Local Real Estate Sales Down — But Not Out. May 13, 2020. Local home sales figures for April are in – and, as expected, the figures reflect the cessation of most
What’s the best advice for a first time real-estate investor?
Real Estate is a time tested way for building wealth, albeit a long term strategy.
The first step for getting into real estate is spending the time upfront to research and learn about the various types of real estate. I would recommend:
- Join , ask questions on their forums and read the hundreds of blog posts.
- Listen to the top real estate
- Read the top real estate
- Join a local real estate investor club
- Take a local real estate investor to lunch
Then based on your research you need to determine how you would like to get involved in real estate.
- Sales – Residential or Commercial agent
- Active Investor
- Passive Investor
Below are some ideas for someone getting started in real estate investing:
- Market – the first step is identifying a target market. Ideally something with strong long term fundamentals, such as low unemployment rates, high population and job growth.
- Team – the second step is forming relationships with a team of professionals you can rely on for finding properties, helping with due diligence, handling property management, etc.
- Real estate Agent – help find properties in your target market
- Property Manager – Most people find a property manager AFTER they close on a property, but in my opinion they are the MOST important part of your new real estate business. They should have experience with similar properties, tenants and have a deep understanding of the rental market. Even if you decide to self-manage, I would recommend reaching out to property managers for their input.
- Loan Broker – getting the proper financing in place is an extremely important part of the purchasing process, so I would recommend finding a local loan broker who can educate you on what’s going to be required to successfully close. Also, local credit unions are great banks to build relationships and get financing.
- Real Estate Attorney – paying an attorney is just a cost of doing business. I would recommend always having an attorney experienced in real estate review the purchase contracts, insurance policies and property management contracts.
- Insurance Agent
- General Contractor
- House Hacking – I’m talking about buying an owner-occupied multifamily property (2–4 units) and getting paid to live for free. By purchasing a small multifamily property, living in one unit, and renting the other units out – you can live for free and possibility get paid to do so. If I could go back in time, I would have house hacked instead of buying my first home. House Hacking is a great way to learn about real estate and property management with the ability to live for free. In addition, properties with 2–4 units are classified as residential by the FHA, so you can benefit from the low down payment requirements when purchasing a duplex, triplex or 4-plex. After living in the property for 6 to 12 months (typically the minimum requirement by FHA), you can rent out your room and repeat the process. Eventually you’ll have enough experience and cash flow to purchase a larger commercial property (5+ units). Depending on where you live, you could purchase a 2–4 unit property for anywhere from $50k-$500K and up, so a 3–4% FHA down payment is a realistic goal for most working people.
There are many other ways to get started as an active investor, such as single family rental, AirBnB, single family flips, etc., but in my opinion, house hacking is the best.
I highly recommend focusing on commercial properties, as compared to single family rentals, given the scalability and differences in property valuations (cash flow and CAP rate vs. sales comps).
As a passive investor you are most likely a working professional who qualifies as an accredited investor. An accredited investor means you are an individual that makes over $200k per year (or $300k married) or has over a $1M net worth excluding your primary residence.
Passive investors typically invest in real estate syndications, which is a direct property investment whereby numerous investors pool their capital to invest into real estate. The syndications are most commonly structured as LLC’s, which gives you a small piece of a property and the related tax benefits.
Unless you have a rich uncle or family friend that syndicates real estate, I would recommend:
- Join a local real estate investor club and identify the people who have successfully raised money and managed past real estate syndications. Ask them for details on their past deals, investor referrals and ask to be put on their investor list for future deals.
- Sign up for one of the top real estate crowdfunding websites, such as Realty Mogul, Crowdstreet, Realty Shares, Fundrise, etc. Look at all of the active deals and perform due diligence on each as if you were going to invest. Each deal will be a unique property with different terms, expected ROI’s and management team. After you review several properties you will start to understand the industry standards for fees, ROI’s and structure which will help you weed out expensive deals down the road. In addition, make sure you analyze:
- Location – the location of each property including demographics and overall market trends. Is unemployment below national averages? Is there population and job growth?
- Rent & Expense assumptions – you’ll want to test their rent and expense assumptions in their financial model. Are the rents already at the top of the market or will their plan to renovate the units allow for rent increases based on local market comps? You can easily find rents from nearby properties on and other websites. Make sure you compare the investment property to similar properties in the same local market. For expenses, compare them to other deal on the website. Are the repairs and maintenance, utilities, property management fees, insurance and other items similar on a per unit basis? Also, make sure their annual rent & expense increases are appropriate. I would question annual rent growth over 3% per year, unless there’s a turnaround strategy that supports it. You can’t expect rents to increase forever, or at least at the same pace.
- Exit Valuation – is their exit valuation reasonable? Are they buying the property at a 7% CAP and expecting to sell at a 5% CAP? If so, they better be able to support this assumption. With interest rates at all-time lows, you should expect CAP rates to rise with interest rates over time.
- Stress Testing – as we experienced during the last recession, real estate is very cyclical and will almost always experience ups and downs, so you should make sure to stress test their assumptions, such as higher vacancy rates, lower rent growth and lower exit valuations. Can the property survive the next downturn and still cash flow? If not, you should move on. We are at the top of the real estate market, so this is very important.
- Fee Structure – you should expect to see a relatively consistent fee structure from experienced real estate teams. I typically see:
- 8% preferred return
- 20–30% carry after the 8% preferred return
- 1–3% acquisition fee on the purchase price
- 4–6% property management fee (internal or 3rd party)
- Management team – has the management team successful acquired similar sized properties in the past? Review their personal resumes and their online profiles. If you’re serious about investing, you may also have the opportunity to talk on the phone or meet them in person. You want to make sure your money is not an experiment for them and they have dealt with the ups and downs of real estate. In addition, make sure they provide updates on the project at least quarterly and are transparent along the way. You don’t want any surprises.
Once you’ve spent the time to identify several experienced management teams with reasonable fees and property assumptions, it’s time to make your first investment. As an investor you usually get quarterly investment updates, financials, other information and of course valuable insight for your next deal.
If you only learn one thing from my post, understand that US real estate is at the top of the market, so make sure you stress test the property and chose a management team that has survived the last recession.
In addition, there are some very attractive foreign real estate investment opportunities in foreign markets, such as Colombia, Panama, Portugal and other emerging economies that still have opportunities to buy institutional quality real estate in prime locations at a fraction of the cost. Of course, you have to find a partner you can trust that has experience in these markets, so due diligence and a trip to the property is vital. If you have any interest in exploring foreign real estate opportunities and personally visiting them with us let us know.