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How to Make Money In Real Estate: A Beginner’s Guide to Investing

September 21, 2019

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Curious to learn more about how to make money in real estate? Are you itching to invest? We don’t blame you—real estate can be a solid investment as part of an overall portfolio, and a great way to ramp up cash flow.

But what’s the best way to invest in real estate—without too much risk? There are two main real estate investing strategies: Fix and flip, or buy and lease out your real estate purchases.

Real estate can be an exciting avenue to significant dividends. Hopeful landlords, though, should carefully evaluate front-end expenses and long-term work before deciding to invest. Let’s wade into the pros, cons, and money-making potential of each real estate investing option, to help you determine if they’re right for you, based on expense, income, and risk.

Do you have the chops to be a real estate investor? Real Estate Investing 101 starts now.

Make money in real estate with: The fix and flip

Flipping houses makes for must-see TV, but it can also make for a lucrative real estate investment strategy, if you do it right. In fact, a recent RealtyTrac report found that homes flipped in the first quarter of 2016 yielded an average gross profit of $58,250—the highest average gross flipping profit since the fourth quarter of 2005.

It also found that home flippers received returns of almost 50% in the first quarter of 2016. That figure represents some pretty impressive real estate investing and cash flow—who wouldn’t want to invest under those circumstances?

Sit tight, though. There are two sides to this real estate coin. This type of investment has some distinct perks and pitfalls.

Advantages of flipping

Aside from sizable profits, here are some of the other main benefits of the fix-and-flip real estate approach, particularly in the case of multiunit and single-family homes:

Flipping is cheap: Most real estate investors who focus on fix and flips typically try to find distressed properties such as foreclosures, which are usually sold for under market value, says Than Merrill, CEO of FortuneBuilders. That translates into a smaller upfront investment and less mortgage loan financing needed from your lender.

Flipping is fast: Buy a single-family home, make repairs, and you’re out. Bam! Get your cash, and get out. Short-term real estate success. No begging tenants to pay rent every month. No unending repairs list to tackle. At least, that’s the idea. The average length of time it takes to fully rehab and sell a property or piece of real estate is about six months, according to RealtyTrac. This means that you or your investor’s capital won’t be tied up indefinitely in your real estate purchase. Real estate investing win!

And second, since you will (hopefully) only be holding onto the real estate in the short term, you’re unlikely to be affected by market fluctuations—or the headaches of long-term real estate ownership.

“The best benefit of fix and flips is the fact that investors do not have to deal with becoming a landlord, or dealing with property managers and tenant nightmares,” Merrill says.

Even after you have gone through the arduous process of finding reliable tenants for your real estate investment, it’s possible they may damage the property or skip out on rent payments.  Not all renters are created equal, and plenty of real estate investors know this firsthand. Telling someone to pay up or hit the road can be a lot more time-consuming than it sounds, and can throw a wrench into your once-seamless investing strategy.

“Tenant issues tend to eat up a lot of time and money and cause unnecessary stress,” Merrill notes.

Potential flip flops

But real estate flipping does come with downsides, like the following investing detail:

Transactional costs: Obviously, the first action you take with a real estate flip is the “fix,” and home repairs can be expensive.

You can cut costs by doing some of the rehab work yourself. Find a contractor you trust to give you a realistic estimate of the budget you’ll need. Be sure this budget reflects how much you’re truly willing to pay to get the property into sell-worthy shape.

Once renovations begin, remember that time is literally money in real estate. If you don’t have an efficient timeline for the work, you’re likely to sacrifice precious cash. And don’t forget the mortgage interest payments, which accumulate while the property is being rehabbed.

Unforeseen complications: These might range from zoning or permit complications to gas, electrical, or septic problems. Due diligence can help you sidestep many issues and protect your real estate investment, but be sure to include room in your budget for unanticipated hurdles.

And make sure your renovations are done with the proper permits and paperwork; otherwise, you may have trouble selling it later. More than a few real estate buffs have learned this the hard way. It’s a real estate investing headache you’ll want to skip at all costs. Do your research before you invest!

Make money in real estate with: Buy and rent

Recent RealtyTrac data has found that rents are rising faster than median home prices in 45% of the markets analyzed, which may make snagging a rental property an attractive income-producing option. That means more profits for wannabe landlords and real estate hawks who decide to buy property, then rent it out for a continuous income stream. It’s the sort of investing scenario people envision when they decide to invest.

“The higher that rents continue to climb, the more profits passive income investors should be able to realize,” Merrill says.

Advantages of renting

This “buy and hold” approach comes with its own unique benefits, like the following:

A steady income stream: Rent, right? Ideally it covers your mortgage payment, but also your property taxes, HOA dues, insurance and all other costs, with maybe a little something left over for you, the hard-working investor.

Long-term wealth potential: Since real estate has historically appreciated over time, it is likely that the longer you hold the rental property, the more you can make. You can also outlast the market dips, sitting out market downturns until conditions improve, while continuing to collect rent and chip away at your mortgage pay-down (if you have one).

