"Oh he made his money in real estate."
December 6, 2012 12:50 PM   Subscribe

I constantly fantasize about investing in real estate. Is there a "low risk" or "beginners" way to get into real estate investing? If you're one of those people that "makes their money in real estate" I'd love to hear about the ups and downs.

I have a good chunk of money saved up - nothing huge, but enough that it's probably time to start investing in things. I realize that there are safer investments to make, but my question is about real estate. I've always had a completely amateur but borderline-obsessive fascination with real estate - researching home/rent values in different cities, neighborhoods in transition, inner-city migration patterns and gentrification, etc. I don't know why, but I could spend hours reading about up-and-coming neighborhoods and rent prices in cities that I don't even live in, and the new businesses that spring up as more people move from the suburbs to the city (or vice versa).

I constantly fantasize about "investing in real estate" - buying properties in different cities and renting them out using a management company, or flipping houses, or something - I don't even know how it all works or what's smart or what's not a good idea, because my experience is 0. I'm only 25 and have never bought property before.

I don't really know anything about investing in real estate but would love to learn. What type of personality type suits it best? How much money would you say is enough to make an initial investment? What are the initial expenses? What are the pros and cons of investing in real-estate for a living? What makes a real-estate investors life stressful? What makes it great (I imagine a flexibility to be ones own boss, make their own money and work not-too-long hours)?

Any blogs or legit (non-sleazy) resources online would be greatly appreciated, as well as personal experience.
posted by windbox to Work & Money (14 answers total) 29 users marked this as a favorite
[full disclosure: I do some freelance writing for a financial services company and just finished writing a profile of one of their mutual funds focused on international real estate...]

Per the above, I just learned a TON about the commercial real estate market, REITs and REOCs, and what goes into evaluating a property's current and potential value, etc. Point being: have you thought about investing in a mutual fund oriented toward real estate, and digging into the specifics of the fund's holdings? It might be a somewhat "safer" (and I use the term loosely) way to give yourself a sandbox to start playing/learning in.
posted by hapax_legomenon at 1:06 PM on December 6, 2012 [1 favorite]

What is it you want to do when you invest in real estate? Flip it? Rent it? Own commercial?

My parents owned rental properties. Sometimes they were a lot of work - sometimes there was quick turnover in tenants, and sometimes they left a lot of mess behind. The properties were old, so sometimes there was a lot of work that needed to go into them. My parents never had trouble keeping them rented, and they were near where they lived so they did most of the work themselves. They made enough money in rent to pay for the buildings and upkeep, and eventually owned them long enough that the rent, I do believe, paid for my undergraduate eduction. It did not make them rich, and my dad had a different full time job. It also meant that sometimes they would get called in the middle of the night to fix the heat next door.

There are lots of things to think about: owning a property means paying taxes (higher property taxes when it isn't your home generally); it means permits and dealing with the municipality; it means insurance; it means more complicated taxes (my parents always did their own taxes, so I don't think it's that complicated, but YMMV). You need to think about where you own property, how much rent you can charge, what the market is like in that area, what kind of renters are you likely to attract? you need a rental application and process that doesn't break any laws. You need the downpayment on the house, plus realtor fees if you need one, plus the money to do whatever needs to be done to make it livable, plus enough to cover the mortgage until the place is renting.

If you owned enough properties, and they were the right ones, I'm sure you could make a living at it.
posted by dpx.mfx at 1:08 PM on December 6, 2012 [1 favorite]

A lot of this depends on your savings and location. What's "not huge"? There are places you can buy a decent family home for $10,000 and places you can't get a studio apartment for under $100,000. Likely, anything you can afford to buy at age 25, with the credit of the average 25-year-old, in the current economy will be a piece of crap that is barely standing up and will not be habitable without a lot of work. Work that you will either need to learn to do and do well, or pay someone else to do (most likely both, when it comes to plumbing, electricity and so on.)

Whether you can immediately resell the property depends on a lot of things, but many of them revolve around the availability of credit for people wanting to buy a home. Or, specifically, the lack thereof. How long can you hold onto a property for -- in most places, if you own land, you pay taxes on that land -- without taking a bath on it? Meanwhile, there are now regulations in many jurisdictions that explicitly prevent people from flipping houses. If you're going to be a landlord, that's slightly easier, but there will be (most likely) a mortgage and bills to pay whether or not you have tenants.
posted by griphus at 1:09 PM on December 6, 2012

You may want to think about getting a job working in a medium-sized real estate firm -- not necessarily as a broker, even -- where you want to own property. There you will learn exactly what goes into buying, selling, and renting.
posted by griphus at 1:12 PM on December 6, 2012

Making money in real estate means work.

