Lately I have been kicking around the idea of making some real estate investments. I'd like to get into something small on the side, both as a hobby and as a source of secondary income. I've come to the conclusion that real estate is a great way to make a little bit of money without having to put in a TON of time, and it's something that can possibly balloon into something bigger if I so choose. Problem is, I know very little about real estate: I will do the research to determine where and what to buy, how I want to do it, etc., but in terms of what to look for, the legal aspects, etc., I'm clueless. I've thought about buying a property in the city in which I currently reside, fix it up a bit while living there, and then renting/selling the property, or buying and renting right away, but just don't know the proper way to go about doing this.
To summarize... Any advice on getting into real estate would be greatly appreciated. I know some of you guys either work in the field or have significant experience, so the basics would help. Thanks fellas.
yeah, same here. i work at a fund with egregious restrictions on personal account trading, so i'm looking for a way to start investing in alternate areas. would love a primer on RE from someone who knows what they're talking about.
I own several residential units that I rent to tenants and would warn you that the biggest downside is the illiquid nature of RE investments and the frictional costs (that many people fail to acknowledge) associated with the purchase, ownership and sale of real estate.
Frictional costs include: paying your RE broker at the sale (who is generally worthless, esp. considering today's technology and MLS systems), costs associated with fixing up the place for sale, carrying costs in the event of vacancies, the headaches associated with being a landlord, taxes, etc.
Buying real estate is just like any other investment in that it is important to build in a margin of safety and risk adjust your retun projections and "stress" your cash flow projections.
Real estate was a great investment because home prices never go down...until they did. Even though I do not need the liquidity, I would prefer to have the equity (minimal now given the decline) in cash today rather than tied up in the properties because it will likely be a while before I am able to sell at a profit worth taking. In the meantime, I generally run slightly above to break even but at least I am continuing to build equity.
would be happy to answer questions based on my experience if you have specific questions. I can certainly tell you what not to do (buy at the top of the fckin market)
jbs, thanks. I'm going to ping you with a PM this evening/tomorrow AM with a few questions, as I think your experience will probably be helpful in going through this process.
jimbrown, if the questions you have aren't too personal in nature, could you post them here in the forum, instead of a PM. I think that it would be a discussion that could benefit many people if we can possibly keep it public. I'm personally interested and I would imagine there may be others that are too.
Regards
As alluded to above, investing in actual properties is a complicated and risky headache waiting to happen. If you're not going to live in the apartment you're buying, then I'd probably suggest putting some cash into a REIT as a safer and easier way to play the RE market. Let the experts handle this for you... you'll be very happy when you don't get a call from your tenants saying a pipe burst at 2:00am, when you don't have to show up for a lease closing, when you don't have to sell at a low price because you're in a rush and need liquidity, when you don't need to buy insurance and worry about liabilities, and when you don't have to pay brokers and closing fees on sales and purchases.
REITs are def the way to go for novice RE investors.
3 questions you need to ask yourself if you are thinking about investing in RE: *How much do you know about the business? *How much time/effort are you willing to spend on a project? *What are your expectations on risk v. reward?
If you dont know much about the business and dont want to spend much time or effort on a project, REITs are the way to go. But it def wont be as lucrative as working on a project on your own; the trade-off being that REITs are less risky and more liquid.
If you insist on wokring on your own project, I suggest you do a lot of research and find an experienced innvestment partner who has more experience than you. That's what I did, I basically went through an invesment broker with a good national reputation that specialized in investment sales and asked them for references for a good partner. I promised them my future business in exchange. I work with 3 other partners, all of them are pretty seasoned and we all bring complimentary skill sets to the table.
I'd also recommend investing multi-family over commercial RE and SFR. Multi-family financing is still very good.
Its been said but I will say it again, RE investing can be a huge pain in the ass; the trade-off being that it can also be very financially rewarding.
Agreed all around.
What kind of RE investments are you looking at? RE funds, RE cashflow funds, RE development funds, there are endless amounts of RE related funds. Or, are you looking more to get into the physical RE and acually buy property. If so here are a few pointers, people on this site have a leg up being in for the most part IB. RE is similar to IB as far as the modeling goes.
1 RE is not a hands off investment, it can easily eat up 20 plus hours a week dealing with problems, tennants, banks ect ect.
2 Tennants are the most important factor in RE investing, the property, location, does it have granite, ect ect doesnt mean shit. If you have a shitty tennant your life is going to be a living hell and you will hate it.
3 RE is a great investment, however go in prepared with the proper legal documents, sufficent funding to cover lapeses in rental and other things associated with renting. Know your rights as a landlord as well as tennant rights.
These are just a few things to consider, it might seem like I am trying to scare you off, but in reality I am not doing that. I am trying to let you know a little of what you are getting into. One other thing, dont go in with friends to start with. Getting outside investors might be necessary but try to do the frist one on your own. The first always has the highest chance of failure and that is not worth getting into a fight with friends or family over.