The risks of renting

Yet there are dangers to this investment strategy as well:

Maintenance hassles: Clogged toilets. Broken garage doors. Rodents. The fix-it list can be endless, and many rental property owners are tasked with handyman duties, as well as coaxing their tenants to pay their rent on time. Don’t underestimate the challenge of finding and keeping quality tenants! If you’re not cut out for all that work, you can hire a property manager, but it comes at a cost, of approximately 6% to 12% of the monthly rent payment.

Tied-up capital: While you will probably be receiving a monthly cash flow from your rental, the bigger payoff can be a long way down the road, since you’re holding the property longer than you would a home you’re flipping. That means that you could miss out on other real estate investment opportunities, since your capital is not available until you sell.

A cautionary note

By now, the prospect of investing in real estate may seem either terrifying or more exciting than ever. And while both options offer potential for making money (even wealth), real estate investing is not for everyone, cautions Realtor® Ed Laine, partner/broker of Miller Laine Properties in the Seattle area.

“It can be a great investment and deliver some significant returns, but I have seen that people with lots of enthusiasm and little experience can make huge mistakes. A knowledgeable real estate agent can help ensure you don’t inadvertently buy a nightmare.”

The post How to Make Money In Real Estate: A Beginner’s Guide to Investing appeared first on Real Estate News & Insights | realtor.com®.

Should Home Buyers and Sellers Google Each Other?

October 31, 2018

We Google that new restaurant down the block, that handyman we’re thinking of hiring, and certainly our prospective dates. These days, we don’t think twice about Googling virtually everyone we meet. So it stands to reason that if you’re hoping to buy a home, you’d Google the seller—or, if you’re selling, that you’d Google your prospective buyer, right?

Well, maybe … or maybe not.

As tempting as it may be to gather Internet intel on the person who’ll be sitting across from you at the closing table, this practice has its good and bad points. Here are the pros, cons, and pitfalls to watch out for when Googling a home buyer or seller.

Why home buyers should Google sellers

Knowledge is power, and the information you can find through public records or social profiles can give you a negotiating edge, says Bruce Ailion, a real estate agent and attorney at Re/Max Town and Country in Atlanta.

For example, you might find out that the buyer just got married or earned a major promotion, or that the sellers are going through a divorce or itching to move to another house they have already bought. Maybe they already have children in the school system or are jonesing for a shorter commute. Any of this background could clue you in to a buyer’s or seller’s pain points, timeline, or financial realities.

What to watch out for: Don’t automatically believe everything you read on social media. We know, it’s hard not to, but that can backfire, says Flavia Berys, real estate broker and attorney with DLA Piper in San Diego: “You can make a lot of guesses based on what you find in social media, but a lot of those guesses might be wrong.”

Let’s say you find out the seller is getting a divorce; you assume that means they’re desperate to sell, so you can totally lowball them, right? Wrong. What if they are independently wealthy and not in a hurry? Or, what if another non-nosy buyer who doesn’t know about the potential divorce offers market value, leaving your bid looking paltry by comparison?

A lot of what you find online would be relevant if, say, you were interviewing someone for a job or considering dating them, but between sellers and buyers, there are few things on social media and web searches that will be pertinent to the home-buying process, Berys says.

Why home sellers should Google buyers

Odds are, you want to leave your house in good hands, right? And if you like your neighbors, you’ll want to find someone nice for them to live next to, rather than saddling them with a new neighbor who loves to host his heavy metal band for late-night practice.

“If you’re a seller with multiple attractive offers, you might tell yourself that you’ll feel more comfortable with the transaction by poking around on Facebook, Instagram, or LinkedIn to see what you can find out about the various potential buyers,” notes Scott Reidenbach, founding principal of Reidenbach & Associates in Wayne, PA.

What to watch out for: It’s a bit of a gray area, but making a decision about a prospective buyer based on social media “research” may get close to the line of discrimination, warns Reidenbach. “The buyer’s alma mater, vacation habits, club affiliations, or employment with a rival company,” he says, are “immaterial to whether they have met all of their contractual obligations, and should not be a reason to decide not to accept an offer on your house.”

Buyers and renters are protected by the federal Fair Housing Act, which prohibits discrimination based on race, color, national origin, religion, sex, disability, or the presence of children.

Granted, discrimination would be exceedingly difficult to prove, says Jeff Rohde, president and designated broker at J. Scott & Company in Phoenix. But it’s a consideration.

Let’s say you’re selling in a closely knit condominium community, and the other owners do not want X as a neighbor. “They might decide to work together to ‘protect’ their association, investments, etc. — however they rationalize their actions — and a pattern might emerge,” Rohde says. And that’s illegal.

Bottom line? Look your best online

All this Google talk might have gotten you thinking about how you can use your online footprint to boost your own appeal as a buyer or seller. The golden rule? The less you say the better.

