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Real Estate Investors: Top 6 Questions

From our experience with investors, most have two primary investment strategies: fix & flip and buy & hold. Generally, the purchasing goals for fix &flip investors are single family residences (SFRs) and small multi-families (up to 4 units). For some of our experienced investors who purchase multi-families (5+ units) and other commercial property types, generally, their goal is to buy and hold for positive cash flow. Whether you’re an experienced or novice investor, I’m sure you have questions about investing that will help you grow your portfolio. Here are the top 6 questions investors ask.

1.    What is the best investing strategy for me?

After making the decision to seriously pursue real estate investing (part or full time), the first step you must take is to decide what strategy to focus on. There are three basic strategies investors can choose to focus on: wholesaling, fixing and flipping, and renting. Each has its own benefits and disadvantages. The strategy you choose is ultimately contingent upon your portfolio financial goals and preferences.

To determine your best strategy think about how real estate fits in with your lifestyle goals. Here’s an example.

For those looking to make cash fast, wholesaling may be your ideal strategy. As a wholesaler, you make an offer on a property. The seller accepts the offer and you enter into a binding agreement. Before the sale date, you flip the contract to another investor. You can close these deals in a few days. You may earn a few thousand dollars by making the deal happen, but you need to continue wholesaling to keep making money. For those looking for a large one-time payout, fixing and flipping is a good choice if you don’t want to become a landlord. This strategy may make more sense if you’re hitting your profit margin target. However, if building long-term wealth is your ultimate objective, investing in rental properties should be your focus. You can get ongoing, residual cash flow that continues for years.

2.    What wealth-building principles should I think about in real estate investing?

The key to success in building wealth in real estate transcends whether you invest in small or large buildings. Your principles should be part of your strategy, and, all starts with knowing what your end buyer will want to purchase. Consider these principles to assist you:

a.   Make yourself an expert in understanding the demographics and statistics in the markets you have chosen. Study the buying habits of buyers in those markets. What types of properties are they looking for?

b.   Study comparables focusing on: Sales rate, time on market, price per square foot of property, of listings that expire unsold, rental values, home value trends and more.

c.   Make sure the areas you invest in are transitioning towards being a more desirable neighborhood. When you drive through the neighborhood, do you see renovation projects underway and a recovering business district? Look for completed renovations as a positive sign.

d.  One of the most difficult parts of building a real estate investment portfolio can be successful property management. Identifying, qualifying, placing and managing tenants is one of the most challenging aspects of rental property ownership. However, there are a number of ways to learn “how to” successfully do this, e.g., reading books and attending seminars. Don’t cut corners when it comes to this area of real estate investing. 

3.    As I start to build my portfolio what are some things I should know up front?

a.  Tax benefits of the property type you’ll invest in.

b.  Financing options. Don’t enter into a purchase agreement before you know if you and the property can qualify for financing. This is especially true for new real estate investors. 

c.  Single-family homes are typically the most highly sought after properties.

d. While a two-bedroom home may produce a decent cash flow, three or four bedrooms are typically a buyer’s choice.

e. Owner-occupied neighborhoods: If you will purchase a property to rent, keep in mind your exit strategy. You want to purchase a property that will mostly appeal to the end buyer. Will your end buyer be a primary homeowner or another investor?

f. Before you sell, check what requirements potential homeowners are looking for. Some low-cost cosmetic upgrades such as paint, granite counter tops, and new door pulls can pay big dividends.

4.  What should I consider about a property’s location?

Surely you’ve heard the saying about real estate it’s all about location, location, location. Ultimately, a property’s location can single-handedly determine its success or failure as an investment.

When considering an investment’s location, first be honest about how much you actually know and understand about the area. What are the major trends? Who lives there now and who will live there in 10 years? Is there a strong job market? How are the schools and public transportation systems? Are there other developments taking place nearby? What about crime?

There's an endless number of questions to be asked. While these are all important to research, the most important question is usually… is there potential for future growth? When looking at an investment property, it’s imperative to think about what the market will look like going forward. Real estate is an asset whose value is driven by demand; generally, an area that is growing will have greater demand for all types of real estate.

5.    How should I structure my investing company?

How to structure your company should be a part of your strategy. LLCs (limited liability companies) have become one of the most preferred forms of business entities used by investors to hold title to investment properties.

An LLC has its pros and cons and each case should be considered separately and weighed properly in comparison to a corporation and a partnership. Placing your properties in an LLC depends on your situation as an investor and what you would like to accomplish as a result of having an LLC. The primary advantage of an LLC is that its owners, known as members, have “limited liability.” Under most circumstances, owners are not personally liable for debts and liabilities of the LLC.

If you have good credit, the right DTI (debt-to-income) ratio and your financing strategy include conforming Fannie and Freddie loans, check with lenders to determine if you can purchase rental properties as an LLC. You may not be able to.

Most private lenders, with a few exceptions, will require you to invest in properties under a business entity. Also, many private lenders offer flexible financing and will look at the cash flow of the property - DSCR (Debt Service Coverage Ratio) and not a DTI ratio.

6.    Do I really need a back-up plan?

The one-word answer to this is YES! You should always have a back-up plan. What if something goes wrong or unexpected? What then? Due to substantial money amounts involved in most real estate deals, you need to be prepared by having a back-up plan. Here’s an example of something unexpected.

Your strategy is fixing and flipping. You get a great deal on a property in a nice neighborhood. So, you purchase and rehab it. You expect the property to sell before your financing matures. But it doesn’t. What’s your back-up plan? If you don’t have the funds to pay off the fix/flip financing, can you get approved to refinance the loan? You should have a refinancing plan in place. At a minimum, 3 months before your loan matures, check to make sure both your property and personal profile can meet the criteria of the lender.

“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.” Robert Kiyosaki

Lathea Morris - www.MorlinoandLathea.com - 973.509.1903 Ext. 1#