![\"The](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/investment-house-1.png\")
<\/a>1. Understand your options<\/b><\/h2>\n
Before you make any decisions regarding your first investment house, it\u2019s important that you understand your options and the job that you are undertaking.<\/p>\n
There are two main ways in which you can make money with an investment property:<\/p>\n
- \n
- Fixing and flipping it<\/strong><\/li>\n
- Buying and holding it\u00a0<\/strong><\/li>\n<\/ol>\n
On average, a flip takes at least 180 days<\/a> to complete. However, this doesn\u2019t mean that a six-month timeline is ideal \u2014 quite the opposite.<\/p>\n
Robert Montuori<\/a>, who sells homes more than 68% faster than the average Sacramento<\/a> agent, says that the majority of flippers want to buy and turn over the properties in 60 days or fewer.<\/p>\n
\u201cIf they can hold the house for three or four weeks, get it on the market, and then maybe get it in contract and sold,\u201d that\u2019s ideal for them.<\/p>\n
The number of days that it takes a property to sell<\/a> makes a difference in a flip, too. While Montuori believes that the \u201csweet spot\u201d of 90 days is reasonable, he emphasizes that each market, area, and time of year is different.<\/p>\n
With a buy-and-hold strategy, you\u2019re not on a specific timeline to sell the house, but you do want to rent it out. So it\u2019s important to choose a home that\u2019s attractive to potential tenants and that you can keep occupied.<\/p>\n
2. Pick the strategy that\u2019s best for you<\/b><\/h2>\n
Every investment strategy involves some speculating, \u201cand that always has another level of risk,\u201d says Montuori.<\/p>\n
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\u2019s best to pick the one that best fits your timeline, goals, knowledge, and resources.<\/p>\n
The fix-and-flip investment house<\/b><\/h3>\n
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.<\/p>\n
In Q4 2018, the average return for flipping a house was $65,000<\/a>. 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.<\/p>\n
The buy-and-hold investment home<\/b><\/h3>\n
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.<\/p>\n
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<\/a> the property at some point in the future.<\/p>\n
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.<\/p>\n
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<\/a> for longer periods of time. They can then use the equity from the property to finance other investments.<\/p>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/investment-house-2-666x381.png\")
<\/a>Source: (cottonbro \/ Pexels)<\/figcaption><\/figure>\n 3. Secure the proper resources<\/b><\/h2>\n
Before diving in headfirst, you want to make sure that you are prepared. It\u2019s important to understand the resources you\u2019ll need for each strategy and to line them up before you start actually shopping for a house.<\/p>\n
Fix-and-flip strategy<\/b><\/h3>\n
Finances\u00a0<\/b><\/h4>\n
You will need enough in savings (or to make enough in income) to pay for a down payment<\/a>, closing costs<\/a>, and for the mortgage loan<\/a> while you take the time to fix up the house.<\/p>\n
Conventional lenders won\u2019t offer loans with mortgage insurance<\/a> on rental properties, so you\u2019ll 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<\/a> or an FHA 203(k) mortgage<\/a>.<\/p>\n
Market<\/b><\/h4>\n
A market where home prices are rising is an ideal one in which to flip homes. However, you must be careful because it\u2019s not guaranteed that home prices will continue to increase at the same rate, or at all.<\/p>\n
Knowledge<\/b><\/h4>\n
You must ask yourself what needs to be done to the house in order to land big returns<\/a>. Once you know what the house needs, you must then figure out what you can do on your own and what you\u2019ll need to outsource to professionals.<\/p>\n
A team<\/b><\/h4>\n
You probably won\u2019t be able to fix and flip a house all by yourself; It\u2019s 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.<\/p>\n
Buy-and-hold strategy<\/b><\/h3>\n
Finances<\/b><\/h4>\n
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\u2019t find a tenant.<\/p>\n
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.<\/p>\n
Market<\/b><\/h4>\n
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.<\/p>\n
Knowledge and\/or a team<\/b><\/h4>\n
