Frequently Asked Questions What type of investor are you? Are you experienced or just starting out? Those starting out on this adventure need to understand some of the basics. There is much to learn about the process of acquiring the right property and the management of this investment to maximize your return on investment, the ROI. Here are a few important bullet points that I follow:
- Location, Location, Location
- Demographics — this is your tenant base, your future customers
- Property condition
- How has this property (it’s a business) been performing; its history
This outline is used at whatever price point you as the investor have — whether it is a $150,000 or $2 million property. Q. I want to pay all cash and I don’t want any financing. What do you suggest? Are you using self-directed IRA money? If so, in most cases, this is the only way to use this money. You can pay all cash, or you can partner with your IRA account. It can be difficult to find lenders who will do non-recourse loans, which is required by self-directed IRA accounts. My suggestion would be based on the amount you have to invest, either a turnkey multifamily property or single-family with a good history and in good condition in a good location. Remember, all monies going in and going out for this property is done through your IRA account. The goal is to have this IRA grow each year from the cash-flow profits. The appreciation gained will happen when you sell and trade up. Keep in mind there are no tax advantages during ownership and no taxes to pay on gains when you sell. Your CPA or IRA custodian can explain more about this. If you just want to pay cash for the investment, it does limit you as to the type of property, which depends on the amount you have to invest. I suggest going for appreciation first. Second would be cash flow. Why? Because historically, properties that are in better areas appreciate faster and are more desirable, making the exit strategy better. So if you can absorb a little negative cash flow, at the end of the day these properties will outperform the so-called “cash flow” properties. If cash flow each month is what you desire, then my question is, how much? I will work from your answer to find the right investment. Q. How do I get started? First we need to answer a few questions.
- How much do you have to invest?
Typically, if you are buying a multifamily property and you are financing this purchase, the lender can require up to 30% down payment. So, this is the amount that you have to invest and will determine the size (price range) of the property. Lenders these days will also want to know your real estate investment history as well as your cash reserves. This will determine the amount of down payment required. In today’s market, an experienced investor will in most cases get in with say, 20% down, if they meet the lender requirements of experience and reserves.
- Do you have a lender?
This is your future partner in your investment. The lender owns the largest portion of your investment. So we want the most favorable partner we can find. I will assist you in this. We must get qualified by a lender before we can go searching for the property.
- What type of property do we want?
Single family – Great for the starter property as well as for seasoned investors. Why? Because they generally stay rented longer, and tenants renting homes take better care of them for you, keeping maintenance costs down. The exit strategy is good because you’re buying in neighborhoods with more owner-occupied homes that are well maintained and appreciating. Also, your market is wider for the owner-occupant buyers than the investors. We look for the home that is below market value to purchase. This is the home that may not have the upgrades, etc. It’s going to be your rental, so we don’t need the best house on the block. We want location, good schools and good condition. When it comes time to sell we vacate the tenant and do the upgrades to capture the greatest profit. Duplexes – Also a good starter property for new investors as well as for the seasoned investor. Unlike the single family, generally you still have income coming in when one side goes vacant. Duplexes also have a good exit strategy for the owner-occupant buyer. Duplexes need to be well located. I can discuss in more detail with you the management differences between two-bedroom/one-bath units and three-bedroom/two-bath units. My experience and rule of thumb is to buy the larger units with rents above $850. This puts you in better demographics and with less turn-over. Q. How long should I hold my investment? This depends on your goals. Are you looking at 10 years out, or maybe retirement? Is this a 5- to 7-year turn and trade-up? These are important questions to consider and I would be happy to discuss your investment goals with you. Q. What about flipping houses? This is a very popular investment with good returns in a short amount of time. For the right investors, we do recommend short-term, low-risk, and high-return home remodeling (rehab) projects and immediate property sale (flipping). We’ve remodeled and flipped more than 50 homes in the Austin area, and we’ve established an efficient turn-key process.