Introduction to Real Estate Investing

now browsing by category


3 Things to Know Before Buying a Rental Property

3 Things to Know Before Buying a Rental Property

By Patrick Morris| October 20, 2013 | The Motley Fool

In the name of diversification, many will seek to spread their assets across a variety of different investment platforms, and rental properties can be an attractive alternative.

For this purpose, I recently sat down with Forde Britt, a commercial real estate broker with the Nichols Company in Charlotte, NC, who is well versed in many facets of the real estate industry. He is also an owner of rental property in his neighborhood near downtown Charlotte.


At first glance, buying a rental property can seem like an appealing investment opportunity. For example, if someone bought a four bedroom home for $200,000 with a $40,000 down payment, at today’s rates, their 30-year mortgage payment would be right around $1,050 a month.

Charging $450 per bedroom would mean that property could be rented out for $1,800 a month. It’s a good rule of thumb to expect an 8% monthly management fee and an estimated 10% loss of income due to vacancy and maintenance expenses. So roughly 20% of that $1,800 will be taken off for expenses — but all in all, the owner could expect to net about $475 in his pocket each month.

Even if rent increased by just 1% per year after 30 years, the owner would collect $750,000 in rental payments, and pay a total of $375,000 in mortgage payments. If the value of the house just grew by 1%, the house would be worth almost $266,000 at the end of 30 years.

Provided the owner sold it after 30 years, he would have netted almost 2,100% return on their initial investment of $40,000 over the 30-year period, even after accounting for the 18% costs. That works out to a compounded annual return of roughly 10.7%.

Now, before you click over to Zillow to look for rental properties to buy in your area and run to Wells Fargo to get a mortgage — it’s important to note that a 2,100% return over a 30 year time horizon is eye-popping at first glance. But if you take that same $40,000 investment and put it in the S&P 500, at the historical average return of right around 8% per year, your return after 30 years would be roughly 900%. And remember, that number also excludes any potential major repairs or other expenses associated with owning a home.

In my conversation with Forde, he highlighted three things that anyone considering an investment in a rental property should keep in mind before they buy a home with the intention of renting it out.

1. You make your money when you buy it Forde noted, “The best principle to have in any real estate transaction is that you make your money when you buy it, not when you sell it — because if you pay too much for it, you’re never going to make money.”

Since many people who buy investment properties often don’t buy one in their same neighborhood, or even in their same city, it’s easy to be lured by what is perceived to be a good deal in an unfamiliar market. Yet just because a home is less expensive than those around it, or in an area on the “rebound,” doesn’t mean it’s worth investing in.

Often, investors see a home at a low price and think they’ve found a great deal, but you must do your research and your homework on the area to truly evaluate whether or not it’s a good investment.

2. Know your worst-case exit scenario Investors in any situation can be lured into thinking that only the good things will happen, and that’s what they plan for, but it’s vitally important to have an exit plan, too.

Source: Inha Leex Hale.

While investing in a rental property can certainly be a profitable and worthwhile investment — don’t allow it to be such a large part of your portfolio that losing returns from it could ultimately bring you down with it.

Forde wanted to highlight how critical it was to have an exit plan if “all of your assumptions don’t work out.” For example, if the home is unoccupied for a few months, the $800 monthly income instead turns into a $1,000 expense very quickly — and that could result in dire consequences if the investor isn’t prepared.

3. Be ready for the unexpected With any investment decision — and almost any decision at all — things can quickly take unexpected turns. For example, if the HVAC unit and the water heater each go out on the same day, repairs could be north of $10,000 — wiping out an entire year’s worth of profit. In this, investors must see that houses can be great investments — but are often full of unseen costs that correspond with them. Being both prepared and able to address those issues when they present themselves is critical.

While rental properties can be great investments, like all investments, their returns also correspond to their risks — and now you have one expert’s opinion on what to keep in mind before you make that critical decision to invest in one.

Top 6 Landlord Guide – Basics for the Real Estate Investor

Source: About.Com | Real Estate Business

Compared to flipping properties, landlording is a long-term commitment with demanding requirements of your time. Before you take the steps toward the job of landlord, examine your capabilities and desires, and make sure that you’re up to it. If you are, it can be a wonderful and profitable experience.

1. Are You Cut Out to Be a Landlord?

All those number-crunching skills that serve you well in selecting, buying and selling real estate properties for investment are valuable. However, as soon as you take on the roll of landlord, people skills are also quite important.


2. Don’t Let Your Investment Manage You – Avoid Landlord Burnout

Maintain your life’s balance, and plan your management activities to maintain profitability of your rental properties without letting your investments manage you. This is particularly important when making a decision to move up to multiple properties when one has been a positive experience.


3. Prepare Properly Before You Select a Tenant

One of the most important tasks confronting the real estate investor-landlord is the selection of tenants. Shortcut this process and it can cost you more than money down the road. Learn the simple steps to intelligent tenant selection.


