Real Estate Investing 101

A. Analyze

• Do research to figure out what type of property you want to buy and what price you need to buy it for to have positive cash flow.

• Increase your credit score by paying down debt

• Increase your cash reserves

• Find Financing options to make your purchase

• Figure out multiple exit strategies in case you buy a property and things don't work out the way you want: sell to retail buyer, sell to investor, rent the whole house, rent by room, AirBnB, live in the property, etc.

• Find the best real estate deals so that you are buying below 80% of the actual value of the home, or more if you need to make repairs and renovations.

B. Buy

• Buy the property

• Pay for any repairs or renovations

• Rent out out your property for more than the cost of expenses, as determined by your analysis

C. Cultivate

• Build your relationships with professional: contractors, handymen, realtors, wholesalers, listing agents, home inspectors, appraisers, insurance agents, lenders, etc.

• Have at least 6 months of monthly expenses in your Savings to show as Cash Reserves to your Lender. This month should be in your bank account at least 3 months before you decide to buy. (Your bank will frown upon large sums of money being deposited into your account within the 1-2 months directly before you purchase your home. You will have to explain these deposits, and they can choose whether or not they like your explanation enough to continue with allowing you to qualify for the mortgage).

• Increase your Credit Score

  • • Pay bills on time or early every month

    • If able pay credit card bill in full every month

    • Cut up consumer credit cards that you don't need. Don't close the account. Just cut it up so that you can no longer use it.

    • Keeping the credit line open (with low or no balance) can help your credit score, because 3 of your credit score metrics are:

      • • Longest time a credit line is open

        • Amount owed vs. Available credit (For example, it looks bad to have $9,000 spent on a $10,000 credit line. It looks good to only have $300 spent or even $0 on a $10,000 credit line. It shows that you still have that $10,000 available to you in an emergency situation.)

        • Amount of credit you have access to

          • • It looks better for you to have $100,000 in available credit versus $1,000 in available credit.

            • For example, even if you don't use those credit cards (which you shouldn't unless you have cash to pay it off each month), having 5 credit cards with a total of $100,000 in available credit, it better than having 1 credit card with only $10,000 limit. The key is to not use the credit cards. Pay them off, and then keep the lines open, solely to increase your credit history. Maybe make a small purchase on it 1x a year, and pay it off immediately.

• Decrease your Debt

  • • Stop buying stuff you don't need.

    • Use any additional income to 1st save 6-12 months of living expenses, and then to aggressively pay of high interest rate date, and then eventually all consumer debt.

    • Pay consumer debt (like credit card debt, furniture financing, and car loans) before paying down your tuition and primary home mortgage

• Have Stable Income (at least 2 years of W-2 income without employment gaps and preferably at the same job; more years may be required for non-W-2 income. Talk to your lender)

• Save 3.5% to 20% of the purchase price for the Down payment

• Save around 6% to go towards closing costs

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Single Family Investing

• Pros

  • Can sell quickly to the average home buyer

  • Easier to sell in a case where you really need to get money (but still may take 1-3 months to close depending on who you sell it to).

  • Can quickly appreciate in value if a similar home in the area sells for more

  • More manageable repairs and expenses

  • Maybe able to find longer term tenants who want to live in a house for years to come

  • Property insurance is cheaper

  • Lower Interest rates and Lower Down payment options

  • Multiple Exit Strategies: Rent out whole house, Rent by the Room, Sell House for premium to retail home buyer, Sell house at a discount to investor so you don't have to do any repairs yourself, pay off house in full and become use Seller financing to continue collecting monthly income without having to deal with repairs or tenants

• Cons

  • Can quickly depreciate in value if a similar home in the area sells for less.

  • Takes a long time to acquire X number of doors in comparison to just buying multi-families

  • More headache since each repair costs will take a greater portion of your monthly rental income

Multifamily Investing

• Pros

  • Can increase value of the property by increasing rents

  • More monthly income because more cash-flowing units

  • Investing in upgrades can allow you to charge more in rent per unit and seriously increase cash flow

  • The cost per door is typically less than if you were to buy the same amount of single family rentals

  • You can get to your goal of owning X number of doors by a certain time

  • Easier to do maintenance because you have more units in a centralized place which is attractive when choosing to work with contractors and handypersons

  • Cheaper repair costs per unit because you are able to negotiate repairs in bulk

• Cons

  • Takes longer to sell since the cost is higher and the pool of buyers is limited to investors

  • Expensive repairs because of the size of the property and the number of units that have things to be fixed on a regular basis.

