Its Time to Invest In Real Estate... Conservatively!

By
Real Estate Agent with The HBH Group (Keller Williams affiliate)

 Many voices are saying that NOW IS THE TIME TO INVEST IN REAL ESTATE.  Many of our clients are looking for a great Austin Texas Real Estate Investment.  Becoming financial free is almost an obsession of many people today, hence the reason for the huge popularity of the midnight real estate investing courses for sale on cable all night long (ala Carleton Sheets and many others)!  

I agree that with the slowness of the market at this time, it is an attractive market for the smart investors.  By smart investors, I mean the true real estate investors that are just that and are not market speculators or market timers.  These last two strategies rarely, if ever work - not in the stock market or in real estate investing either.  The smart investor is conservative and at least incorporates these tips for real estate investors (if not, many others as well):

  1. Buy properties that are in good shape, preferably rentable as-is...
    • If you have to complete repairs just to rent it, what is the point?  With the volume of available properties in the market you have time to wait for the best ones and not be in a rush to purchase the first thing that comes along.  The better the state of the property the less additional capital will be required up front to rent it.  Wait for the nice ones and be ready to pounce on them when they come along.  Also be willing to pay close to list price for these - they need no additional capital and you don't want to get into bidding wars for them since the prices may skyrocket quickly in an auction-like environment.
    • Be careful when buying foreclosures - There are many barbs that await you like: dealing with non-motivated seller (a bank), having to buy as-is with no seller's disclosure requirements on the bank, having to use the bank's contract form rather than a state association of REALTORS® contract that is more fair to both parties, you have to pay for your own survey, often the bank pays no closing costs on your behalf - These are all reasons that foreclosures have been a "bargain" in the past, but beware!  The prices on foreclosed properties in my area are very near properties sold by an individual!  Also remember that banks will NEVER do any repairs for you.  That will be completely up to the new owner!
    • Get appliances with your deal, when you can - If you are buying from an individual, you may have your REALTOR® request that a washer, dryer and refrigerator are included as a part of your contract offer to the seller.  These must convey with the sale.  You need them to use the property as a rental, why not ask for them?
  2. Make sure you are credit worthy...
    • Fannie Mae guidelines are tougher now so expect the approval and underwriting process with your l ender to be a bit more bumpy of a ride.  I am working two such sales this week with a VERY qualified buyer and the underwriting demands are downright unbelievable!  It is getting much more difficult to own multiple properties since so many would-be investors have defaulted in the past couple of years.  Write your offers with plenty of time to close, so you have time to meet all the lending requirements.
    • Be prepared for the worst - the lenders are jumpy - Understand that the mortgage brokers and banks will tell you that there will be no problem with your loan, but when it goes off to the lender for approval (and underwriting) things can get infinately more difficult to close.  Again make sure you have thought of everything that can go wrong in the lending approval process and be prepared for those things to happen.  They probably will in this market!
    • Work to pay down your mortgages fast to protect yourself against downturns in rental and sales markets - In the market we are in now, the rental/leasing market is heating up while the sales market is cooling.  Why?  The last two points spell it out - there are fewer and fewer easy loans availble.  The pool of tenants is thus increasing so if you own property right now, rents are going up!  Use the increases to pay down your mortgages ASAP to a point that refinancing makes sense, or better yet, pay them off.  Think of what a freedom you would have if you owned five homes out right today and had $5,000/month in rent coming to you.  Who needs social security when you have that?  I know of one person who did this and kept using the income from his homes to buy more with cash.  He now owns 32 properties and has a $35,000/month cash flow.  He has created a trust that actually owns his properties.  When his attorney created the trust, the stipulation was made that the trust may only acquire properties for the next 100 years - they may not be sold.  Further, the trust will be willed to his heirs who will now have income for their entire life after his passing.  What a gift to your kids, huh?
  3. Be prepared to put some cash in...
    • In my market, typically 20% at least - Again cash is king and cash-flow is an imperative.  You want to purchase your properties where they are ALWAYS making you money.  You do not want an albatross sucking you dry every month, so be prepared to put some cash in up front.  If you graph your returns with a 20% investment and standard, conservative 5% annual appreciation on the total value of a property, you will see that the returns on this sort of an investment will outstip anything you can make in the stock market, mutual funds or the bank.  This doesn't even take into account the tax advantages.  Talk to your CPA about those!
    • You don't want to be strapped to the investment like an albatross around your neck - there are some expenses to being a landlord.  Don't overlook them!  Are you going to have a management company manage your tenants and upkeep of the property?  This is the way to make your holdings fairly "headache-free" but you need to put those into your model up front when running your inital projected returns calculations. 
    • Graph out your returns based on historical performance - Work with a REALTOR® that can give you hard historical appreciation numbers for the neighborhoods you are interested in.  Use these numbers to project your returns.  This holds true for appreciation and for rent prices.  Knowing both of these sets of numbers and using them to project your returns is just plain smart!
  4. Think cash flow and manage expenses wisely...
    • Cash flow is KING! - Whoops I said it again.  And it will always be true.  Always plan for the worst of  situations and try to ensure that you STILL have cash flow coming in and you will not make a bad investment.  This is truly investing as opposed to speculating!
    • Keep your repair costs under control - Make sure you account for the costs of repairs and upkeep.  You may choose to keep a service warranty in place on the property to control major repair costs.  We recommend these to our investor clients and we require them on the properties we manage.  They are great insurance AND can help you fix the repair costs where you projected returns are not whittled away by air conditioners and water heaters that wear out.
    • Make your rent model as stable as you can for the long haul and prepare to hang on - Again put cost controls in place (this is a business after all!), and remember...  CASH IS KING!  (Did you hear that?)

