The following article is a summary from the book, “Realtor for Life,” written by Duane Duggan.
When you’re thinking about investing in real estate, have a goal and a plan. It can be as simple as “buy one house per year.” Make that plan, then get out there and work that plan!
1. Buy houses or condos for appreciation
Buying a small house or a condo is a great way to get your real estate portfolio started. The problem most people have is taking that first step to get going.
2. Buy multi-units for cash flow
After you get started with the first investment, the second one gets easier. As you start to compare cash flow numbers on single family houses to multi-units, you will find multi-units return more cash flow for every dollar invested.
3. Buy real estate now and then wait
Over time, real estate has gone up in value, but there are cycles of boom and bust. If you wait for real estate to go down before investing, you’ll probably never make that investment in the first place. Instead you’ll be looking back with perfect hindsight saying, “I could have bought it for ‘that price’!” Make the investment now, then wait.
4. Never say never! Unless
Again, with perfect hind sight five years down the road, you may look back and say, “I shouldn’t have sold that for ‘that price’!” However, to build a portfolio you might actually sell and do what is called a 1031 Exchange. The 1031 Exchange provision allows you to trade up while deferring the payment of capital gain taxes.
5. Sell with purpose
Sometimes it might actually make sense to sell a property, pay the tax, and buy another. The reason might be that you get a higher depreciable basis to shelter current income. Be sure to get expert tax advice in making these decisions.
6. Assemble your investment team
Teaming up with an active REALTOR is key to helping you find, evaluate, and purchase properties.
1-4 Unit Lender
If you want to compete in this hot market, you need to have your financing arranged in advance. Building a relationship with a lender is paramount in being able to act quickly when necessary.
5+ Unit Lender
If you make the jump to multi-unit properties, you will find you need a lender that specializes in that at the time of purchase. The source of funds is entirely different than purchasing a single-family home or up to four units so get the right lender.
Hard Money Lender
A hard money lender is a source of funds that can be available on very short notice. An investor with a hard money lender resource can often compete with quick cash offers.
All of your purchases should be evaluated by your trusted tax advisor to determine any tax consequences or benefits.
You should discuss with an attorney how best to hold title given your personal situation. As you build your portfolio, making informed decisions can protect your investment.
Having a relationship with an insurance agent helps you evaluate costs quickly when you are analyzing a property. Insurance needs to change as you grow your portfolio. Insurance changes for the 5+ multi-unit properties.
Having a property manager lined up in advance helps you to evaluate the expenses of running a property and helps you keep the property running in top form.
As your portfolio gains equity, you will want to accelerate the growth by doing 1031 Exchanges to defer taxes. Build a relationship with an exchange company so you can learn how the process works and know what the fees are.
Self-Directed IRA Company
An untapped resource are the retirement plan funds sitting in many investor’s accounts.
It has been okay to invest in real estate using a self-directed retirement account since 1978. Not many people know that. Learning the details of how to do that can accelerate the growth of your retirement funds.
Tenant in Common (TIC) Company
A Tenant-in-Common Investment is a group of up to 35 owners that own a piece of real estate together. A TIC investment is for someone who does not want to deal with any of the details of managing and owning a property. The downside is that you give up control over when to buy and sell, or have any say in how the property is run.
Having a relationship with a reputable title company can help with the speed of a transaction. A strong title company can also help with solving any title problems as the come up.
7. Hire a manager
Most of America won’t invest in real estate to secure their financial future because of the “hassle” of dealing with the management of the property. A professional manager can take the sting out of dealing with property management issues. Hiring a professional property manager with your first property will keep you enthusiastic about owning real estate.
8. Educate yourself
In a hot market, investors have to act quickly and make decisions quick. Knowing the market and having your real estate team assembled allows you to make rapid, informed decisions.
Leverage is the concept of using other people’s money (OPM). It is usually the bank, but it can be private lending sources, too. Starting out, you are usually more highly leveraged as you are putting the least amount down to make your purchase. Down payment requirements vary for owner-occupied purchases and investor purchases. Your lender can help you decide what type of financing programs work for you. A great example is buying a four-unit using FHA financing with only 3.5% down as long as you live in one of the units. What a fantastic way to get started owning real estate without a 25% down payment.
10. Do it
Some people look for the “perfect” investment for so long they never end up doing anything. Even if it isn’t the perfect investment, like the ones showcased on late night TV, investing in real estate will likely shape your financial future.
About Duane Duggan: Duane Duggan has been a Realtor® for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: the Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, REALTOR® for Life. Also see his video podcasts about real estate topics on RE/MAX of Boulder’s YouTube channel.
For questions, email Duane at DuaneDuggan@BoulderCo.com or call 303-441-5611