he’d planned for that) was broken into.
He went to check on it and discovered the trespassers had also pulled out all the copper and all the electrical—meaning a whole new level of complexity with the flip. Now he’d have to do much more work than anticipated just to bring the house up to full electrical code.
“We just kind of stood there with our jaws on the ground going, ‘Oh no, what are we going to do?’” he recalled. “That was a long drive home.”
Luckily, he spoke to his insurance provider and found that because of the type of policy he’d purchased, all that electrical work would be covered. They inspected it and sent a check, and Tassell fixed it and immediately sold the house.
“We signed up for the insurance where they knew it was vacant,” he said. “Somebody new to the industry, they might just get regular homeowners insurance. Well, homeowner’s insurance isn’t going to cover that. There’s specialty insurance that does, and it’s worth its weight in gold.”
4. Know your real estate market like the back of your hand
The real estate market can be tricky to read, and if you’re getting into investing, you want to make sure you’re hitting it at the right time. As the market declines, VanPoole says, it’s prime time to pick up a rental property because more people will be looking for apartments, thanks to discouraged buyers who aren’t qualifying for properties they like. As it improves, that’s the time to buy a house to flip—you’ll get it at a lower cost and sell it higher.
A good way to gauge the market health in your area is watching how long it takes properties to sell. Hicks says the sweet spot is 90 days. If homes are selling in about 90 days, the market is normal. If it takes longer, home values aren’t going to increase.
But if it takes less than 90 days, you can predict prices will go up because demand is higher. Also, make sure you budget for repairs, vacancies, and upgrades accordingly—at least 15% of your purchase price in order to stay cash-flow positive. If you expect to sell a house between $375 and $425 thousand after you’ve flipped it, budget off the lower number.
“A lot of people will take the budget off the $425, and then the market shifts and lowers the price of comps in the neighborhood,” VanPoole said. “Next thing you know, you’re selling closer to $380, and all that profit you projected you would get isn’t there anymore and you’re losing money. So when you’re buying, always project your sales price conservatively.”
By far, though, the most important thing to do is actually get out and experience the market you’re buying and selling in on a granular level.
Get in the car and take a drive, both on weekdays and the weekend. Drive around at night, as well. The goal here is to mitigate risk. You want to know if development in the area is thriving, or if there’s a bad neighborhood nearby. Sure, you can look at statistics, but the best way is to check it out yourself.
5. Take advantage of tax breaks for investors
Owning property to rent out or to flip will still have you grappling with capital gains taxes, but because you’re now a bonafide real estate investor, you’ll be able to enjoy some tax breaks specific to your cause such as the 1031 exchange. You’ll want to work with an accountant who knows the real estate investment business in order to save the most money. Be sure to investigate tax breaks related to:
- Personal Property
- Pass-Through Entity Deductions
- Home Office
- Employees and Contractors
- Insurance Premiums
- Legal or Professional Services
- Federal Opportunity Zones
6. Work with a real estate agent who has investing experience
When you first start out real estate investing, you’ll slowly begin to assemble a team of people you work with. Think a property manager, a trusted general contractor, a lawyer if you need one.
But the most important member of your team should be a seasoned real estate professional with experience in the investment business. According to Tassell, Hicks, and VanPoole, some of the many varied ways agents can assist with your real estate investment include:
- Rental price insight
- Legally appropriate lease language
- Up-to-date MLS statistics on home sales
- Granular neighborhood information
- Unbiased contractor reviews
- Current market trends
- Available homes appropriate for investing
- Awareness of fair housing laws
All in all, purchasing your first investment property can be a scary concept. But if you have a good team to work with and a solid plan of what you want to do with the property, you’ll be able to avoid the analysis paralysis that stops so many from taking the leap into investing.