Should You be Buying New or Existing Homes for Rental Properties

Should you buy new or existing homes for rental properties?  The rental property investor is seeking cash flow and value appreciation over the long term.  For years since the crash that began in 2007, rental investors who do not do their own fix & flip have for the most part been buying existing homes.  Many times they’re buying from fix & flip investors, or they’ve purchased ready-to-live-in foreclosure homes.

However, the foreclosures coming onto the market now are often “zombies,” homes in poor condition that have been abandoned through a long foreclosure process.  The fix & flip investors are enjoying a great market, as they can buy these at deep discounts and rehab for sale at retail or to rental investors.

There is a lot of competition for fewer foreclosures, so prices are rising.  This of course increases the amount the rental investor will have to pay.  Zombie homes cost more to rehab as well.  This evolving market brings the question of whether prices have risen to a point that buying a newly constructed home could be a viable rental property deal.

Builders are cautious.  They’re not flooding the market with spec homes, but they are beginning to become active again.  Let’s compare and contrast new versus existing homes for a rental property purchase:

New Delivers Desired Features

Renters want what buyers want; the newest popular home features.  The fix & flip property can be outfitted with some of them, but things like great rooms with dining, living and kitchen together aren’t as easy.  The new home hits all of the tenant’s hot buttons.  Usually they will pay higher rent for these features.

The Right Neighborhoods

Home builders are building in the popular areas of town.  Where buyers want to live, tenants want to live.  Your market research has been done for you, and buying in these growing areas can also be a good equity-growth strategy.

What about the Cost?

The first concern is usually whether a new home price will cut cash flow at competitive rent levels.  Obviously, you’ll want to compare what’s available to you for pricing.  However, sometimes you may be able to help a builder with a win-win deal.  They need to turn homes to roll funding for new building.  This keeps their sub-contractors happy as well.

Watching the market for new homes that aren’t moving as quickly as others could yield opportunities.  A builder has holding costs just like investors.  Helping them to turn a house that is sucking up interest and marketing money could help you to negotiate a great deal.

Factor in Warranty Savings

Buying a new home carries a warranty, and some builders even have extended warranties available.  Your budgeting to determine cost and potential rents should factor in lower maintenance and repair costs for the warranty period.  Over the long haul holding period, your repair costs should be lower due to the all new major appliances, plumbing and electrical.

It is Still all in the Numbers

Considering the pros and cons, it still boils down to the numbers and going out into your market and working deals.  Talk to builders and particularly check new home listings with longer than average days on market.  There could be a deal out there that will cash flow.  Of course, if you can buy existing homes at double-digit discounts to new home prices, then the numbers rule.

Real Estate Investor Competition Heating Up – Sharpen Your Deal Pencil

Real estate investors have had a great ride for a half dozen years now.  The glut of foreclosures after the crash that began in 2007 provided over a million bargain basement deals, most ending up in the portfolios of rental property investors large and small.  Fix & flip and wholesale investors filled the supply line with rental properties, and rental demand is still quite high nationally.

When the big players like Blackstone Group jumped into the fray, thousands of properties went in block purchases and were converted to rental units.  All of this investment prosperity and activity has created a bit of a bubble in prices for the properties investors most desire.  Competition is heated in many markets, and this means higher prices.  Higher prices make it more difficult to make the rental cash flow work.  Today’s real estate investor, whether a wholesaler, fix & flip, or rental property investor, will need to sharpen their deal pencil and their negotiation skills as well.

Market Research

Knowing your market inside and out is a must.  Since markets are constantly evolving, market research is an ongoing activity.  Even real estate wholesalers and fix & flip investors need this information, because most of their customers will be rental property real estate investors.  Survey the rental market, call like a tenant prospect, and compare properties you’re considering to the current rental inventory.  Keep abreast of the local economy, major changes in business or industry, and the demographics of the average tenant who is a prospect for your unit.  Keep track of incentives being offered, as giving away a month’s free rent definitely takes down the annual cash flow.

Drive a Harder Bargain or Get There First

This is an “if you can” statement.  Competition is in the mix, so better marketing for distressed sellers could give you an early edge over competitors.  Working pre-foreclosures can help with a timing edge, but they’re well-covered at websites and in publications.  Getting the absolute best upfront price will help not only with cash flow but also with overall ROI when you sell.  One way to help in negotiations with distressed sellers is to have a firm handle on your financing so you can offer a fast close without hassles for a homeowner who is seeking escape from their situation.

