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Real Estate Investing Options 101

 

Real Estate investing is said to be one of the most secure investments available, but often it’s overwhelming to those who don’t know their options. Many people know that the stock market can be advantageous (big risks = big rewards, right?!), but real estate investments offer advantages the stock market cannot, like tax benefits, diversification, and leverage.

While talking to colleagues in the industry who don’t just sell real estate, but invest in it as well, they’ve heard it all! Some success stories and some horror stories. The Great Recession definitely had many people scared to dip their toes back in the real estate pool, but those who stuck it out long term lived to tell the tale of how they now have income or have recuperated the losses some weren’t lucky enough to avoid.

 

Flips – Not Your Average HGTV Program

Can you turn on your TV and not be able to find a house flipping show at any given time? It seems like everyone is ready to buy an outdated or slightly damaged house, fix it up with a reasonable budget (and a whole lot of creativity) and sell it for a sweet profit. Even experienced flippers from Virginia Beach had a shot on HGTV! Although it seems Chesapeake Fix didn’t get picked up.

The top three markets for home flipping in 2018 reported by FortuneBuilders.com were:

  1. El Paso, Texas
  2. Sioux Falls, South Dakota
  3. Fort Wayne Indiana

What they DON’T tell you is that flipping can be hard without the right connections and service providers in place. When everyone is trying to flip houses, less people can do it profitably.

The more people bidding on a home, the higher the price which often lowers the profit. Many inexperienced home flippers will over value a property and often not have enough funds to finish the home and/or make very little profit on their flip.

 

Buy & Holds – Rental Market Money Makers

Owning rental properties is another great way to invest or make income while being as hands-on or hands-off as you’d like. The hardest part is choosing the property and the location. Some people choose a location that they are familiar with, some buy in areas with high rent and appreciation potential. The high military population in the Hampton Roads area provides good tenant traffic and steady turnover for maintenance and potential rent increases.

If it is move-in ready, you can start to rent it out once your purchase is finalized. You can also choose to get a property manager to help however, this will reduce your overall cash flow profit. You are still responsible for the common costs of home ownership regardless how much rent you receive though. Maintenance and taxes are ongoing costs. When you decide to sell you get the advantage of long-term capital gains tax treatment, as long as you’ve owned the property for more than 2 years, saving you anywhere from 0%, 15%, or 20% on any appreciation.

According to RentCafe.com, current rents in the Hampton Roads area have risen between a 1 – 3% year over year change, while Richmond Virginia has about a 5% increase y.o.y.

The potential amount of money you make from a rental varies with how much rent you can change and the appreciation of the property. Hot markets like San Francisco suffer because rents minimally or are less than buyer expenses, but appreciation is quick and part of the long-term strategy. Places like Virginia where the markets are much steadier and more consistent with the national averages can steadily increase rent with yearly inflation and wage increase but have a much slower property appreciation.

 

A World of Opportunity

No one said you had to purchase where you live though. Think outside the Virginian box! Maybe where you grew up, have connections, or perhaps if you’re savvy and following trends, purchase in a hot U.S. market! When you calculate the 5 to 10-year return in other areas, the numbers can beat the stock market time and again, sometimes more than 3x compared to stocks!

**Lease Options should also be mentioned. This is an opportunity to have a long-term tenant who essentially wants to buy the home eventually. Price, timeline and deposit are decided, and a contract is signed. This keeps the tenant more accountable for the property since they are planning to buy it, but also  if they decide not to, it helps you reach past the two year point to get the long term capital gains, but you would have to find a new tenant.

 

Private Lending – Mr. & Mrs. Money Bags

All joking aside, this is the most “set it and forget it” type of lending (investment), but there’s a lot of “what if” situations to consider. Someone wants $20k, you give them $20k in exchange for a banknote and mortgage on their home and POOF, you’re a private lender! There is A LOT more that goes into private lending because the profit can be great (think 10% on any loan – that’s better than the historic average of 7% returns through the stock market!), but also it takes a lot of vetting, trust and law abiding.

Check out more on Investopedia if you are interested! https://www.investopedia.com/terms/l/loan-note.asp

 

Real Estate Paper – Non-Performing Notes

That just sounds bad, doesn’t it? Non-performing? No one wants to see those words, but for investors, this could mean opportunity. Because a note is only an agreement on paper – it can be sold to third parties (therefore freeing up the initial lender to more on to the next opportunity). Usually they can be found at discounted costs, let’s say 10%. Now the next purchaser is potentially about to make even more profit through the borrower’s payments.

But what if they stop paying? OH NO! The short version is if you’re willing to take a chance, you could potentially buy a note at a VERY discounted cost and create a new agreement for the borrower to restart payments. The borrow wins because their payments may lessen because of the decreased value of the note through the trade(s) and you win when they start to pay again! Want to dive in deeper with notes? Check out this helpful article on USNews.com

 

Show Me the Money

Having a home that has already appreciated can be very helpful when deciding to continue to invest. A Home Equity Line of Credit (HELOC) can be taken out to finance other purchases and keep your cash liquid. With interest rates still at historical lows, this can be a cheap and easy source of funding.

IRA’s can also be a source for investments beyond the stock market! Most people don’t even know that self-directed IRA’s are able to be invested it in real estate. You can pay a professional to set one up for you in as little as one day. According to NerdWallet.com, the money will be available to buy anything of value, including real estate, non-traded business and even a horse farm (Chesapeake, we’re coming for you!). There are some extra rules to follow, but the profits from rent or appreciation get tax deferment or in the case of a Roth IRA, no taxes.

 

The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

 

 

Resources:

https://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/02/real-estate-notes-a-smart-investment-alternative

https://pilotonline.com/entertainment/tv/article_511f6620-ed9f-11e8-9b00-cf15dcc0b208.html

https://chesapeakefix.com/

https://www.nerdwallet.com/blog/investing/self-directed-ira-right/

 

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