With the recent turmoil in the stock markets, perhaps you’re ready to re-invest some of your reserves into residential real estate and income producing assets. Historically, the stock market and the housing market have out performed fixed income assets such as bonds and t-bills. Real estate has provided smoother returns than the stock market going back to WW2. Although many firms have indicated a bullish outlook for stocks in 2018, predictions are cloudier in the following years. With interest rates on the rise, investors may consider this an opportunity to “lock-in” some profits and transfer them to real, income producing assets. There is not a direct correlation between the stock market and real estate; however, when the stock market does well, investors have more confidence and discretionary cash. This leads to more investment into real estate.
There are numerous parameters to consider before you get into the car with your realtor and begin the search. Items to consider will include how much cash do you want to put into the transaction, the location, the type of property to invest in, the condition of the property, is this a property you want to “flip” or is it a long-term hold and do you want to manage the investment or have a property manager. This is a very broad overview of the considerations you will need to make before you go shopping for your income producing property.
When you think about your cash investment, you will need to determine whether you want to pay cash for the entire property or will you want to finance part of the transaction. In financing the transaction, you can expect to pay a bit more in interest rates, than you would your primary residence. You can anticipate a down payment of 20%-30% which calculates to financing 70%-80% of the purchase price. One lender recently quoted a 5.125-5.250% interest rate with the buyer paying 1 point and having A+ credit for a 30-year term. There are some lenders who will offer terms of a 15 year note with 4.375-4.50% interest rate. If you have a private banker or wealth manager, they would possibly have a lower interest rate.
There are many kinds of residential real estate. You have the single family, detached house at the top of the heap. This investment would give you one tenant to deal with at a time. The next type of building would be a duplex, tri-plex or quadraplex. You would rarely have the entire property vacant, but you would have more tenants to oversee. The next step up would be to consider an apartment building. Anything with over 4 units is considered an apartment building. Townhomes and condominiums referred to as “single family attached,” can also be purchased as income producing assets.
There are usually added homeowner association fees and from time to time there could be HOA Assessments for improvements to the property. Depending on the number of tenants for your property, you need to think about the property management. There are many property managers and their charges depend on the services they provide. They can list the property to find a tenant, run background and credit checks, collect rental payments, pay HOA fees and they can be the point person for any repairs or emergencies with the tenants. Some will charge an ongoing monthly fee, some a percentage of a 12-month lease and others have fee schedules.
The condition of the property is something you also will want to consider. Do you want new construction, a recently updated property or do you want to purchase a property and renovate the asset? You will want to be precise in your cost estimates if you want to renovate or upgrade the condition of your investment. Cost overruns can affect your budget and projections on your profits.
When thinking about the condition of the purchase, it would be prudent to figure out whether you want to have a long-term, investment or want to “flip” a property. To reap your rewards on the sale of the asset’s improved condition is a possibility. Many buyers in the marketplace do not want to take the time and spend the money to renovate a property. One of the key components of a successful “flip” is to make a good value in your purchase and know what it will cost to make your improvements. A long-term investment can “appreciate in value” and your tenants will pay you back for your investment. There are many cities with a large housing appreciation to enhance the value of your property.
With all housing, you want to keep at the forefront of your thinking, the wise consideration of “location, location, location!” Certain areas of cities have premier, expensive housing. Cities with larger populations have prime areas that are seeing gentrification. You can purchase properties in areas being renovated and appreciating at the same time. Location is a very important part of the equation in your investments.
Once you consider the above factors in your investment strategy, it will be time to meet with a realtor to start your search. You will want to have your financing or cash in hand and be ready enjoy your search for your new income producing assets.