How to Invest in Real Estate, Part 1 Westwood

By
Real Estate Agent with Your Castle Real Estate

Investor often ask me what types of real estate investments are available on the market.  Here's what we tell them.

This is the first of several postings on the topic.

Please offer comments - positive or negative!

Assignments.  If you don't have much equity to work with, and/or if your credit power is limited, assignments can be a way to get started in real estate investing.  You will need to have a strong "sales" personality to succeed at it, though. 

 

Rental Condo or Rental Home.  Purchase of a residential property to be rented out to tenants, usually on a 6-12 month lease term.  This is how most new landlords get started.  You can hire out all of the property management functions, but in many cases you will do many of them on your own.  There are smaller down payment requirements than for larger rental buildings.  The purchase process and financing process is very similar to what you experienced buying the home you live in now.  It's a great way for beginners to get started.

 

Small (2-4 units) Apartment Building.  Purchase of duplex, triplex or quadplex to be rented to tenants, usually for 6-12 month terms.  Usually what the rental home / condo landlords graduate to.  In most markets they cost a little more than a rental home, but are much more likely to cash flow on the average month.  Less cash flow risk; if one unit is empty you have other tenants that still help you with the mortgage payment so it doesn't all come out of your pocket.  Many owners will start to delegate some of the property management tasks to an on-site assistant (typically the most responsible tenant), such as yard maintenance and showing empty units.  The financing process is only slightly more involved than a residential loan.  Relatively small down payment requirements make it affordable.  The purchase process is also very similar to purchasing a home.  It's a good way for beginners to get started.

 

Large (5+ unit) Apartment Building.  Still targeting tenants for 6-12 months at a time, buildings with more than five units are considered "commercial" property.  The loans are more difficult to qualify for, and usually a larger down payment is needed.  Uncommon for the new investor; this is usually what landlords with several years of experience "trade up" to.  Cash flows on larger buildings are more stable than for smaller buildings, and the economies of scale make it practical (and desirable) to hire a property manager to take over most the work for you.  This takes reduces the hassle factor of the landlord process. 

             GLOSSARY

Lease Option (L/O) - Acquiring control of a property (though not necessarily ownership), then leasing the property to a tenant.  The lease is bundled with an option, so the tenant can (but does not have to) purchase the property for a given price within a given time frame. 

Lease Options.  Again you are seeking a tenant for a property, but usually for a slightly longer term (12-18 months) and frequently (though not always) with the goal that the tenant purchase the property from you at the end of the lease.  If you purchase the property, then it's an easier process; if you find a highly motivated seller to let you re-lease the property to another tenant, it can be a lot of work to set up.  However, the re-lease method doesn't require any cash out of pocket and does not rely on your credit score, so it is appealing to many investors.  Great for beginners with the right skills and attitude.

 

Fix and Flips.  Purchasing a home that needs work.  The scope can range from the basic "paint and carpet" to extensive overhauls to scraping a decrepit property and completely starting over.  Usually does not involve tenants, and the objective is to get in and out of the property as quickly as possible.  Great for beginners with the right skill sets or the willingness to learn.

 

Conversion of Apartments into Condos.  A synthesis of the fix and flip and rental operations - purchasing an apartment building in a neighborhood dominated by owner occupants, then converting the building from apartment building to condominium.  Often requires renovation of the units to meet the expectations of owner-occupant buyers in that area.  Complex and time consuming, but has wonderful tax advantages compares to fix and flips and often has superior returns to all other asset classes.  Ideally suited for the sophisticated investor with extensive experience. 

 

Scrapes, Pops and New Construction.  Purchasing a small home in an expensive neighborhood that may or may not need work.  The home is bulldozed and a new home or duplex is put on the lot.  Alternatively, the existing home is renovated and more square footage is added on.  A pop-top is adding a second story to an existing home to add more square footage (commonly, a master bedroom suite).

