The stock market seems overpriced. You don’t earn beans on bond yields these days. Gold scares you. As for savings accounts: Forget about it. The monthly interest will barely buy a cup of coffee
Where can you put that nest egg of yours to work?
For many savvy investors, the answer is residential real estate. It offers a number of ways to gain financial advantage.
Investment properties always account for a significant number of transactions and last year was no exception. Investors bought some 1.09 million homes in 2015, according to estimates from the National Association of Realtors. That represented a rise of 7% from the year before.
A combination of trends have spurred investment buying. The strengthening economy has led to an increase in household formation, which had lagged during the recession. That jump in young consumers looking to rent or buy a home has put pressure on housing supplies, according to Lawrence Yun, NAR’s chief economist.
“Steadily increasing home prices and strong rental demand appear to be giving more individual investors assurance that purchasing real estate will diversify their portfolios and generate additional income if they decide to rent out the home,” he said.
Homes selling in the lower price ranges are especially attractive for investors, according to Doug Duncan, chief economist for Fannie Mae, the government run mortgage company.
“Builders are not building new homes in that [low price] space,” he said. “The rental market is good.”
Too, investors know there is some hangover from the foreclosure crisis in many local markets. Banks repossessed nearly 30,000 homes in July, according to ATTOM Data Solutions, which has been compiling foreclosure information for a decade. These properties are often badly in need of some tender loving care and the banks usually price them low to sell quickly. Investors target these listings to search for particularly good deals.
Hold or flip?
Real estate investors run the gamut from large corporations and private equity groups to moms and pops. Many of the latter own or buy just one or two investment properties at a time. Whatever the size of the operations, investors pursue two main strategies: buy-and-hold and flipping.
Whichever one they use, Matthew Martinez, president of Beacon Hill Property Group of Miami, has a key piece of advice for those considering trying to become real estate tycoons: “Get in the game. The biggest mistake people make is doing nothing at all. They sit around and think about it, talk about it, and years go by, decades go by.”
It helps to have someone, a mentor, to help smooth over the rough patches with sound counsel and to point you to the resources you need at a price you can afford. They can show you how and where to find bargains, how to best market the property, and how to profitably manage it. The biggest factors in successful investing are how to buy right and how to control costs.
Martinez, who worked in business development for an Internet company at the time he began investing back in the early 2000s, was lucky enough to befriend a veteran real estate investor who was buying a unit in his Boston-area condominium complex. With the older man’s advice, Martinez was able to build more than $1 million in equity in just three years.
Buy where you live
Those were heady years for buying in the local market, with home values making double-digit annual gains. But profits can be made in hot markets and cold, according to Martinez. Investors, though, especially new ones, should be very careful about buying properties away from their home areas.
“Never chase opportunities in somebody else’s backyard,” he said.
It’s not just that it’s expensive to fly out to your property every time something needs your attention, it’s also much harder to know other markets as well as you know your own. To be successful, you have to be diligent about research and be on the lookout for opportunities, and that’s much easier to do in familiar territory.
And once you identify that opportunity, be prepared to act quickly and seize it. You’re not the only one looking for that chance.
Investors also have to realize that the market goes down as well as up. Many were caught up in the housing bust with properties they couldn’t sell for anywhere near what they paid for them. Transactional costs are also higher than in other investments such as stocks or bonds, so investors have to include those costs in their profit and loss calculations to figure if they are truly making a good return on their investments.
In the next post, we’ll discover what you should keep in mind as you pursue long-term gains.
