{"id":7685,"date":"2019-01-31T17:20:44","date_gmt":"2019-02-01T01:20:44","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=7685"},"modified":"2024-04-01T07:20:51","modified_gmt":"2024-04-01T14:20:51","slug":"smart-real-estate-investments","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/smart-real-estate-investments\/","title":{"rendered":"6 Smart Real Estate Investment Strategies for Beginners"},"content":{"rendered":"

When Seychelle VanPoole<\/a> of a top-selling real estate team in Dallas, TX<\/a>, 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.<\/p>\n

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\u2014and the property is worth $325,000.<\/p>\n

VanPoole was young, only 23, when they bought the house. But no matter your age, whether you\u2019re 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\u2019re first venturing out into the investment world. They could help you save\u2014and make\u2014a bundle of money.<\/p>\n

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1. Learn how to detach yourself from a property<\/h2>\n

If you\u2019ve been through the buy-and-sell cycle for personal property such as the family home, you\u2019ll 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.<\/p>\n

\u201cOne of the big mistakes new real estate investors make is they buy a house as if they were going to live in it,\u201d said David Hicks<\/a>, the CEO of HomeVestors, a well-known national real estate investor franchise founded in 1989 famous for its promise to buy \u201cUgly Houses.\u201d<\/p>\n

\u201cThey 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, \u2018Wow, I can live here!\u2019 you probably want to drive around the block because you are about to make a mistake.\u201d<\/p><\/blockquote>\n

Charles Tassell<\/a>, 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.<\/p>\n

\u201cFrom a monetary perspective, you want to make sure you\u2019re really looking at this and asking if it makes good financial sense,\u201d Tassell said.<\/p>\n

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\u2019ve done that two or three times, buy a home you intend to stay in for the long haul.<\/p>\n

\u201cIt gives you an appreciation of the homeownership aspect,\u201d VanPoole said, \u201cand also allows you to get more competitive interest rates and lower down payments since you lived in it first.\u201d<\/p>\n

2. Start with one property to flip, or multiple properties to rent<\/h2>\n

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.<\/p>\n

\u201cYou\u2019re going to find there are a lot of moving parts,\u201d he said, noting that not only will you have to go through the purchase and sell process, but you\u2019ll also need to assemble a team<\/a> to help you rehab the home. Having just one property at a time will stop you from feeling overwhelmed.<\/p>\n

For rentals, Hicks says it\u2019s a bit different. It\u2019s easier in that case to have several rental properties, because it\u2019s less trouble than having only one.<\/p>\n

\u201cIf you have one and it’s vacant, you lose all your income,\u201d he said.<\/p>\n

Just be sure those properties are all relatively close to one another\u2014you don\u2019t want to drive forever every time you need to visit the buildings.<\/p>\n

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3. Get the right insurance for your current project<\/h2>\n

Just as important as buying the right property is buying the right insurance<\/a> for it. During one of Tassell\u2019s first-ever home purchases to flip, the house (which originally had the plumbing ripped out, but he\u2019d planned for that) was broken into.<\/p>\n

He went to check on it and discovered the trespassers had also pulled out all the copper and all the electrical\u2014meaning a whole new level of complexity with the flip. Now he\u2019d have to do much more work than anticipated just to bring the house up to full electrical code.<\/p>\n

\u201cWe just kind of stood there with our jaws on the ground going, \u2018Oh no, what are we going to do?\u2019\u201d he recalled. \u201cThat was a long drive home.\u201d<\/p>\n

Luckily, he spoke to his insurance provider and found that because of the type of policy he\u2019d purchased, all that electrical work would be covered. They inspected it and sent a check, and Tassell fixed it and immediately sold the house.<\/p>\n

\u201cWe signed up for the insurance where they knew it was vacant,\u201d he said. \u201cSomebody new to the industry, they might just get regular homeowners insurance. Well, homeowner\u2019s insurance isn\u2019t going to cover that. There\u2019s specialty insurance that does, and it\u2019s worth its weight in gold.\u201d<\/p>\n

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4. Know your real estate market like the back of your hand<\/h2>\n

The real estate market can be tricky to read<\/a>, and if you\u2019re getting into investing<\/a>, you want to make sure you\u2019re hitting it at the right time. As the market declines, VanPoole says, it\u2019s prime time to pick up a rental property because more people will be looking for apartments, thanks to discouraged buyers who aren\u2019t qualifying for properties they like. As it improves, that\u2019s the time to buy a house to flip\u2014you\u2019ll get it at a lower cost and sell it higher.<\/p>\n

A good way to gauge the market health in your area is watching how long it takes properties to sell<\/a>. 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\u2019t going to increase.<\/p>\n

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\u2014at 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\u2019ve flipped it, budget off the lower number.<\/p>\n

\u201cA lot of people will take the budget off the $425, and then the market shifts and lowers the price of comps in the neighborhood<\/a>,\u201d VanPoole said. \u201cNext thing you know, you\u2019re selling closer to $380, and all that profit you projected you would get isn\u2019t there anymore and you\u2019re losing money. So when you\u2019re buying, always project your sales price conservatively.\u201d<\/p>\n

By far, though, the most important thing to do is actually get out and experience the market you\u2019re buying and selling in on a granular level.<\/p>\n

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\u2019s a bad neighborhood nearby. Sure, you can look at statistics, but the best way is to check it out yourself.<\/p>\n

5. Take advantage of tax breaks for investors<\/h2>\n

Owning property to rent out or to flip will still have you grappling with capital gains taxes<\/a>, but because you\u2019re now a bonafide real estate investor, you\u2019ll be able to enjoy some tax breaks specific to your cause such as the 1031 exchange<\/a>. You\u2019ll 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<\/a> related to:<\/p>\n