My first post about my first real estate deal.
In May of 2007 I began to work for a retired Sikorsky Aircraft executive who used his retirement funds to invest in distressed properties. I was very lucky to have met him; I was introduced to him by a member of a real estate investment club. I was an Actuarial Science major with very limited knowledge of the real estate industry.
My objective was to find distressed residential properties, discuss the investment with the team of 3, present the idea, and he would decide whether to pursue.
A month into my assignment I found a two family property that was purchased by “Einstein” for roughly 279,000 dollars in January of 2006. Even though he had less than a 600 credit score and up to that point pulling in a whopping 12.00 dollars an hour he was able to purchase the property. February of that same year, Einstein decides to fix up the property and rent it out. Unfortunately, a frozen pipe burst and the first floor and basement was damaged by water. Einstein calls his insurance company and they do not cover the damage for whatever reason. Einstein decides to stop paying the bank and abandons the property.
June of 2007, I find the property as well as Einstein and ask him if he would be interested in selling the property. He agrees to sell and is still the primary owner although his bank was in the process of foreclosing. After realizing the damage was not too bad, I get a few very high estimates for the cost to repair. Each quote I obtained was over 100k. I knew the damage was not that much, but 100k worth of rehabbing that property would make it the jewel of the neighborhood. I asked the contractors to purposefully estimate the cost of every nook and cranny so the estimate would come in high.
After getting authorization to speak on behalf of Einstein, I negotiated with his bank which happened to be located in California. I was able to get them to take a look into their depreciating asset. The bank, Fremont Investment and Loans, apparently was not in the business of fixing assets; at least not physically. So, they decided to send a local REALTOR to get a brokers price opinion on the value of the house in its current condition. Instead of performing due diligence and pay for a quality appraiser they relied on the services of a random realtor for $50 dollars. The realtor did not want to step foot in basement took a few pictures of property and sent it to the bank.
To shorten this story...Fremont agreed to a 113k net payoff. Comparable homes at the time were starting to steadily decline. The value of similar homes was around 230-240k. Contractors quoted repair for the house was 45k. We ended up selling the property to the rehabber. I ended up with a pretty penny for the deal. Aside from my weekly earnings, I was given a hefty portion of the profits. I did not work too hard or too long, if I were to break it down to 16 hour days, I worked nearly 22 of them. Now, I am furthering my education in real estate at NYU and looking for internships/employment. The guy I worked for moved to North Carolina.
I also kept a single family property that I found and it is currently being rented.
*If we did not sell the property, I would have kept the property and rented. *3000 square foot multi-family in a renters town. 3 bedrooms each floor. 1400 per month for rent each floor easily. *Einstein is a name created to protect the homeowner.
Thanks all. I have a few specific questions that I will ask (and I will do so in this thread, as requested). I've been considering buying a multi-family home near where I grew up, where home prices are ridiculously cheap and it should be fairly easy to nearly double mortgage payments each month (assuming full occupancy). As noted, I know NOTHING so this thread has been helpful already. My questions will make my RE knowledge pretty obvious, as I'll be started from square one.
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NoBama,
I really wanted to make a RE investment, but held off on it because of the items you listed.
I really wanted to buy a townhome (or 3) and rent them. then I learned: Investment RE mortgages seem to be 1% higher than typical residential Insurance is higher on investment property (because of a-hole tenants) Association costs will eat away all of your profits.
The mobile home method is very interesting. What do you typically sell the homes for? What area of the country are you working in? Any other advice would be really appreciated.
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In all seriousness, what is your expected default rate? And, how do you get someone whose largest asset is probably their gun collection to pay you when they are late? I imagine threatening them with bad credit (they live in a trailer) would not phase them much?
That is definitely true, but there aren't necessarily $2,000 mobile homes everywhere. I tried searching the mls in the southwest suburbs of Chicago and I found very few. The few I found were almost all well over $10k.
I'm not familiar with mobile homes (as you can tell), but isn't the land typically leased from the park? Does that complicate the transactions at all.
My biggest question though is - how do you know that there is demand? Even though it's relatively cheap I don't want to buy a mobile home that sits unused for 9 months.
I am seriously considering this if I can find a semi-desirable area (obviously very relative). Lucky for me my mom works at a small law firm that handles real estate transactions. I think their guidance would help me through any potential transactions.
@Nobama88: You get the general idea.
Typically, unexperienced buyers forget to model 3 big costs associated with an RE investment:
*Operating costs: taxes, insurance, maintainence, management fee, etc. *Capital expenditures: TI's, LC's, cap reserves, etc. *Vacancy factor (depends on mkt)
The real analysis comes in figuring out opex/capex, while forcasting revenue is straightforward. From there, just use Direct-Cap.
Just curious, where did you get that 42% figure?
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