First and foremost - congratulations. I believe the statistics dictate that somewhere on the order of 90% of America's millionaires made their money through real estate. The benefits of owning investment property are obvious. Pay down principal while someone else ‘pays your mortgage'. Reduce your tax burden through depreciation of your properties and maintenance writeoffs. Potentially large equity gains via appreciation. Eventually, either trade up (via tax deferred 1031 exchanges) to larger properties or just live off the rent once your properties are paid off.
However, realize that along the way, and before you get started, you may have to make lots of decisions, make some sacrifices and put in a good chunk of time. What kinds of decisions might one have to make? Let me list a few of them....
- Where do you want to purchase?
- What do you want to purchase?
- Do you want to manage the properties yourself?
- What is your goal?
Where do you want to purchase? Different markets have different features. You want to buy in Texas? The 1% rule is alive and well there (1% Rule). You want to buy in California? Better be ready to put down a big chunk of money to have your rent cover your mortgage payment (unless you want additional writeoffs). Will the coasts appreciate faster in the future, or will they stay stalled for sometime (note the Seattle area is projected to have 10+ % appreciation this year).
What do you want to purchase? Rent out a single family residence (SFR)? Duplex? Triplex? Fourplex? Commercial? Realize that four units or less are considered residential from the financing perspective. It is not uncommon to be able to finance these for ZERO down. Five units and higher? Commercial - much higher down payment requirements. Typically 20-25% though I have seen lower in some cases. (Talk to lending experts like Brian Brady, George Souto, Jeff Belonger) What about economy of scale? Sure if you buy a 100 unit apartment building, you are probably getting the units at a better price ($/unit) than in a fourplex. But are you ready to manage such a large operation? What about caliber of tenant? Frankly, if you are renting out $500.00 units in a fourplex versus a $1200.00 SFR - you are more likely to have issues involving repairs, delinquent rent and evictions with the fourplex. Then again, the fourplex may be easier to cashflow.
Do you want to manage the properties yourself? Obviously if you decide to purchase property remotely, you will have to hire a property manager (a good rule of thumb dictates 10% of the monthly rent as a fee). But if you purchase locally - are you hands on? Do you want to deal with your tenants (complaints, screening, eviction, etc)? Do you want to be woken up at 4 AM with a call about a broken toilet? Or would you just as soon pay the 10% and have a property management company deal with these issues?
What is your goal? Do you want to have 1 million $ in equity in 10 years. Do you want to generate $10,000 a month of cashflow to live off of. Do you want to earn no money but generate huge write-offs potentially reducing your taxable income by a huge amount. The direction you choose will play a large role in answer some of the questions posed above.
Aside from asking questions - I'll also pose some general suggestions.
1) Have a cash reserve!!! Don't plow all your money into your properties. You WILL have vacancies. You WILL have repairs. ETC. A good, conservative rule of thumb is to have 6 months operating expenses in reserve per property (now that's my conservative rule).
2) Build your ‘Power Team'!!! If you expect to acquire multiple properties...you will need people who work with and for you. Potentially, you'll need a savvy Real Estate Agent. A property manager. A handyman. A plumber. An electrician. A lawyer (should you choose to put the properties in their own corporation). An insurance person. Etc. Build this team out of people you trust and you work well with because you will deal with them over and over again!
3) Do your research!!! Don't just wake up one day, decide you want investment property and buy the first property you (or your agent) find. Strive to study and understand the market (whichever market you want to invest in). What has happened historically there? Is the economy booming? Is the economy depressed? Are property values going up or down? What is the net migration (influx or outflux)?
Obviously these are general guidelines and one could go into much greater detail within any subsection. Best of luck! I very much look forward to comments from experienced investors(like Chris Smith), agents who represent investors and folks who are interested in investing.
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