Real Estate Investing
Like starting a business or investing in the stock market, real estate investing can seem intimidating. It’s not, though. There are just some key fundamentals you need to know before getting started.
Julie and her team are here to point you in the right direction and provide the tools necessary for making smart decisions. We’ll introduce the basics of real estate investing and provide you a step-by-step guide to success.
Investment Basics
At a basic level, real estate investing is a method of earning money by renting, flipping, or owning residential, industrial, or commercial properties. Ownership can be outright, or through a Real Estate Investment Trust (REIT) or crowdfunding platform.
Although no type of investment can offer guaranteed profits or protection of the principal value, real estate has historically been one of the safest asset classes for investors, and offers several possible benefits generally not associated with other types of investments, such as:
LEVERAGE—Real estate investors can use borrowed funds to invest in a piece of real estate they could not otherwise afford to purchase outright, and then realize all potential profit from such ownership.
TAX ADVANTAGES—Outright ownership of income property offers landlords eight unique tax deductions: (1) Rental Property Depreciation, (2) mortgage interest, (3) deferral of capital gains via a 1031 exchange, (4) maintenance and repair costs, (5) cost of professional services such as rental property management and legal counsel, (6) utilities, (7) travel costs associated with managing property, and (8) property taxes.
CONTROL—Unlike a passive investment in stocks or in an REIT, outright ownership of real estate affords you greater control over your financial outcome.
Step-by-Step Guide
STEP 1: KNOWLEDGE IS POWER
Learn as much as you can before making your first investment. There are plenty of creditable online resources which render expensive real estate investment courses unnecessary. Read blogs like lendinghome.com, join forums like biggerpockets.com, and network by attending meetings of your area’s Real Estate Investor Association.
Next, find yourself a mentor. Julie is always ready to consult with you about her experience in real estate, and she can offer you a wealth of information that will help you make the most effective decisions.
STEP 2: TREAT IT AS A BUSINESS—DEVELOP A PLAN
Real estate investors must consider their real estate activities as a business in order to set and achieve their goals. A solid business plan will allow you to define your objectives and determine a viable course of action leading to their attainment. A business plan helps you visualize the big picture, maintain focus on your long-term goals, and avoid being distracted by minor setbacks. Real estate investing can be complicated and demanding, and a solid plan will keep you organized and on task. For more on developing your business plan, click here.
STEP 3: INVEST FOR CASH FLOW
As a beginner, your primary focus should be on the cash flow generated by rental income rather than speculating simply on potential gains in property values. Betting on appreciation alone is not always the best idea, but real estate professionals like Julie can help you when determining where the best areas of appreciation may be found.
STEP 4: START SMALL & WORK YOUR WAY UP
Start with an affordable initial investment, like a duplex, avoiding properties needing significant repairs. Make it your primary residence for two to five years and rent out the extra unit, saving the rental income to purchase your second property. Then repeat the process to grow your investment portfolio.
The most affordable way to purchase your first duplex is through a Federal Housing Administration owner-occupied loan that allows a low down payment (3.5% as of March 2015), doesn’t require landlord experience, and that will count the future rental income from the other half of the duplex to help you qualify for a loan.
STEP 5: UNDERSTAND MARKET FUNDAMENTALS
Choosing the location of your first investment should begin with a thorough understanding of fundamental factors that drive the real estate market in our area.
- Supply and demand determines whether a real estate market is a seller’s or buyer’s market. A shortage of supply will push up rental property prices while a surplus of supply will cause prices to fall (Click here for a detailed look at current supply and demand in the San Francisco Bay Area. Webcast requires signup).
- Demographics and economics, including population, job, and income growth, make for a robust and healthy real estate market. With an annual growth rate of 4.3% over the past three years, strong population growth, rising incomes, low unemployment, and a new wave of tech IPOs slated for 2019 and 2020, the Bay Area offers a solid underpinning for the rental market in the foreseeable future.
- Good schools are one of the primary factors considered by families with school-age children when buying or renting a home. According to a recent survey conducted by realtor.com among homebuyers, nearly three quarters of respondents said good schools were important to their search, while 78% of buyers in their preferred school district gave up important home features, such as a large backyard and updated kitchen, to get their district. Detailed information on schools, including parent reviews, can be found at greatschools.org.
- Price-to-rent ratios are used by investors to determine if a residential property investment will be profitable. The price-to-rent ratio is a simple metric that measures whether buying or renting is more affordable in a given city, and is used as an indicator for whether housing markets are fairly valued or in a bubble. Basically, it calculates the ratio between property prices and annual rent. Thus, the formula for calculating this ratio is average property price/average annual rent. Zillow offers a searchable database for median home values and rent prices, while biggerpockets.com provides a more complex tool for detailed analysis.
- Rent control, zoning, and future development plans, though outside of your control, can significantly impact your investment. It is essential you take time to become familiar with current and planned rent-control initiatives, as well as future development plans for your targeted areas of investment (Click here to find out which cities in the Bay Area have rent control).
