Investing in real estate can be both fun and financially lucrative. And for some investors, it can be more satisfying than just owning stock or mutual funds because owning property feels more tangible. If you’re just starting out in real estate investing, here are some essential tips that will help you become a better investor.
Diversified Real Estate Investor Group (DIG), a membership-focused real estate investing non-profit, shared some tips with us from their real estate investing for beginners guide. While DIG’s tips focus on the Philadelphia area market, we’ve repurposed them here for the Silicon Valley and San Francisco Bay Area real estate markets.
- Define your objectives.
Defining your objectives in terms of what you want to gain and over what period of time will enable you to create the optimal real estatement investment strategy for your goals.
Part of defining your objectives is getting a clear idea of how much time you have to devote to the project now and in the future. For example, some landlords do all of the maintenance on their property themselves, while others work with a property management company, like Intempus, to handle it all. And some investors go in on an investment with partners, family members, or friends to reduce costs and share the workload. The key is having clear goals on what you want to earn and in what time frame, and also how much you’re willing to put at risk for the endeavor.
- Choose a location.
The old saying “Location, location, location” still holds true when it comes to investing in real estate. As we wrote about in our post “What to Look for in a Residential Investment Property,” location will factor into your investment decision for a number of reasons. Beyond just investing in an up-and-coming neighborhood, you’ll want to factor in the local economy and job growth prospects for the area along with amenities, such as medical centers, access to shopping, good schools, etc., depending on the needs of the types of tenants you’ll be renting to.
- Estimate property appreciation and re-sell value.
It’s important to have a good sense of the historical real estate market for the area where you’re investing, as well as the future prospects for the area. This involves understanding comparables, such as real estate prices, available inventory, and days on the market.
You’ll also want to be up to date on the latest news for the area. For example, in California, there is a push by state legislators to build more housing and relax local zoning restrictions. Factoring in how local changes will impact your investments will help you make a more informed decision. Reading the real estate sections of local newspapers is a great way to stay up to date on what’s happening in the area where you’re looking to invest.
In places like the Bay Area and Silicon Valley, where real estate prices are already expensive, it’s sometimes hard to imagine prices going up even more. But historically, this area has been a great place to invest in real estate, and future prospects also look bright. The key is understanding as much as possible the local dynamics that impact real estate prices now and in the future.
- Be clear on cash flow, cash outflows, and operating costs.
One of the reasons that real estate investing is so popular is that it offers a way to get a continual monthly inflow of cash via rent payments. But remember that you’ll have regular cash outflows as well, such as mortgage payments, homeowners’ association dues, taxes, and maintainance. You also need to be prepared for periods between tenants when you may not be receiving rental income, but still have your ongoing costs.
Calculating your net operating income, which is your income from rent (and any other sources of income related to the property, such as parking fees) minus all of your related expenses, will show you how much you can potentially make on your investment over the long term.
- Identify the best times to buy.
In addition to location, timing matters in real estate. As mentioned earlier, changes in local and state laws can impact the real estate market, as well changes in the local economy. For example, in the Bay Area, when companies go public, it can impact real estate prices because of the amount of capital that becomes available to potential buyers. Interest rate changes also impact the real estate market and ability for buyers to get attractive loans. Thus, properly timing when you get into the market (and when you get out) will increase the odds of getting a better return on your investment.
- Consider different types of real estate investments.
There are a variety of types of real estate investments you can make. One option, if you want to be a hands-off investor and invest in smaller amounts, is investing in a real estate investment trust or REIT. Similar to mutual funds, REITs give you the opportunity to co-invest along with other investors to own shares in real estate developments. In fact, many IRA and 401k plans have opportunities to invest in REITs.
In addition to REITs, DIG recommends for beginning real estate investors to start with residential real estate because it tends to be less risky than commercial real estate investing. Residential real estate investing offers plenty of opportunities, with ample houses and apartment buildings at varying price levels, and you can often start getting a fast return on your investment with rental income.
Commercial real estate can also be lucrative, as businesses are always looking for commercial space, especially in growing urban areas. However, commercial real estate has added complexities that you’ll want to be cognizant of before you make the foray into this kind of investment.
Even with expanding cities and suburbs, there are still plenty of opportunities to invest in vacant land and lots. Like commercial real estate, investing in land, particularly if you want to develop it, involves legal, tax, and zoning complexities that can be far more complex than investing in an existing home. In addition, you’ll need to understand the costs of adding the needed infrastructure, such as electricity and water, if the land doesn’t already have it.
- Know your funding options.
If you don’t have the cash to pay for a property outright, there are a number of funding options available to finance your investment. Here are a few that DIG recommends:
- FHA Loans – Because they’re insured by the Federal Government, FHA loans can be more readily accessible than other types of loans. In general, to get an FHA loan, you need to have a down payment. And this type of loan usually has a fixed interest rate for the duration of the term.
- Hard Money Loans – Hard money loans require you to have an asset that can be used as collateral. The cost for this type of loan is generally higher than other options, but it can be useful for short-term projects.
- VA Loans – If you’re a veteran, you can tap into this type of loan, which is administered from the U.S. Veterans Administration. This type of loan does not require a downpayment and the interest rate is usually fixed.
- Private Loans – Private loans can be a great option, and often come with beneficial terms. If you have people in your sphere of influence who are willing to loan you money with good terms, a private loan can be one of your best options.
- Seller Financing – While these types of loans can be rare, some sellers are willing to accept payments for their property over time vs. getting their full payment in a lump sum upfront, usually from the bank.
- Conforming Loans – Conforming loans follow specific guidelines from industry specialists, and often they require a standard down payment of around 5-20% and a fixed interest rate.
- Portfolio Loan – These types of loans are not sold in the secondary mortgage market with other loans. Instead, they’re sold and administered by the lending institution. This enables banks to keep short-term loans with competitive rates.
- No Money Down – While this type of financing arrangement is less common, some lenders will make a loan without requiring a downpayment. This type of financing means you’ll have higher monthly payment, and thus more financial risk.
To be successful with any type of investing, it’s essential that you be as educated on the subject as possible, as well as being informed about local market conditions. People from all walks of life have been successful with real estate investments, so, with the right amount of research and a good degree of caution, you have the chance to be also.
Work with the Local Experts in Real Estate and Property Management
Managing your real estate investment doesn’t have to be difficult and time consuming. Intempus Property Management has been helping satisfied clients throughout the Bay Area and Silicon Valley for well over a decade. Contact us today to talk to one of our friendly experts. We’ll be happy to answer any questions you have.