The coronavirus pandemic has put a lot into perspective for many of us. While no one’s quarantine experience was the same, one thing we can all agree on is that all that time at home certainly gave us time to reflect.
For many, that means you decided to change your career path, spend more time with family, move across the country or finally go after the goals that have been on your to-do list for far too long.
But for those who know home is where the heart is, a long-term goal might be to start real estate investing — which isn’t always easy.
The Post consulted two professionals who walked us through how beginners can start building their real estate portfolios.
Ahead, find six commonly asked questions that many new investors ask and all the answers you’ll need to get started.
1. When assessing your finances and credit ahead of possible investment, what should you think about? What will lenders be looking for?
- 1 1. When assessing your finances and credit ahead of possible investment, what should you think about? What will lenders be looking for?
- 2 2. When identifying a possible investment, what factors matter most?
- 3 3. What are the benefits of buying and flipping vs. buying and renting?
- 4 4. What loan options are available to rental property owners and how should they be evaluated?
- 5 5. If you’re investing in a rental property, do you need to hire a property management company? What if the property needs construction?
- 6 6. How do you set the rental rate to cover bills and generate revenue?
“There’s an old finance saying: ‘Never make a bet that can bring down the house.’ Before diving into an investment property, assess the risk it poses to your overall financial health,” said Igor Popov Chief Economist at Apartment List. “Being a bit pessimistic helps to ensure you’ve played out unfortunate scenarios and that the potential upside is worth the risk.”
“On a more tactical level, become familiar with your credit score and credit history, making sure there are no mistakes in either of the reports from the three bureaus,” Popov added.
Bob Pinnegar, president and CEO of the National Apartment Association, also explained the importance of considering your long-term goals before investing in a rental property.
“These [goals] will guide you through the entire investment process. Consider your current financial situation as you craft these goals, including your credit score, income-to-debt ratio and amount available to put for a down payment,” said Pinnegar.
“It’s crucial to develop a relationship with your bank, get prequalified ahead of time and think about what type of financing your property will [need] — conventional or commercial depending on property size,” Pinnegar explained before mentioning the benefits of using an investor. “Consider whether to bring on additional investors, as doing so may allow you to invest in a newer, larger property.”
2. When identifying a possible investment, what factors matter most?
“If you’re considering an investment property, perform the same due diligence you would if you were going to live there,” Popov said. “Understand the changes in the local markets, how school districts are trending, and what features may affect the neighborhood or the property in the years to come.”
Popov added that while the housing market has been hot in recent years, with home values rising tremendously in many U.S. markets, it’s wise not to assume this will continue. Instead, try to find reasons for why renters and future buyers will avoid or gravitate to this property to prepare yourself for all outcomes.
“When evaluating a potential property, always make sure that it aligns with your long-term investment goals and closely examine the local regulatory environment,” Pinnegar said. “While many other businesses can move to jurisdictions that are more business-friendly, real estate investments are tied to the land on which a building sits and subject to local, state and national regulatory burdens with little chance of escaping.”
“It’s also important to ensure that a potential investment property matches the market and demand,” Pinnegar added. “Is the market geared towards single-family homes or young professionals just out of college?”
“Consider the age of the property, its condition and the state of its mechanics (roof, boiler, pipes), all of which may need to be addressed and ultimately add to your costs. Avoid getting emotionally attached to a property and look at it through the lens of potential residents. A rental property is more than just an investment piece, it’s a new business endeavor that you’ll be overseeing.”
3. What are the benefits of buying and flipping vs. buying and renting?
Here’s the difference between renters vs. the home value: According to Popov, “rents reflect renters’ willingness and ability to pay in the next 12 months, while home values price in future price appreciation.”
“If the market is expected to boom in the coming years, chances are the mortgage payments will be significantly higher than the rent. If the market doesn’t expect a home to grow too much in value, the rent may even exceed the mortgage, generating income each month.”
“Be clear about how you want your investment property to empower your financial goals. Are you looking for passive, monthly income, or rather a long-term investment vehicle? Very few homes may offer both,” Popov added.