Just a few pointers that has turned into a short novel on smart investing.  Hopefully these ideas can help you turn your investments into a goldmine over the coming months and years!

This information is brought to you as a public service of the The HBH Group Realty Team with Keller Williams Realty. You may learn more about us at our websites located at: http://www.TheHBHGroup.com/ and http://www.TheHBHGroup.biz/ or contact our offices at (512) 439-3772 or toll-free at (877) 268-1877.  We are experts in Austin Texas Real Estate Investment and we teach a monthly real estate investment seminar in the Greater Austin area and YOU ARE INVITED to this FREE event.  Simply call our offices to reserve your seats!  Also ask about the investors club that we are forming in the North Austin markets currently - We would love to have you participate!

Want more GREAT INFORMATION LIKE THIS? Just CLICK HERE: sign me up

 

Other articles on investing in real estate:

  1. Looking for Property Management in Round Rock?
  2. Investment in Texas Can Help You Retire Early!
  3. It's Time to Invest in Real Estate, Conservatively!
  4. Why Flipping Homes Can Carry Strong Liability
  5. Foreclosures are Always a Bargain!  Yea, Right!
  6. Texas is a GREAT Place to Live and Invest!
  7. Round Rock Real Estate makes the News...
  8. The Tale of the Foolish Real Estate Investor
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Ambassador
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Gary Woltal
Keller Williams Realty - Flower Mound, TX
Assoc. Broker Realtor SFR Dallas Ft. Worth
Steve, I've always learned on the investor side with real estate you make your money going in. That's why all your points are good ones. You have to set your criteria up front with what's a good deal and stick with it.
Apr 30, 2008 12:34 PM #1
Rainer
150,345
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX
So true Gary...  And many people think that the statement "make your money on the way in" only refers to stealing the property from the seller at WAY below market.  I beg to differ with that assessment as well.  My post clearly points out that it means many things: growth potential, a good operational model WRT cost and income, controlling expenses...  Yadda yadda yadda...  the bottom line is, rental property is a business and the investors who really do well with ir, run it as a business to make profit.  When that is the mindset, we are talking REAL REAL ESTATE INVESTING and not speculating as so many try today.  These folks little the landscape with more foreclosures as they mismanage their way to financial failure!  My $0.04 (since I had already said my $0.02!)...  Steve
Apr 30, 2008 01:52 PM #2
Rainer
61,095
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert
Great advice. It's a great time to buy conservatively all over the country. Real Estate is traditionally a long term investment. Part of our problem is that we had investors jumping in and out of real estate like the stock market. We're heading back to a traditional real estate market.
May 01, 2008 04:21 AM #3
Rainmaker
254,197
Robert Machado
HomePointe Property Management, CRMC - Sacramento, CA
CPM MPM - Property Manager and Property Management
This is good advice for those thinking they are going to get rich in real estate.
May 01, 2008 05:45 AM #5
Ambassador
514,550
Stanton Homes
Stanton Homes - New Home Builder, with thousands of floor plans and almost unlimited customization available! - Raleigh, NC
Design/Build Custom Home Builder in North Carolina
Steve - great overview of what it takes to truly make it as a real estate investor.
May 01, 2008 06:02 AM #6
Rainer
33,782
Greg Taylor
Greg Taylor and Associates, PLLC - Murray, KY