4. Setting the Rent – Cover all the Bases

Some might think that deciding on the rental amount for a property is only a matter of matching the market rates. That’s an important factor, but there is room for manipulation of the rent price based on other factors. Learn how changing the rent amount at the beginning can influence tenant choices and long-term occupancy.


5. Things Break – Plan and Budget for It

A rental property is a home or office also. Using the property on a day-to-day basis will cause wear and tear, and repairs will become necessary. Plan and budget for these problems, and learn how to handle repairs to keep your tenants happy. How you treat the property speaks to their treatment of it.


6. Don’t Panic when You Get the Call About Mold – But Act Quickly

In recent years, there’s been a great deal of media coverage of property and health problems related to mold. A few large damage awards, as well as many insurance companies dropping mold coverage, have caused a great deal of concern among real estate professionals and landlords. Learn how to react to and handle a mold call from your tenants.The Author: Chris Smith is a real estate investor, founder of an online reference for investors and real estate professionals and has published articles in Corporate Finance Magazine, Euromoney, and the Business Journal Network. More about Chris Smith.

Best Ways to Invest in Real Estate

Wall Street Journal | WEALTH MANAGEMENT JOURNAL | October 29, 2012

A Real-Estate Primer

Direct ownership offers income, but REITs might be better for some

Q: What’s the best way to invest in real estate today? “Hard” real-estate investments or “soft” shares and ETFs?

A: As housing finally rebounds, investors are searching for the best ways to take advantage. Tim Courtney, chief investment officer at Exencial Wealth Advisors, says an investment portfolio of more than $10 million could benefit by including both “hard” real estate, meaning direct ownership—either full or partial—of commercial, residential or other properties, as well as “soft” real estate, such as shares of real-estate investment trusts or other securities.

Those with smaller portfolios who want to invest in real estate generally should stick with real-estate investment trusts, or REITs, exchange-traded funds, shares of real-estate-focused companies and other investments that provide more liquidity than direct property ownership, experts say.

Properly researching and monitoring hard real-estate investments generally requires a significant commitment of time, making shares more attractive for most individual investors. It also can take longer to see gains from hard real-estate investments, though these investments do have the potential to provide sizable, steady income, says Deann Morgan, a managing director with Bank of America BAC -4.43%Merrill Lynch. Matthew Tuttle, president of Tuttle Wealth Management LLC in Stamford, Conn., adds that while investment properties can be attractive investments, they can be hard to value.

For those going the soft route, Mr. Courtney notes that U.S. REITs have done well this year, and says they are no longer bargains. He says international REITs are more attractive, some offering dividends of about 5%.

“It’s best to own an index fund that provides exposure to a large basket” of REITs, Mr. Courtney says, to avoid the volatility of individual shares. He’s a fan of REITs funds offered by Dimensional Fund Advisors and Vanguard Group Inc.

For some investors, though, hard investments remain more attractive. “The returns on REITs and similar investment vehicles, after management expenses, aren’t substantial enough to deter our clients” from investing directly in real-estate properties, says James Carolan, a partner and head of the U.S. real-estate practice at the international law firm Withers Bergman.

Jeff Leventhal, managing director and partner at financial-services firm HighTower in Bethesda, Md., is focusing on parts of the market that held up during the downturn, such as self-storage facilities, college housing and medical office facilities. Those sectors should hold up again if the economy slips into another recession, he says.

Mr. Leventhal also is targeting distressed residential markets, “but given most of our clients own their home, we prefer to look outside this space, for enhanced diversification.”

One option for deep-pocketed investors: Funds focusing on real estate managed by private-equity firms, which typically offer higher returns than public REITs, says Jack Foster, head of real assets at Franklin Templeton Real Asset Advisors. But, he adds, the private funds also entail significant risk.

“Investors need to consider lockup periods that can be as long as five years,” says Mr. Foster. Still, the expanded pool of distressed property owners after the recent financial crisis and economic downturn “has created significant opportunities in private-equity real estate,” he says.

On the whole, “the days of flipping for a quick profit are dead,” says Scott Miller Jr., a managing partner of Blue Bell Private Wealth Management LLC in Blue Bell, Pa. “But for an investor who understands their local market, is willing to do the research, is patient enough to get a great buy and has the skill set to perform the necessary and ongoing maintenance, hard real-estate investments will prove to be more profitable” than soft ones.

Mr. Zuckerman is a special writer for The Wall Street Journal in New York. He can be reached at Send questions about alternative investing to

A version of this article appeared October 29, 2012, on page R5 in the U.S. edition of The Wall Street Journal, with the headline: A Real-Estate Primer.

