Residential homes are the backbone of any city, town or community. They also help to drive and support a strong economy. This means that when you choose to invest in real estate, not only can you create your own wealth and financial freedom, but you will also be giving something back to your community.
Contrary to what many people believe, it is easier to invest in residential real estate than ever before. This is largely due to the availability of more options when it comes to accessing funding for investment, as well as an abundance of tools and resources – both online and from experienced individuals. No longer is real estate investment reserved for those from the upper financial echelons of society. With the right assistance, you, your colleagues and your neighbors all have the opportunity to make property investment work for you.
To help you get started on your journey, here’s what you need to know about residential real estate investment.
People will always need places to live and this helps to make residential real estate investment a fairly sound choice in the majority of cases. Investors have two main choices: flipping and buying to turn a property into a rental. Home flipping is a very popular choice for investors who are interested in making bulk profits fairly quickly. If you intend to flip a home, you need to buy cheaply, invest wisely when it comes to updating elements of the property, such as putting in a new kitchen or bathroom and then selling as high as you can as fast as you can. Speed is of the essence when you are flipping properties as selling quickly will help to ensure that you sell when the market is most profitable.
Investing in rentals is less common in many areas and this is due to the ongoing constraints of the process. You will have to spend a considerable amount of money to purchase a property and may need to spend more to bring it up to standard. You can then charge a set amount in rent every month, but you are still responsible for a large part of the upkeep of the property and land. Buying to let is a good option if you hope to obtain a steady, long-term income. Nevertheless, the bulk of your investment will remain tied up in the property itself until you sell it.
Choosing whether to invest in commercial or residential real estate can be a conundrum for many people who are new to the investment process. Many people believe that commercial properties offer a far greater return on investment, but whilst this may be true in some cases, commercial properties are harder to obtain, particularly if you are an individual rather than a company. This is because banks and other lenders usually only provide commercial mortgages to businesses rather than individuals. There’s nothing to stop you from setting up as a business to obtain funding this way, but it will take time, energy and require a lot of paperwork before you can get stuck into the investment itself. Residential real estate investments are far easier to get started with.
No lender is going to offer you the financing that you need without a solid business plan to back up your proposal. This business plan needs to cover a number of important elements including:
- Your main objective
- An analysis of the market you are investing into
- Your strategy for either flipping or renting out your investment
- Your exit strategy
- A plan for how you hope to finance your venture
The strategy is one of the most important aspects of your business plan. You need to have a solid strategy in place to illustrate your competence. How are you going to find properties to invest in and how are you going to ensure that you secure them at the lowest possible price? Who is going to carry out the work? Where are you going to source the materials needed? These are all things to consider when writing your business plan.
A great business plan shows that you have taken the time to understand every aspect of your proposal and are committed to making it work – making you a much better candidate for borrowing money. However, it isn’t just banks that you can approach to finance your project. Many investors are now favoring alternative solutions, such as bridge loans, since they offer greater freedom and flexibility, support fast closes and have a heap of other benefits.
Unfortunately, tv shows about real estate investing tend to make it look much easier than it really is. Sure, there is a very real opportunity to make money fairly quickly, but that doesn’t mean that the process is without risk. The less experienced and prepared you are, the greater the risks involved could be. In addition to doing your own research about what property investing actually entails, there are also some other things to take into consideration.
Expect the unexpected
It may be a cliché, but it is virtually impossible to prepare for every eventuality during a residential real estate investment. As such, you should always factor in unexpected costs that could arise once the project is underway. Doing this will help to ensure that the books stay firmly balanced in your favor.
Prepare for professionals
There is nothing wrong with undertaking work to a property yourself, but unless you truly are a master of all trades, chances are that you will need to bring in professionals at some point during the journey. This could include electricians, plumbers and more, who will be able to ensure the property is safe and functional. Be prepared for the costs involved.
Avoid a neighborhood nightmare
It can be easy to be swayed by a fancy property or what seems like an epic deal, but if the location is off, it can put the entire project in jeopardy. Unless you are buying somewhere that you know extremely well, you should make sure that you do very thorough research before committing to a property somewhere new.
Tips for mitigating risk
The good news is that there are some things that you can do to help mitigate your risks when investing in residential real estate. These include:
The 70% rule.
This states that you shouldn’t pay more than 70% of the after-repair value (ARV) of a property. The 30% remaining is designed to be your profit, although some investors dip into this to cover fees and other small costs. For example:
The property you wish to buy will be worth $200k after repairs. Therefore, its ARV value is $200k. However, it needs to have around $50k spent on it to bring it up to the standard needed to obtain the ARV. The 70% rule means that you shouldn’t spend more than $90k. This allows for the expenditure needed, plus gives you a tidy profit. Obviously, there is some wiggle room within this rule depending on how much profit you are hoping to make.
Figure our your per-month profit.
A lump-sum figure can seem like you are making a huge profit, but by breaking down the project into the number of months that you estimate will be spent working on the property to reach the ARV, you can get a more accurate view of whether the investment is really worth it.
Study the market beforehand.
Take a look at how long comparable properties have remained on the market, as this will give you an indication of how long it will take you to sell. Remember, all the time the property remains unsold, you are waiting for a return on your investment.
There are many different financing options for buyers looking at fixing and flipping residential real estate property. Bridge loans are particularly popular amongst investors since they offer short-term financing that is tailored specifically for the rapid pace of flipping properties. However, it is important to explore all avenues so that you can find the right financing and the best deal based on your individual requirements.
At Washington Equity and Funding Corp, we offer up to 100% financing loan to cost on real estate investments, particularly for investors whose projects don’t typically fit the usual underwriting criteria of more traditional lending sources. We’d be delighted to provide you with an estimate on financing.
Want to know more about residential real estate investing, or want to schedule an appointment to discuss your plans and see if we can offer you the financing you need to get your project off the ground? Please contact our expert team today.