You’re fully funding your IRA, 401K, and/or other long-term investment accounts. You've got emergency funds in savings and maybe a little more. Maybe you’ve got a 529 started for your kids, or you play around a little bit with trading stocks. You also might already own a home which is building equity as you pay down your mortgage and home values rise.
But, is all of this enough to hit your savings, retirement, education, and “fun money” goals?
If so, go forth and vacation!!!
If not, let’s talk about diversifying by entering the seemingly scary, but not impossible to take advantage-of, world of real estate investing.
How to get started
There’s no doubt that you’ll learn a lot once you buy your first investment home. But, what’s the best way to prepare so that you can avoid some common stumbling blocks? Here are some handy steps to get you started:
Understanding the Investment
Here’s a tough truth about the Portland area market for prospective investors: If you are planning on financing the home, especially if your down payment is 30% or less, then more than likely what you’re going to be looking for is a property that you’ll break even on.
Breaking even means that the monthly income (rent) matches the monthly expenses. Expenses can include: PITI (principal, interest, taxes, and insurance), maintenance, and property management (I’d suggest managing it yourself until you develop a larger portfolio).
If you’ve heard that Portland rents are “skyrocketing” then this might surprise you. The problem is that as quickly as rents have been increasing, home values have outpaced them.
But, that’s okay. No investor, particularly at the beginning, makes much money from collecting monthly rent on a few properties. Your investment is based on market appreciation and home equity gained as you pay down the mortgage balance.
As you build your portfolio of investment properties, cash flow will turn positive. Over time and with enough properties, your cash flow will enable you to make a solid income!
The beauty of investing in real estate versus purchasing stocks
Let’s assume that you have $80,000 to spend. You buy $80,000 in stocks. Let’s say that in a year’s time, those stocks appreciate 10%. You’ve made $8,000 on your investment.
Not a bad return at all! But, of course, those stocks could have easily lost 10% or even more. Predicting the stock market isn’t easy and stocks can be very volatile.
So, instead of buying stocks with your $80,000, you buy a $400,000 home. You use your cash for the down payment and finance the other $320,000.
Let’s say that in a year’s time, that home appreciates 10% and is now worth $440,000. You’ve now made $40,000 on your investment. That’s a 50% return, even if you’re just breaking even on rent vs expenses!
With housing, your return is based on the full value of the home, not just on the money you put down. This is why it’s such an attractive investment.
Of course, home values can drop, too (as many investors learned in 2008). It’s important to understand the risks involved with any type of investing and be familiar with the local market so that you feel confident in your decisions.
The ideal way to invest in property is to purchase with all-cash. But, since most people don’t have a few hundred thousand dollars or more in liquid funds readily available, you’ll need to figure out your financing BEFORE you find a home to make an offer on.
While finding the best possible rate is important, it’s not the only factor in choosing a lender. The Portland area real estate market is SO hot right now, competition for property with investment potential is very high. You’ll need both a lender AND a Realtor that can be readily available any day of the week, and just about any time of day.
The first step is to be pre-approved. Many people want to wait to do this until after they find a property they are interested in. If you wait that long, you will likely miss out on that opportunity as you scramble to get your paperwork together for your lender.
I have seen this happen again and again and I can tell you that it is devastating for clients to miss out on a home with great investment potential just because the pre-approval wasn’t ready.
I rarely doubt my client’s ability to obtain financing. I ask clients to get this out of the way so that all I need from the lender to be able to submit your offer is an updated pre-approval letter (which should take a good lender only a few minutes to provide me if the pre-approval process is complete).
Shop for rates, but also shop for a solid lender with experience and good communication skills. Consider going with a local lender, as that will often strengthen your offer. Sellers are well aware of how difficult and painful the underwriting process can be with large banks and national lenders. All other things being equal, they are more likely to accept an offer that includes a pre-approval letter from a local lender.
Need a lender recommendation? Contact me!
Research the market
Do you live in the Portland area? If so, then you might want to start with focusing on the areas you are most familiar with. This will give you a leg up on out-of-town investors and will be easier to manage.
But, whether or not you live outside the Portland metro, take the time to do some research on your areas of interest. Talk to your Realtor, friends, and other social media contacts to get the scoop on what areas are particularly hot. Drive around and take note of the neighborhoods that are most walkable.