“Investing in rental properties can be a very fruitful endeavor. From the property owner standpoint, it’s another business that can provide supplemental revenues to support you and your family,” said Pinnegar.
“For many, investing is a way to help pay mortgages and receive tax write-offs in the short-term, and an appreciating investment in the long-term. Overall, it’s important to weigh your long-term goals and determine whether a quick, albeit riskier, buy and flip plan or a long-term appreciating rental property fits your situation best.”
4. What loan options are available to rental property owners and how should they be evaluated?
According to Pinnegar, there are a range of loan options available for rental properties. He mentioned three: loans backed by banks, loans from the government or even private money.
“For potential real estate investors, and even those already involved in the industry, it’s important to speak with a loan broker to find the best loan fit,” said Pinnegar. “Often, loan brokers can give potential investors the broadest range of options and evaluate the pros and cons specific to financial situations, market conditions and a host of other variables.”
Pinnegar also recommends speaking with an established real estate broker who is experienced with the type of rental properties you’re interested in. “This is because transactions differ widely based on property size and agents have different specialties – as an example, a transaction for a 1-4 unit property is more akin to a single-family home purchase and would require a different kind of agent than 5+ unit properties, which lean more towards a commercial loan,” Pinnegar explained.
“A knowledgeable agent can also connect you with a trusted loan broker, particularly for multi-family properties, as these transactions tend to be complicated and brokers rely on proven relationships with colleagues who can close deals and bring in commission.”
5. If you’re investing in a rental property, do you need to hire a property management company? What if the property needs construction?
“Buying a piece of rental property is not just an investment, but a business. Each rental property owner will need to evaluate their long-term goals and decide who is best positioned to manage the day-to-day activities of their property,” said Pinnegar. “Another factor to consider is the number of properties in your portfolio, and whether that number could grow in the future.”
Pinnegar also noted that no matter who is doing the work, property management can easily become a full-time job — no matter how big a real estate investor’s portfolio is.
If you’re not interested in dealing with the daily necessities a property needs, a property management company is the way to go. “In general, property management companies will handle the maintenance requests, leasing transactions and maintenance of your property, for a fee, while adhering to local, state and federal laws and regulations.”
On the other hand, if you want to be more in control of your property and are okay with dealing with things like late-night maintenance calls, hiring a property manager may not be necessary. “It’s also important to remember that, for those who are going to manage a property themselves, knowledge of local, state and federal laws and regulations is critical,” Pinnegar noted.
If you’re buying a home to flip it, Popov recommends you try to do as much research ahead of time on construction costs so you’re not blindsided in any way.
“[Construction] costs have been on the rise recently throughout the U.S., so it’s definitely worth having frank conversations with possible architects and contractors if you’re looking to spruce up a fixer-upper,” Popov said. “If you’re planning to rent, keep in mind the property management [cost]. You’ll want to retain your renters and ensure they have a great experience — which means making quick fixes as things break and taking care of issues or questions that arise. If you don’t have time, budget for a property manager that will take a small cut of the monthly rent in exchange for handling these tasks.”
6. How do you set the rental rate to cover bills and generate revenue?
“Both rents and home prices are changing quickly as spring seasonality meets optimism around vaccination rollout and reopening [during the coronavirus pandemic],” Popov said. “Do your due diligence with sources that track real estate trends, and keep up with new inventory to make sure [your property is] priced competitively and your investment doesn’t sit vacant.”
If you’re going the rental property route, Pinnegar said to make sure you look at your “potential expenses versus potential revenue on paper to help inform your investment” first.
“If the deal doesn’t look good on paper and you will not have positive cash flow from the very beginning, think about your risk tolerance and proceed with extreme caution,” Pinnegar flagged.
“The market plays a large role in rental rates [so] investors should first look at comparables in the specific real estate market and asset class. It’s important to look at other rents in the area and ask how your unit compares to others in the market, while also considering the age and condition of your property,” Pinnegar said. “Certain amenities – natural light, outdoor space, gyms and parking – are highly desired and could also bring greater value to your rental property, therefore increasing potential rent and revenue.”
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