Be Careful of Condition & Future Repair Budget

Many of the opportunities available in current local markets are older homes in well-established and popular neighborhoods close to city centers.  This is fertile ground for the real estate investor, but older homes require more maintenance and major improvements may need to be in the planning budget.  One sure way to get to the end of a rental property’s investment life and be disappointed in the overall ROI is to have spent more for repairs and rehab than anticipated through the live of the investment.

Build Rent Increases into Leases

Inflation never ends, though it can ease a bit for short periods.  Sure, you can just surprise your tenants with a coming rent increase, but that can backfire on you with move-outs and vacancy cost increases.  If you put a rent increase percentage into your lease, your tenants will expect it, which yields two advantages.  1) You can let it stand and offset inflation in your costs, or 2) To keep a good tenant you can offer to decrease or eliminate it for a renewal of their lease.  The key here is to have a good handle on your costs to rehab a unit between tenants and a good idea of how long it will be empty and not generating rent.

Expect Property Tax Increases

Rental property owners hold their investments for years, and governments over-spend every year.  Local government deficits will eventually lead to increases in property taxes, so a wise real estate investor will consider them in their budgeting and future need for increases in rent.

Don’t Be Discouraged

Rental demand is higher than at any time in recent history, and it’s still rising.  If you offer tenants good location, nice amenities, and competitive rent, you’ll enjoy near full-time occupancy and nice cash flow.  It’s just best to plan for cost increases and possible rent incentives you may not need now.  The rental property real estate investor enjoys tax advantages and generally lower risk than investors in other asset classes, so just get out there and make it happen!

MainStreet Realty Services is here to help both the experienced and the entry level real estate investor.

Why You Should Be Investing in Real Estate

Investing in Real Estate

Investing in real estate can be a very lucrative business. Do you know what Donald Trump, David Walentas, Jeff Sutton, and Donald Bren have in common? They all made billions from investing in the real estate market.

The profit potential by investing in real estate is tremendous. With investment of just a few thousand dollars, you can build a large real estate empire within decades. All that is needed is the acumen for appraising future productivity of the real estate asset you are considering to purchase.

Real estate business is one of the few investment options where obtaining a bank’s loan is not that difficult. When investing in the real estate market, you put your money to work today and make it grow to earn money in the future. You have to earn enough profit to cover the costs and the risks you take on owning the real estate property.

The best thing about investing in the real estate market is that your investment grows tax-free. You do not have to pay any money to Uncle Sam unless and until you cash out your real estate property.

If you had the chance of meeting with a real estate investor, they would tell you about the thrill of chasing down a real estate deal or their last remodel. They pursue the addictive feeling and are always on the lookout for the next opportunity to win great deals.

How Can You Make Money from Real Estate?

You can make money in real estate in several ways.

  1. Rental Income: Rental income from real estate is a common way to earn from the real estate property. You buy the real estate property and rent it to the tenant. You will receive a stream of cash in the form of a rent that the tenant pays you for using the property for a specific period of time. The rental income can be generated from both residential and commercial properties such as car washes, office building, storage units, rental houses and more.
  2. Appreciation in Real Estate Value: This is another popular way to earn from the real estate property. Every real estate property consists of intrinsic value, which is the value of the land where the real estate property is located. The intrinsic value of the property appreciates and depreciates according to the demand. Greater is the demand, more would be the intrinsic value of the property. The contrary happens in case of low demand of the property. Some of the factors that affect real estate value include easy commute, amount of traffic, safe environment, close proximity to shopping centres, schools, parks etc. Moreover, price appreciation can also occur due to renovations and capital improvements.
  3. Real Estate Income Through Flipping: Flipping is a real estate appreciation strategy where the real estate investor purchase a “hot” property and quickly sells (flips) it for a profit. The profit earned from flipping real estate can come through different ways.
  • Simple Flip: This is a simple flipping strategy and refers to buying properties at low prices and quickly selling them at higher prices. The strategy is usually used in a rapidly rising market.
  • Fix and Flip: The flipping strategy refers to buying a house that needs repair, fixing it and then selling it for a profit.

Investors purchase the property at a discounted price that is much below the house’s market value. The discount may be due to deplorable condition of the house or urgency of the owner to get rid of the property. The former is known as fix and flip, while the latter is simple flipping. After purchasing the property, the investor then performs the necessary repairs if required and then sells it at or above the market value.

Types of Real Estate Investments

Now that you know how easy it is to generate income from real estate property, let us delve further and find out about the type of real estate properties that you can invest your money in to earn real estate income.