With a fix-and-flip, you need a team to help you get the house ready to sell. In buy-and-hold, however, you\u2019re going to be hanging onto the house for longer, and your team might need to be bigger as a result.<\/p>\n
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\u2019s landlord-tenant laws?<\/p>\n
SmartMove reports that more than half (54%) of apartments will turn over each year<\/a>, leaving you to search for new tenants annually. If you do background checks, credit checks, or income screening<\/a>, finding qualified new tenants can take weeks to months<\/a>.<\/p>\n
Some landlords don\u2019t 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\u2019t say the same.<\/p>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/investment-house-3.png\")
Source: (Markus Winkler \/ Pexels)<\/figcaption><\/figure>\n 4. Consider your goals when looking at possible investment houses<\/b><\/h2>\n
The next thing you need to do is to select which property is going to help you turn a profit.<\/p>\n
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.<\/p>\n
Montuori advises taking a holistic view of the local housing market and factoring in any unique considerations.<\/p>\n
\u201cPeople in the colder areas are not very optimistic in the wintertime. So sellers might sell a house for less; There\u2019s not as many buyers out there.\u201d<\/p><\/blockquote>\n
Fix-and-flip strategy<\/b><\/h3>\n
The right size<\/b><\/h4>\n
The standard-sized house for the neighborhood in which it\u2019s located will likely be the most popular and desirable with buyers. Therefore, it\u2019s best to avoid going too big or too small with the home you flip.<\/p>\n
How do you know what size is standard in the neighborhood? A local real estate agent can help you understand what\u2019s \u201caverage\u201d and what\u2019s considered an outlier in different parts of town.<\/p>\n
The right price<\/b><\/h4>\n
Most flippers ideally want to pay no more than 70% of the home\u2019s 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 \u201cright\u201d amount of money to spend.\u00a0<\/b><\/p>\n
\u201c[The] amount of money depends on the condition of what you\u2019re looking for,\u201d says Montuori. Remember that not only are you buying the house, you\u2019re also buying the neighborhood itself \u2014 specifically, you\u2019re 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.<\/p>\n
Don\u2019t 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.<\/p>\n
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.<\/p>\n
Not in the best shape\u2026\u00a0<\/b><\/h4>\n
If you\u2019re getting a steep discount on the home, it\u2019s not going to be perfect \u2014 and that\u2019s 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.<\/p>\n
\u2026But not falling apart<\/b><\/h4>\n
Although you can\u2019t expect a discounted home to be in the best shape, it\u2019s also best to ensure that it\u2019s not falling apart.<\/p>\n
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\u2019s unlikely that you\u2019ll pull in as much net profit \u2014 assuming you\u2019ll make your money back in full at all.<\/p>\n
Most flippers have the best luck with homes that haven\u2019t 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.<\/p>\n
Buy-and-hold-strategy<\/b><\/h3>\n
The right size<\/b><\/h4>\n
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.<\/p>\n
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<\/a>. Additionally, when it comes time to sell your house, houses with at least three bedrooms are usually the most popular.<\/p>\n
The right price<\/b><\/h4>\n
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.<\/p>\n
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.<\/p>\n
Adjustable in the right ways<\/b><\/h4>\n
When figuring out which home to invest in, it\u2019s best to take the community into consideration in order to ensure that it\u2019s able to accommodate the highest-quality potential renters.<\/p>\n
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.<\/p>\n
Standardized in the right ways<\/b><\/h4>\n
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.<\/p>\n
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\u2019s uniform with your other properties?<\/p>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2020\/05\/investment-house-4-666x381.png\")
<\/a>Source: (Emmy E \/ Pexels)<\/figcaption><\/figure>\n 5. Hire a qualified real estate agent with experience in investment properties<\/b><\/h2>\n
- Buying and holding it\u00a0<\/strong><\/li>\n<\/ol>\n