By: Amber Carrillo, Carrington Real Estate Services
Everyone wants to be a Real Estate Investor. You hear it time and time again that there is no greater way to realize large returns on your investment than in Real Estate. And that saying is absolutely true! What bank can you deposit your money in and realize a return of 7, 8, 9 or even 10% year? That’s right, they don’t exist.
But, before you get started, it’s extremely important that you take a step back and set some goals. Goals?!? Absolutely! Whether you are in sales, trying to lose weight or training for the next apple pie eating contest, you have to set some goals. Realistic goals. Get out your Evernote (or notepad for the non-techies, sheesh) and make two columns; you guessed it: Pros and Cons. Think about the money you have to invest. Are these funds that you can set aside for a period of time or money that you will need in the near future.
If you want a quick return on your cash, then think about flipping. Trust me when I say this; not everyone has the stomach for it. Yes reality TV does a great job of showing you the glamorous life of flipping houses and you sometimes catch a glimpse of the disappointments, but everyone always comes out on top in the end. Wrong. When it comes to flipping, you have to be so careful with the house you choose, especially when it’s your first one. Read my lips: HAVE IT INSPECTED!! Yes, I know you hail from a long line of contractors and maybe from the Master Carpenter himself, but you don’t know everything. Unless your alias is Kal-El, you don’t have x-ray vision and you can’t see through walls, ceiling and floors. PUHLEASE, save yourself the heartache and hire an inspector!
With flipping, you can get in and get out fast and realize a great return. You need to make sure you have a good team on your side which includes honest & reliable contractors. I promise they exist and that’s not an oxymoron. And, keep in mind, it is all about location, location, location! Make sure you calculate for hidden costs that may come up and carrying costs as well if you don’t sell it immediately. In a hot market like we have in Houston where the average time spent on the market is 3.4 months coupled with a lack of inventory, your property shouldn’t sit long.
Buy and Hold
If you have the funds to invest long term and let your money sit and season, then there are a few different scenarios available. You can always buy and hold. This is where you buy the property and lease it out. Now, you will need to develop an exit strategy. I have had some investors that are well seasoned investors (just like Momma’s fried chicken) and they have ridden out the cycles that the real estate market sees. They know when to jump in and when to jump out. Look at the numbers in the area you are interested in over time. Historically, what were the values 5 years ago, 10 years ago or 20 years ago? How much have the properties in that area appreciated and what is a safe number to anticipate on my property? Where can you gather this type of data? Well, I’m glad you asked. Ask an experienced Realtor as they have the tools available to pull any information you require.
Another excellent option for those investors in it for the long haul is buying and owner financing or holding the note as we call it. Just look at the lack of financing options available today. Unless you have a credit score over 640 and enough money in reserves, not to mention a W2 paying job, you won’t be approved for financing. There are plenty of good folks out there who are self-employed and credit worthy who can’t get financed. There are also those who may not have a huge down payment and are credit worthy that can’t qualify for traditional financing. Then there are those who ride the line, who may have so-so credit, but if you run a rental verification on them, they have always paid on time and met their housing obligations. Yes, you’re taking a chance, but you take a chance every time you walk out the door. The average interest rate right now is 3.75% for traditional financing. Think about charging 6 or 7% or greater.
Let’s look at the figures here. Let’s take a $105,000 house. Say the buyer puts down $5000 as their down payment, leaving a balance of $100,000. If you charge them 6%, that’s $6,000 in interest that you will collect every year multiplied by how many years you hold that note. I don’t know about you, but $6,000 every year over 20 years is a heck of a return. $120,000!! That’s on top of the actual payment they’re giving you toward the principle! Wowza!
All in all, if you lay out your goals ahead of time, you will be better prepared. We all have to have something to work toward or otherwise, we wouldn’t work, right? Now, let’s buy some Real Estate!!
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