Always wanted to build a Real Estate empire?
Want to know how to get started?
This 3 part series will get you well on your way with real life examples and experiences using proven techniques for generating huge returns.
If you missed part 1 , get caught up here first to learn the basics.
Selecting the Right Property: By Type
“How do I select the right property?”
This is a one of the biggest questions I get from those seeking real estate advice. First, decide what type of income you want from this property: rental, long-term investment, short-term investment, or vacation rental income?
1) Rental Income
If its rental income, I would highly suggest seeking out multi-unit properties. Anything 4 units or less and you can still use a conventional loan and take advantage of conventional rates. Research rentals in the area, occupancy rates and learn how to be a landlord.
Property management companies are great but you will be paying 10% of your gross. Be sure to do your research on home warranty companies and landlord laws. There are also landlord associations that can help with legal advice, and reputable handy men.
2) Long-term Investment (more than 2 years)
With long-terms investment the biggest factor is location, location, location. Find the most distressed house in the best neighborhood you can afford. This can prove to be huge payouts if you chose the right area and time your sale. A perfect area will never lose value, but choose carefully. For example, walkability is huge and will continue to be for the foreseeable future. Segmenting the market for a long term investment is also important, ensure you are aiming for the right clientele when making improvements, target the wrong customer and your home improvement investments could end up not delivering a return (which is key to any home improvement on a long term investment). Plus, if it you’re the primary resident for 2 out of 5 years, you will pay 0 capital gains, a big bonus.
Long term capital gains can be as much as 25%, depending on your tax bracket and state. We also recently sold a property at the exact 2 year mark. It was a huge fixer upper and we built an additional guest house in the back. The house sold for nearly 50% higher than we purchased it for 2 years ago. We chose the perfect neighborhood, and put a ton of work into it, which included a renovated guest house and new bathroom.
If your going for a fixer upper, the contract is key. If you live in the NW Portland/Gorge area, Pinnacle Concepts LLC is a great company to work with. They have done a lot of our remodel work, the owner Randy is one of the best guys you can hope to find.
Before and after dining room renovation:
Before and after kitchen guest house renovation:
3. Short term investment (less than 1 year)
Again, location is key, but here you will be looking for something that is quick to fix up. No foundation, roof, electric, or plumbing work. Cosmetic updates, landscaping, and low dollar fix ups. Also, you have to consider short term capital gains, upwards of 39%! This is not a path I have headed down before, be careful with this option, it’s risky and most real estate is a long term investment unless you are doing this full time and are a contractor yourself.
4. Vacation Rental
This option is reserved for mainly vacation destinations and in great locations. You can often find distressed properties for this investment, but they will go fast and often paid for cash due to condition. Bedrooms are the one of the biggest income generators for these sorts of investments, the more people you can house, the more you can charge per night. This requires extensive managing on a weekly or even daily basis, a true part time job. Also, check with local laws as many states and or cities do not allow short term rentals (defined as less than 30 days). You also have to figure in the cost of furniture, bedding and supplies, which can be significant depending on the size of the home.
According to the Financial Samurai at Personal Capital, you must decide on a realistic income from your rental property:
It’s all about income. As a real estate investor you must ascertain what is the realistic income the target property can generate on a sustainable basis every year. Once you have an income range then you can calculate a property’s gross rental yield and price to earnings to compare it with other properties on your acquisitions list.
We used social media marketing to advertise the vacation rental we invested in, check out this link for a full tour.
We purchased that property at an auction, fixed it up, rented it out as a vacation rental (for 4 years), and sold for a great profit. We purchased the property off an auction website, Williams and Williams, a great place to find auctions. Check out this link to the vacation rental we purchased, and pictures of the original condition of the home when we purchased it.
Develop an exit strategy no matter what property you buy.
Put every property in your ROI calculator I mentioned in Part 1, and decide how long you want to keep it. Five years is a reasonable time frame for a long investment to properly forecast. Examining the market and properly forecasting will bring in huge returns. I’ve been asked by others to invest in their real estate ventures with no clear exist strategy, I would not recommend it as this should be your biggest criteria when deciding how to invest.
Find a property you feel confident in, and trust your gut! Don’t settle just because you want to get in the market, you will find the right property if your consistent and have an open mind. Keep your eye on the cash-in (exit strategy), we will be discussing that in Part 3: Cashing in on your Investment — next week!
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Financial Samurai, October 6, 2014, https://blog.personalcapital.com/investing/what-you-need-to-know-before-buying-rental-property/