Despite a challenging economic outlook for some industries, one sector is gaining viability - real estate. In the 2016 Emerging Trends in Real Estate report released by the Urban Land Institute earlier this year, things like “18-hour cities” and the migration of parents of millennials from urban areas to start over in suburban area are signals that real estate as an industry will continue to gain strength throughout 2016.
Trends like these illustrate that real estate can be a smart place to make an investment and grow your wealth over time. There are two main areas you can focus on 1) fix-and-flip for a profit or 2) buy-and-hold and get cash flow via rental revenue.
When markets are experiencing a shortage of housing, homes that have been "flipped" tend to sell quickly and for strong sales prices. The market for homes in the $350,000 and under range in the Phoenix Valley continues to be hot. And, if you are thinking of a buy-and-hold scenario, the Phoenix/Scottsdale market has very strong demand for rental properties across all age groups.
But with the positives come the drawbacks. Because the trends are favorable, the real estate market for these homes is highly competitive.
If you would like to get started in the real estate investing arena, it is critical to educate yourself and be strategic in where you look for investment opportunities and who you partner with to assist you locate these homes.
Read on for our beginner’s guide to real estate investing...
Assemble your real estate team before you buy
Building a team with strong relationships will allow you to make serious, informed offers that will result in seller acceptances.
Here are some team members you will most likely want to have in place:
● A mortgage broker or banker, who can help you get the financing for your deal
● A real estate attorney to protect you by reviewing and revising contracts
● An appraiser who can help you get a correct appraisal for your potential property
● An accountant who is well versed in real estate investments
● A good contractor, for repairs whether you’re rehabbing a home or buying rental property
How to find rehab or wholesale deals
As mentioned above, you can buy properties to fix up and resell (flip) or you can buy and hold properties that you can then rent out for monthly cash flow.
The advantage of flipping properties is that you can end up with a good return on investment (ROI) in the short term. Let's say you purchase a property for $100,000 and put $50,000 into repairs. Once the home has been updated and rehabbed, the new property value comes in at $200,000. If you sell it for that amount, you have just made a $50,000 profit.
However, the above example is an incredibly simplified version of how ROI works. There are many other factors that you need to add to the mix to make sure the numbers work in your favor —such as not overpaying initially when you buy the properties or underestimating the costs of renovations or holding costs.
Additional Costs: In order to successfully flip properties, you will need to take the time to identify fixer uppers that appear to be under market value. And these opportunities may be more difficult to find in a hot market with rising property prices. Beyond the actual purchase price, you will also need to factor in fixed purchase costs for inspections, title and escrow and lender fees.
Holding Costs: Holding costs are another component. During the process of upgrading the property, you will need to carry mortgage payments, property taxes, utilities and insurance. Plus, your budget will need to include funds for making repairs, whether you are doing them yourself or hiring contractors.
Once you know where to locate and how to identify rehab opportunities, you can take the proceeds from a previous flip and roll them into the purchase and rehab of another property. This new property could be larger in a more desirable neighborhood, or upgraded with higher-end finishes, and therefore sold for more cash!
Working with the right real estate professionals will help you identify which neighborhoods to consider and help you determine where you should focus your search. We can help you find the fixer-uppers that may be under market value. Also, as Realtors, we will have access to many properties that may not be publicly available.
Finding buy-and-hold rental properties
The second scenario is a longer-term play. In this case, you purchase a buy-and-hold rental property with the intent of renting it out to tenants. If you find the right long-term, buy-and-hold rental property, you will be able to bring in a consistent cash flow each month, which can be a great source of supplemental income.
The rental market in the Phoenix Valley is very strong right now with lots of demand. Here is a May 2016 rental report from ARMLS. As of last month, the average lease price was $1,505 and the median lease price was $1,340. Rental units stayed on the market for an average of 25 days.
In the case of a rental, you will need to carefully review the operating expenses on the property and compare them to market rental rates to see if you will make or lose money monthly.
Here is an example:
- You purchase a duplex and your down payment and closing costs came to $20,000.
- Each of the two units can be rented for $600 per month.
- Assuming both units are rented, you will receive $1,200 in month in rental income.
- You tally all of your expenses for the duplex including mortgage payments, taxes, insurance, utilities, management fees, as well as some cash put aside each month to cover capital expenditures and routine repairs.
- You calculate that these expenses add up to $1,100 per month.
- Now, by subtracting your expenses from your income, you will end up with a positive cash flow of $100 per month.
Again, this is a very simplified example, and it doesn’t cover all of the expenses that can come up such as emergency roof repairs, HVAC system failures, broken windows that need replacing, and other unexpected expenses can eat away at your profits. Or, one or both of your units could be vacant for a month or more or you could have a tenant who fails to pay their monthly rent. However, the more you can anticipate problems before they happen, the easier it will be for you to recover from these setbacks!
Now that you have found and invested in your rental property, you will need to decide how you want it managed from month-to-month.
Finding the right property manager
Do you plan to manage your own property or do you intend to hire a manager? Property management can become a full-time job, especially as the number of rental units you own increases. As a property manager, you’ll have to deal not only with maintenance, repairs and tenant issues, but also with insurance, fair housing regulations, building code compliance and more. If you’re not an expert in these areas, managing your own properties may not be worth your time and effort.
By hiring a professional manager, you can save yourself from headaches over the long term. While you’ll have to factor in the cost of property management as a fixed expense, your property manager will handle taking care of routine repairs, tenant issues, property upkeep and making sure you property is close to 100% occupancy.
Your real estate professional can refer you to reputable property management companies to help you take care of your investment.
Where should I start investing in local real estate?
To start, identify and begin working with a knowledgeable real estate professional who knows about the different neighborhoods and where the best opportunities may be found.
We can help you locate the properties that will fit into your budget and your overall goals. Whether you are looking for rehab opportunities or rental income properties, we can guide you to the best property to suit your needs.
Contact us learn more about investment properties in our area.
Disclaimer: This is a basic overview of real estate investing in the Phoenix/Scottsdale market. For specific questions, please consult your team of professionals, including your real estate agent, CPA, lender, title company, attorney, contractor and so on.