Murray Kentucky, Real Estate Attorney and Investor
Steve - Great advice for the beginners and a good reminder for those of us experienced in the game.  It truly is a GREAT time to be buying, there are more motivated sellers now than ever before.
May 01, 2008 07:16 AM #7
Rainer
6,931
Mike Wilmers
RE/MAX Heritage Homes - El Cajon, CA
Steve - We are partners in a condo with our kids that was purchased about 3 years ago at the top of the market.  Our partners wanted out, so we purchased their portion at today's market value and will be renting it out.  We tried to sell it, but didn't want to take that big of a loss.  Unfortunately the rent won't quite cover the monthly outlay, obviously not an ideal situation.  Our CPA said the tax write off would offset that negative cash flow.  Still wondering if we should just cut our losses and sell it - losing nearly all the cash we put down on it.  Any thoughts?                      By Debbie W.
May 01, 2008 04:45 PM #9
Rainer
150,345
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX

Debbie:  There are so many variables in a situation like that it is hard to say.  Here are some things to think about:

  1. Is the market staying strong in that area from a sales value perspective? 
  2. Will the market help you recoup the losses if you stay in the investment for a longer period of time?
  3. If so, how long might that take?
  4. How are rents doing in the area?  Is there a chance that soon the rents will make up the negative cash flow for you and if so, how long might that take?

Your REALTOR can give you historical data for that area and market that can help you build a model for this.  Personally I am a BIG believer in holding on to an investment once you get into it.  Historically real estate always comes back, it just depends on how long you are willing or able to wait.  In the short run, you become a speculator and that increases your risk significantly.

Call me if you would like to discuss further!  I would be happy to help!  Steve

May 01, 2008 11:24 PM #10
Rainer
6,931
Mike Wilmers
RE/MAX Heritage Homes - El Cajon, CA

Steve, thank you so much for your lengthy response.  Much appreciated.  My husband is a REALTOR, actually, and both of us continue to keep an eye on both the rental and resale markets in that area (San Diego metro).  No doubt a great rental area for young professionals, so no problem there.  We estimate it could take several years for the condo market to rebound to where it was when we bought the property, since condo increases always trail single family homes.  On the positive side, we purchased our partner's percentage of ownership at today's prices!  This is our first long-term rental, and though we obtained it by default, we'll take advantage of the write-off and hold it for as long as we are able. 

Thanks again, Steve.  I enjoy reading your blog.      by Debbie

May 02, 2008 11:37 AM #11
Rainer
150,345
Steve Homer
The HBH Group (Keller Williams affiliate) - Round Rock, TX
Shame on me for NOT checking until after I wrote my last...  Then I read and subscribed to your BLOG once I learned!  Sorry for not noting that before...  Actually I had an investor here in town from San Diego today.  I have many from Californians that I work with here in the greater Austin area, although it slowed a good bit since the market has been dropping out there!  Again thanks for reading and if I can ever help any of your clients with investing in this market, please call!  Steve
May 02, 2008 01:57 PM #12
Rainmaker
241,601
Erin Newington
(916) 585-3858 Keller Williams Realty - Elk Grove, CA
Elk Grove Realtor
Make you money on the purchase and make sure you will cash flow!  Great post!
May 02, 2008 03:59 PM #13
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