Simple Ways To Invest In Real Estate

Source: Investopedia ( |  October 25 2009

Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular over the last fifty years and has become a common investment vehicle. Although the real estate market has plenty of opportunities for making big gains, buying and owning real estate is a lot more complicated than investing in stocks and bonds. In this article, we’ll go beyond buying a home and introduce you to real estate as an investment.

Tutorial: Exploring Real Estate Investments

Basic Rental Properties
This is an investment as old as the practice of landownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate has consistently increased in value from 1940 to 2006, then proceeded to dip and rebound from 2008 to 2010. (To learn more, read The Benefits of Mortgage Repayment and Understanding Your Mortgage.)

There are, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, end up having no tenant at all. This leaves you with a negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of finding the right property; you will want to pick an area where vacancy rates are low and choose a place that people will want to rent.

Perhaps the biggest difference between a rental property and other investments is the amount time and work you have to devote to maintaining your investment. When you buy a stock, it simply sits in your brokerage account and, hopefully, increases in value. If you invest in a rental property, there are many responsibilities that come along with being a landlord. When the furnace stops working in the middle of the night, it’s you who gets the phone call. If you don’t mind handyman work, this may not bother you; otherwise, a professional property manager would be glad to take the problem off your hands, for a price, of course. (For further reading, see Tips For The Prospective Landlord.)

Real Estate Investment Groups
Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but don’t want the hassle of being a landlord, a real estate investment group may be the solution for you. A company will buy or build a set of apartment blocks or condos and then allow investors to buy them through the company, thus joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent.

There are several versions of investment groups, but in the standard version, the lease is in the investor’s name and all of the units pool a portion of the rent to guard against occasional vacancies, meaning that you will receive enough to pay the mortgage even if your unit is empty. The quality of an investment group depends entirely on the company offering it. In theory, it is a safe way to get into real estate investment, but groups are vulnerable to the same fees that haunt the mutual fund industry. Once again, research is the key.

Real Estate Trading
This is the wild side of real estate investment. Like the day traders who are leagues away from a buy-and-hold investor, the real estate traders are an entirely different breed from the buy-and-rent landlords. Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them for a profit. This technique is also called flipping properties and is based on buying properties that are either significantly undervalued or are in a very hot market.
Pure property flippers will not put any money into a house for improvements; the investment has to have the intrinsic value to turn a profit without alteration or they won’t consider it. Flipping in this manner is a short-term cash investment. If a property flipper gets caught in a situation where he or she can’t unload a property, it can be devastating, because these investors generally don’t keep enough ready cash to pay the mortgage on a property for the long term. This can lead to continued losses for a real estate trader who is unable to offload the property in a bad market. A second class of property flipper also exists. These investors make their money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment depending on the extent of the improvements. The limiting feature of this investment is that it is time intensive and often only allows investors to take on one property at a time. REITs
Real estate has been around since our cave-dwelling ancestors started chasing strangers out of their space, so it’s not surprising that Wall Street has found a way to turn real estate into a publicly-traded instrument. A real estate investment trust (REIT) is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. REITs are bought and sold on the major exchanges, just like any other stock. A corporation must pay out 90% of its taxable profits in the form of dividends, to keep its status as an REIT. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends.

Much like regular dividend-paying stocks, REITs are a solid investment for stock market investors that want regular income. In comparison to the aforementioned types of real estate investment, REITs allow investors into non-residential investments such as malls, or office buildings, and are highly liquid, In other words, you won’t need a realtor to help you cash out your investment. (For further reading, check out How To Analyze Real Estate Investment Trusts, How To Asses A Real Estate Investment Trust and The REIT Way.)

With the exception of REITs, investing in real estate gives an investor one tool that is not available to stock market investors: leverage. If you want to buy a stock, you have to pay the full value of the stock at the time you place the buy order. Even if you are buying on margin, the amount you can borrow is still much less than with real estate. Most “conventional” mortgages require 25% down, however, depending on where you live, there are many types of mortgages that require as little as 5%. This means that you can control the whole property and the equity it holds, by only paying a fraction of the total value. Of course, your mortgage will eventually pay the total value of the house at the time you purchased it, but you control it the minute the papers are signed.

This is what emboldens real estate flippers and landlords alike. They can take out a second mortgage on their homes and put down payments on two or three other properties. Whether they rent these out so that tenants pay the mortgage or they wait for an opportunity to sell for a profit, they control these assets, despite having only paid for a small part of the total value. (For more on taking out a second mortgage, read Home-Equity Loans: What You Need To Know and Home-Equity Loans: The Costs.)

The Bottom Line
We have looked at several types of real estate investment, however, as you might have guessed, we have only scratched the surface. Within these examples there are countless variations of real estate investments. As with any investment, there is much potential with real estate, but this does not mean that it is an assured gain. Make careful choices and weigh out the costs and benefits of your actions, before diving in.

Read more:

Source: Investopedia ( |  October 25 2009