  1. Residential real estate investments: Residential properties include single-family housing, multi-family units (4 plex and less), condominiums, townhouses and mobile homes. Residential zones use smaller FAR (floor area ratio) than business, commercial, or industrial zones. These properties offer homes in a narrow range of prices and sizes, thus providing great investment opportunity for low-income investors.

Various factors affect the property value of residential properties. In many cases, the property value does not remain fixed. The factors that can cause a residential property to gain or lose value includes location, accessibility, neighbourhood, and adding aesthetic features to the properties such as fences, trees, or other hardscape elements.

  1. Commercial real estate investments: Commercial properties consist of building or land that is intended to generate profit through rental income or capital gain. Office buildings, farm lands, industrial properties, hotels, medical centers, malls, hotels, warehouses, garages, retail complexes, multifamily housing buildings are all different types of commercial properties.

In many states, a residential property that contains more than a certain number of units is classified as commercial property for loans and tax purposes. Normally, real estate properties containing five units and above are considered commercial properties.

Commercial real estate property is valued differently than residential real estate property. It costs a ton more than residential real estate properties, but also has a greater return prospective. In addition, investing in commercial real estate property allows you to diversify the risks. For instance, if you own an apartment complex and a tenant leaves the apartment, you lose only percentage of the income of that property. However, if you lose a tenant from a residential unit, you lose the entire rental income. Moreover, the cash flow generated from commercial property is often higher per square foot than it is in residential property.

  1. Real Estate Investment Trusts: Real estate investment trusts or REITs refers to a portfolio of real estate or real estate mortgages that are traded similar to stocks. REITs derive at least 75% of its gross income from mortgage, gains from sale of real estate property, and rental income. A typical REIT contains at least 100 shareholders and distributes around 90% of its annual taxable income (minus the capital gains) as dividends.

REITs allow investors to purchase a portfolio of real estate properties and manage them by a professional real estate team. Purchasing REITs can significantly limit personal risk.  Owners of REITs do not have to worry about paying back mortgage loans or maintenance of the property. The REIT management company takes care of that for the owners.

  1. Mixed-use real estate investments: Mixed-use real estate investments is an investment strategy that combines two or more types of properties into a single project. The investment strategy consists of purchasing properties that are used for various purposes. For instance, an investor may took out a lease on a three story office building. The ground floor could be leased to a health insurance company. The remaining floors could be utilized for other businesses such as a membership gym, an upscale retail shop, hair salon or a virtual golf range. The benefit of mixed use real estate properties is that they have the ability of diversification and are effective in controlling risk.

Basic Real Estate Investment Advice and Tips

Before we delve further into the realm of real estate investment, let me take a moment to explain that you should never invest in real estate property in your own name. Most experienced Triangle real estate investors use a special legal structure such as LLC (Limited Liability Company) or LP (Limited Partnership). The reason is that you will be on the hook for anything above the insurance settlement if someone gets hurt on the real estate property and sues you for the injury. This may lead to financial bankruptcy or at the very least great financial suffering.

The legal real structure can be set up by paying only a few hundred dollars or a few thousand dollars if done through an attorney. The paper work required for forming a real estate company isn’t that difficult. You may also opt to set up different company for each real estate project. This is known as “asset separation” that would help you in case you get into trouble with one of the property as you can put it into bankruptcy without hurting the others.

Before you make a clear determination as to the type of legal entity you want to set up as Triangle Real Estate Investors, I strongly encourage you to speak with both a legal as well as tax professional.  As I am neither, they can more accurately guide you through this process.

Having cleared this point let us find out what the best way is to invest in the real estate market.

  • Buy Low, Sell High, and Rent Smart
  • Do not Wait Too long to take Advantage of Low Prices
  • Never invest in Buying a High Value Dream Home
  • Utilize social media tools for real estate listings
  • Remember the Rule: Fixed mortgage, Affordable payments and Long-term hold

On a final note, real estate investment is certainly not easy. In order to succeed in real estate investment you have to thoroughly understand the market and act opposite the herd. Consider getting in touch with a reliable real estate agency for successful real estate investment. A real estate broker is a person or firm that acts as an intermediary between the buyer and the seller of the real estate property.

Whether you want to buy or sell a real estate property, you should hire an experienced real estate broker that has the required experience, skills and tools necessary to make the process simple for you.

If you are a Triangle Real Estate Investor, contact me by calling (919) 322-3960 ext. 7 or email me at Rodney@MainStreet-Realty.net if you need any help buying or selling real estate investments.

You may also begin your own search for residential real estate investment properties by clicking on the link.