  • More tenant turnover as tenants find new apartments to move into or as they expand their families and want to live in a home

  • More expensive everything (ex. insurance, down payment)

  • Higher interest rates

  • Higher down payment percentage typically required

• • • • 1031 exchange: Selling a property and using those capital gains (that you would normally pay a lot of taxes on) to purchase a new similar property to delay paying taxes on those capital gains.

      • Asset: the entire property of a person/association/corporation/estate less any debts owed

      • Cash Flow: Gross income minus expenses = Net income; Rental Income minus house payments (mortgage principal, mortgage interest, property taxes, insurance, HOA fees), minus property management expenses, minus repair costs , minus vacancy rate = Cash Flow

      • Duplex: having 2 units in 1 property

      • Holding Costs: the costs associated with owning a piece of real estate during the time that the property is not being rented out. E.g. Mortgage payments, insurance, property taxes, utilities, security system, etc.

      • House Hack: when you live in 1 unit of a property while renting out the other unit(s) and using that additional rental income towards your overall monthly Property payments. Example: Renting Rooms in your house. 2nd Example: Living in a duplex and renting out one side while living in the over side. Using the rental income from the rented side to cover all or a portion of your housing expenses. House hacking is ideal because loans with the lowest down payment options requires you to live in the property for at least 1 year. Therefore, you can take advantage of the lower down payment option to acquire the home, and get accustomed to what it takes to be a landlord.

      • Income Producing Assets: anything that by owning it brings you in additional income. Examples: rental property, stocks that pay dividends, REITs, Profitable business or business franchise, royalties.

      • Liability: anything that takes money of your pocket without bringing the same or more money back in. Examples: cars, vacations, clothes, eating out, subscriptions, etc.

      • Multi-Unit: having multiple units in 1 property

      • Pre-Foreclosure: when a property owner is late on their mortgage payments and the bank is deciding whether to foreclosure on the property and take the property from the owner since they have defaulted on their loan

      • Quad: having 4 units in 1 property. Some states allow you to purchase up to 4 units with a normal residential loan. The process is the same as when you are buying a single family house.

      • REIT: Real Estate Investment Trust - a company that sells shares that represent a percentage of ownership in a portfolio of properties managed by the money

      • SFH Single Family House: can refer to a free standing property used for residential purposes. Can also refer to any non-commercial property used for residential purposes.

      • Triplex: having 3 units in 1 property

      • Value Add Opportunity: When you make repairs to a property in a way that increases the overall value of the property. When you identify ways to increase the rents in a property that increases the overall cash flow or value of the property.

9 Ways to Identify an Up and Coming Neighborhood

1. Neighborhood Data Forecasts Positive Future Trends.

2. Rapidly Declining Days on Market.

3. Influx of Artists.

4. Historic Architecture.

5. Retailers Checking In.

6. Declining Crime Rate.

7. Proximity to Other Hot Neighborhoods.

8. Accessible Public Transport Systems.

9. Real Estate Agents may know what neighborhoods are trending based on where their buyers are looking to buy next.

Resource Link: https://www.mashvisor.com/blog/up-and-coming-neighborhoods-rei/

Link to the LQ Property Analyzer.

Information you need to know to analyze properties:

• Mortgage Information

  • Purchase Price

  • Down Payment Percentage

  • Purchase Price - Down payment = Loan Amount

  • Interest rate

  • Mortgage Length (years)

  • Closing Cost (I typically estimate 6% of the purchase price)

  • Annual Property Tax

  • Annual Property Insurance

• Monthly Expenses

  • Principal, Interest, Taxes, Insurance

  • Management Fees

  • Outdoor Maintenance/Lawncare

  • Utilities and Home Warranty

  • HOA/COA

  • CapEx

• Up Front Expenses

  • Vacancy Rate

  • Renovations

  • Advertising/Listings Fees

• Income

  • Estimated Monthly Rental Income

House Hack (Low Down Payment): single, duplex, Triplex, Quadruplex

Live-In Flip

Cash

Hard Money

Traditional Investing - Traditional Lender

Live in for 1 year and then more out and Rent it out

Syndication

Private Money

BRRR

Buy Commercial

Commercial Residential

Short Term Rental

Vacation Rental