Scrubbing your social media pages of any information that could be used against you in negotiations is a good idea, says real estate agent Liane Jamason of Smith & Associates Real Estate in St. Petersburg, FL. So don’t vent about what a hassle it is to have your house on the market, or mention how desperate you are to buy in a certain school district. As is the case with all info you share online, what you say can—and will—be used against you!

The post Should Home Buyers and Sellers Google Each Other? appeared first on Real Estate News & Insights | realtor.com®.

How to Hire a Property Manager: Tips to Find the Right Pro

August 3, 2018

How to Hire a Property Manager

sturti/iStock

If you’re wondering how to hire a property manager, you have no doubt heard how this professional can be a boon to landlords who want to outsource the nitty-gritty details of running a rental property. But finding a good property manager can be challenging, since the quality level and services they provide really do run the gamut.

The key to hiring the right property manager for you is to draft a detailed job description and ask the right questions during the interview process. Here’s how to do that, so you can find the perfect pro who will save you headaches rather than create new ones.

What does a property manager do?

First things first: Do you really need or want a property manager’s services?

In an ideal world, “if you choose the right manager, it should make your life more peaceful and more profitable,” says Kimberly Smith, author of “Making Money With Rental Properties,” which is part of the Idiot’s Guides series.

Some property managers will have connections that will help fill your vacant properties with good tenants who pay on time and never cause a ruckus. Furthermore, a skilled property manager can do everything from marketing to rental collection to handling day-to-day maintenance issues.

“The right property manager will be able to deliver more efficient management and, in some cases, less expensive services,” Smith notes. In other words, paying a good property manager can actually save you money.

“For example, if they are managing 10 properties in one area, they can contract to have all HVAC systems serviced seasonally and get a volume discount,” she explains.

How to hire a property manager: Ask for recommendations and references

Most employers check employee references before extending an offer, and hiring a property manager should entail the same steps.

When Brady Hanna, president of Mill Creek Home Buyers in Kansas City, KS, first got into real estate investment, he was busy, exhausted, and overwhelmed. He went with the first property management company he found, and it was a huge mistake. Hanna learned the hard way what happens when you don’t ask around.

“They ended up filling my vacant unit, but as I scaled up and added several more properties, their communication was terrible,” Hanna says. “It was like pulling teeth to get information out of them. Sometimes I couldn’t reach a live person when I called, and several months in a row my rental income was paid significantly late and there were always excuses from the management company as to why.”

Hanna fired the company and then asked other local real estate investors for recommendations. That’s how he found the company he uses and trusts today.

“I would estimate that only roughly 20% of all property managers are great, so you want to find that out ahead of time instead of learning the hard way like I did,” Hanna says.

How much do property managers make?

Property managers are paid in a variety of ways, so you need to come to an agreement with your manager based on your individual needs.

Hanna provides this guide for reference: “When filling vacant units, they will typically charge half to one full month’s rent for marketing and filling your unit. Then on the ongoing management, the fee is usually anywhere between 7% to 10% of the rent collected. Some property managers will also charge an up-charge on maintenance items as well.”

Check the property manager’s qualifications

“A property manager that is acting on your behalf to lease and manage your property must assume fiduciary responsibility and needs to be a licensed real estate agent,” Smith says.

Other requirements vary from state to state, but you can call the nonprofit National Property Management Association to find out what the rules are for your area. For example, some states require HOA management licenses or property management licenses.

Lay out clear expectations

Generally, a property manager’s job is to manage the rental process from start to finish. That means “if the property is vacant, they will hire contractors to get it rent-ready at the owner’s expense, take pictures of the property, market it for rent, screen applicants, handle the showings of the property, fill it with a tenant, collect rent, and handle all maintenance requests as well,” Hanna says.

If tenants aren’t paying, it’s typically a property manager’s job to file for evictions and work with attorneys to collect back rent.

But there is no standard property management job description, which means it’s up to you to outline exactly what you are looking for from the get-go, Smith says. Do you want the start-to-finish management? Or are you looking to split the duties? This needs to be spelled out from Day 1.

Questions to ask a property manager

Not sure how to ascertain whether or not a manager can do the job you need? Hanna suggests asking the following questions:

  • What is your process for screening applicants?
  • How long does it typically take you to fill vacant units?
  • How many units are you currently managing?
  • How big is your staff?
  • What is your process for maintenance requests?
  • What is your process when a tenant doesn’t pay rent on time?
  • Have you filed evictions before? If so, how do you do that?

 

A good property manager should readily have answers to these questions—and if not, that’s a red flag. Remember, the whole point is for the pro to make your landlord duties easier, and part of that is simply establishing clear communication and a comfortable rapport.

Patricia-Anne Tom contributed to this report .

The post How to Hire a Property Manager: Tips to Find the Right Pro appeared first on Real Estate News & Insights | realtor.com®.