 

(c) Copyright  2008 Your  Castle Real Estate 

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Rainer
11,785
Brandon Gill
Your Castle Real Estate - Aurora, CO

This map definitely confirms everything we are seeing out there on the market.  Another observation is that the red areas are "red" hot with investor activity.

Oct 17, 2008 04:20 PM #1
Rainer
10,153
Jim Goffred
Your Castle Real Estate - Parker, CO

Very interesting that some areas have a relatively high foreclosure rate (above 25%) with a positive average price change.  The Baker neighborhood is a perfect example

Oct 17, 2008 04:40 PM #2
Rainer
6,730
Lori Hinsberg
Your Castle Real Estate - Castle Rock, CO

This map definitely confirms everything we are seeing out there on the market.  Another observation is that the red areas are "red" hot with investor activity

Oct 18, 2008 07:40 AM #3
Rainer
9,346
Todd Houghton
Your Castle Real Estate - Aurora, CO

It is amazing to see how much some of these markets have dropped and look like they are continuing to drop.  I hope the bottom is near for some of these communities.  On the flip side, what a great market to buy an investment in.

Oct 18, 2008 08:18 AM #4
Rainer
7,819
Laurie James
Your Castle Real Estate - Englewood, CO

With all of the neighborhoods that have homes over 800k it seems that they are still doing relatively well.  I would like to ask all of the Active Rain community what they think of that?  My guess is that the number of sales is what is going down.    

Oct 18, 2008 08:30 AM #5
Rainer
2,138
Dano Keys
Your Castle Real Estate - Denver, CO

Very useful information for investors.  Many people do not know that there are many options when they are helping clients.  The more educated your clients are the more deals that will be done.

Oct 18, 2008 02:08 PM #6
Rainer
11,785
Brandon Gill
Your Castle Real Estate - Aurora, CO

Wow!  With all of the negative press on the real estate market it is really great to see how each local market is actually doing independently of one another.  It makes sense when you see the map on where many areas are declining.  My question is, will the declining markets shift in the next few quarters?

Oct 20, 2008 04:31 PM #7
Rainer
10,153
Jim Goffred
Your Castle Real Estate - Parker, CO

Have you heard that the days on market have been decreasing the last two months?  I think that maybe we are past the bottom and climbing on up. It will still take some time but I'm seeing the first signs of things turning around.

Oct 20, 2008 04:42 PM #8
Rainer
6,522
Matthew Haraminac
Peak Real Estate Advisors - Denver, CO

Very useful information for investors.  Many people do not know that there are many options when they are helping clients.  The more educated your clients are the more deals that will be done.

Oct 20, 2008 05:40 PM #9
Rainer
6,522
Matthew Haraminac
Peak Real Estate Advisors - Denver, CO

Very useful information for investors.  Many people do not know that there are many options when they are helping clients.  The more educated your clients are the more deals that will be done.

Oct 20, 2008 05:40 PM #10
Rainer
10,153
Jim Goffred
Your Castle Real Estate - Parker, CO

Have you heard that the days on market have been decreasing the last two months?  I think that maybe we are past the bottom and climbing on up. It will still take some time but I'm seeing the first signs of things turning around.

Oct 22, 2008 04:43 PM #11
Rainer
9,346
Todd Houghton
Your Castle Real Estate - Aurora, CO

It is amazing to see how much some of these markets have dropped and look like they are continuing to drop.  I hope the bottom is near for some of these communities.  On the flip side, what a great market to buy an investment in.

Oct 24, 2008 04:49 PM #12
Rainer
11,785
Brandon Gill
Your Castle Real Estate - Aurora, CO

Can't wait to see what is happening in the 3Q of this year.  It seems that much of the map will stay the same.  It would be interesting to hear if any of these areas have it rock bottom.

Oct 25, 2008 02:39 PM #13
Rainer
9,726
Mike Huey
Your Castle Real Estate - Thornton, CO

Your information reflects a true depiction of what is going on in the Denver market. I like the way you have put this information. It is insightful but matter of fact.  Do you send this information to your clients or just use it in your brokerage?

Oct 26, 2008 03:20 PM #14
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