How to Select the Right Property (Part 2) – Delivering Returns on a Skyrocketing Real Estate Market

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.

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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:

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Before and after kitchen guest house renovation:

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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.

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Exit strategy

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.

Bottom Line

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!


Read more from the Digital Drinkers 

15 Stretches for Splits, and Tips for Sharing Your Practice | 5 Secrets to Flexibility Training, and Building a Following | Surviving a Beer Fest    |     Investing In A Home, Part 1   |   The Portland Trail Blazers Brand      |   Training For My First 1/2 Marathon  | 5 Things to Chant in Your Head While Running

 


References

Financial Samurai, October 6, 2014, https://blog.personalcapital.com/investing/what-you-need-to-know-before-buying-rental-property/ 

Delivering Huge Returns in a Skyrocketing Real Estate Market

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.

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The Basics of Real Estate Building

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I began investing in real estate at the age of 25 in Jacksonville, Florida, during the crash of the real estate market from 2006 to 2008, a losing venture! I’ve learned a lot since then. During the last 5 years my wife and I began heavily investing in real estate in the Pacific Northwest, purchasing properties in Vancouver, Washington, Hood River and Portland Oregon. We have effectively delivered a 43% return yearly on our investments on average, 4 times the national average. How? Read on to find out.

Right now the real estate market is skyrocketing nationwide, with many homes “flying off the market” in a matter of days, at well over asking price. Is this the right time to buy? This leads to the first lesson in real estate:

A. There is no “right time”, ever.

The market is always going to be volatile, it’s real estate. It is more important to find the right property, in the right neighborhood, for the right price. Stop staying “I missed it”, there is nothing to miss, keep looking; you will find the right place with enough persistence.
B. Stop watching silly home flipping shows.

This not representative of a realistic situation you will find yourself in. Leave flipping to those who do it full time, it is a full time job. Doing this on your spare time, turning a property in months will be costly and not worth your time.

C. Have cash ready to invest.

I don’t care what the real estate books tell you, you need some cash begin with. This can be either out of savings, home equity line of credit (HELOC), or finding investors (friends and family is a good place to start). Down payments are 25% of the purchase price for an investment loan/property, or make it your primary resident (live in it) , and pay as little as 5% down with a conventional mortgage.

D. Build a Return on Investment (ROI) Calculator.

Build a calculator that will determine your return for each property you consider. Include maintenance, taxes, depreciation rates, and forecast for growth. Below I posted a screenshot of an example, and in Part 3: Closing the Deal and Cashing In, I will post a working spreadsheet you can use to make your real estate investments come true!

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E. Don’t discount any property.

Look at EVERYTHING. I mean everything: rundown properties, homes with ghost stories, bad neighborhoods, good neighborhoods, even houses that are not for sale. What do I mean by that? If you see a home you like, find the owner, and try to buy it. They may be more open to it than you think and for a great price if you do not involve real estate agents. This also eliminates the competition. Real estate auctions, foreclosures, and short sales are also good places to start. Here is a good start on distressed properties.

F. Find a persistent agent.

Real estate agents that understand what you are looking for and are willing to visit a property an hour after it goes on the market with a flashlight at 9pm. This is especially important if you work full time. The best houses go off the market within days sometimes hours, be the first in.

Realtor-open-house
First Discount Safety – Link

G. Find a good lender.

A good lender will know you and your finances personally, for every purchase. I like brokers; they are personally involved along the way and tend to close on time (which is important in this market). Establish this relationship before you look, you will need to act fast if you find that right property.

H. Find a good contractor.

Almost any investment property will need work, and the good ones will need a ton of work. Building a strong relationship with a good contractor can take time. Most good contractors are months out and talking to one before you even look will ensure projects will be completed in a timely manner.

Bottom line: Follow these essential guidelines and you are off to a good start. Relationship building is the key to success, start getting involved in the real estate community and contractor community now for long lasting profitable relationships. You will probably make some friends along the way as well.