Think about where the big employers are located. There is probably a lot of opportunity nearby for investors. (For instance, on the west side of Portland, Nike, Intel, Tektronix, Genentech, and other big employers are all pretty close together.)
Check out sites like www.greatschools.org to search specific areas or addresses. Homes in better school districts tend to command higher rents. (Sites like this that grade schools are a bit controversial, but it’s a start if you aren’t very familiar with the schools around Portland.)
Go to websites like Zillow, Craigslist, Rent-o-meter, and Zilpy to check out what is currently being listed for rent in your areas of interest. Make a spreadsheet with columns for home type (condos, attached, detached), square footages, listed rent amounts, and how many days they have been listed. Use a different tab for different areas of town. Update it regularly so you catch listings that rent quickly. This data can be invaluable!
Also, try to pay attention to areas that DON’T have many rental listings. That could mean that there is a shortage of rentals and therefore could have great opportunity for an investor. (Or it could mean that home prices are such that rental properties don’t make sense.)
Beginning Your Search
Redfin, Zillow, and other public search sites are fine when you are casually looking and learning about different areas. But, when you’re ready to get serious, contact your Realtor and get an active search started.
Your Realtor can setup an automated search directly with the local MLS (multiple listing service). Also, a good Realtor pays attention to coming soon and pocket listings and keeps their ear to the ground for other good opportunities.
If you have a very specific area of interest and the market is competitive, your Realtor may be able to put together a marketing campaign to shake loose opportunities with people willing to sell off-market.
As you narrow down your search and begin looking at listings, you can contact a few area property management companies and ask them for rent estimates for specific properties. Once your rent portfolio expands, you may need a property management company, so this is a good first step to find out which companies are most responsive and helpful. Do not be surprised if their rent estimates vary widely, though!
When you and your Realtor start to view properties that look like they have investment potential, you need to think about more than just how much it might rent for. Rentability is just as important because every month it is vacant cuts sharply into your investment return.
Here are some things to pay close attention to:
- How close is the home to being “rent-ready”?
- What is the quality of the community? Do the homes/buildings look well maintained?
- What is the parking situation like? Is there any street parking or visitor parking?
- Does the layout of the home have mass appeal? (open concept living area, decent sized open kitchen, master suite, a half or full bath on main floor, an extra bathroom for the secondary bedrooms, or “room-mate” plan with two master suites, wood or wood-like floors in living area, etc.)
- Are the appliances somewhat updated?
- Does the water heater, furnace, A/C unit, etc. look old or newer?
- How close is it to mass transit (Max line, bus lines, etc.)
- If it’s a condo and it’s not on the ground floor, how many flights of stairs are there to climb?
- Is there an HOA (Home Owner's Association), CC&Rs (conditions, covenants, and restrictions), or other restrictive bylaws/community rules?
- Are there monthly/quarterly/yearly HOA fees, or other fees that will need to be factored into the cost?
- Are there community amenities?
- Is the neighborhood walkable to local businesses?
- Would you rent it?
The mistake many new investors make is skipping out on inspections. Their thought process is that since it’s not their personal home, a general inspection, sewer scope, and other specialized inspections aren’t necessary.
This is particularly dangerous thinking for an investment property. The general inspection is important for at least 2 reasons:
- It can help you keep from making a costly mistake by identifying major problems with the house.
- It is the best possible tool for negotiating while under contract.
Based on issues identified in the general home inspection, you can then bring in specialized inspectors/contractors to verify the issue and provide estimates to correct the problems. Depending on the situation, you may then want to submit a repair addendum to the seller or negotiate a reduction in the sales price. (Or, it may be that the best option is to walk away and find a better investment opportunity.)
Learn to be a Landlord
There’s a lot to learn about being a landlord! And many of the things you’ll need to know are specific to the city, county, and state that the rental home is located in. It’s a good idea to be familiar with the resources.
Here are a few to get you started:
Healthy Homes Coalition of Multnomah County (and the Rent Right Guidebook for Landlords and Tenants)
Cozy - Modern Property Management (Rent Collection, Screening Tools, Renter Applications, etc.)
Let's Chat About Becoming an Investor!