A smart way to get started is to purchase a multi-unit property that you live in. You should be able to easily afford the entire mortgage without the rental income. Ideally you should be able to buy it outright with cash (this is rarely the case).

You can hire a handyman that you trust to take care of all the things that need maintanance on property. Gutter cleaning, furnace maintenance, boiler/hot water heater cleaning, minor repairs etc.

There are things you pay for every month, yard care/maintenance, snow shoveling, garbage removal, etc. Be sure to factor those into your budget.

Understand that nothing lasts forever and that you will be replacing expensive, un-sexy things in a house, furnace, boiler, hot water heater, sewer lines, old lead pipes, knob and tube electrical. So you should have some funds in reserve in case you need to do that.

Tenants will ask you for stuff, but you could luck out and get some awesome folks in there renting from you.

You run the risk in rental properties of some real nightmares. A tenant can turn your house into a "grow house" or a meth lab. Your tenants can stop paying rent, move in their entire extended family, get a vicious dog, or just be jerks you don't want to deal with.

There are very specific laws for landlord/tenant interactions, know them all or you may be in for all kind of problems.

Notice how in 2006 every other show on TV was a property flipping show? Now all you get are crickets. Flipping property in the US stopped being a money maker when the bottom fell out of the housing market.

Flipping ususally was a money-maker in SPITE of what the flipper did, not because of it. Most property markets were so insane because the prices rose despite any improvements made to a property. I owned a house in South Florida in 2001 that gained $5000 in value every month for a 24 month period. I sold for a considerable profit after 24 months. I didn't DO anything to it, it was a wacky market.

Buying property is a very interesting proposition. It's different depending on if you plan to live in it or if you plan to rent it out. Different mortgages, different insurance, different everything.

Here is what I would tell someone who was purchasing a home.

1. 20% or more down
2. 5% in closing costs (money you pay in fees, taxes, escrow, etc.)
3. Have at least 10% of the cost of the home in savings, in case something huge needs repairing or replacing.
4. Have a 6-12 month emergency fund in savings, in case you can't work or get laid off or something.
5. Plan on owning the house for at least 5-8 years.
6. Don't plan on gaining anything in significant property value raises, it's just not that kind of market.
posted by Ruthless Bunny at 1:13 PM on December 6, 2012 [8 favorites]

My buddy is a real estate investor / flipper who lipstick flips properties in the $175k to $200k range in Minneapolis. He financed the first six or so, but now pays cash for his properties.
He loves it, but I'll bet it took him about four years to get to a point where he was in positive total cash flow. The first years were lean, for sure.

He flips duplexes because at least in Minneapolis there is a big resale market for duplex properties with investor landlords. Duplexes never stay on the market long, so once the For Sale sign is up he is weeks away from payday. He is his own agent as well, so no Realtor commission.

He pays a lot per property for the most thorough inspections possible - a general home inspection, an electrical inspection, and a roof inspection. Money well spent, and it has kept him out of some real money pits.
posted by lstanley at 2:26 PM on December 6, 2012 [1 favorite]

As Ruthless Bunny remarked above, the blowhard flippers on TV shows are mostly crickets now. What's also interesting is that their evil twins--the "no money down" folks--are dead to the world as well.

A down market, or crash, can drive a stake into the hearts of these people, and the reason for this is that both flipping and zero or low-money down scenarios are where people get into trouble in real estate. If you have funds that you like to gamble with, I'd say, go ahead and try a flip, or see of you can finance a purchase with a low downpayment (good luck in getting a post-Lehman meltdown bank to talk to you on this; most require 25% or more into the deal).

But the key to making consistent returns in rental real estate is, 1) don't think about flipping, or even about the money you'll make when your property appreciates, and 2) use a downpayment of 30% or more--or even buy the property with cash.

A lot of people who hear #2 will say, "What the fuck? 30% equity into the deal? You'll hurt your potential leverage, and you'll lose interest payments that you can deduct from taxes!"

But listen to me. The deal is this. It's been many years since you could get a good rental return on less than 30% equity, an even then, it was tough. When you buy a condo, house or building, you want a positive cash flow from day one, and 30% or more in equity is the best way to achieve this.

tl;dr summary

Unless you're a gambler and desire to lose your stake, don't flip, don't give a fuck about appreciation, and stick to 30% or more in downpayment.
posted by Gordion Knott at 2:34 PM on December 6, 2012 [1 favorite]

Unless you are independently wealthy and can put a lot of money at risk and hire advisors, you should probably take it slowly by getting a job in real estate and learning the ins and outs over a period of years before putting your own money at risk. The problem with you investing now is not only that you don't have the knowledge and experience but also because by having limited funds you will not be able to have a diversified portfolio of holdings and will be putting too many eggs in one basket (whether it's one type of real estate holding, or one market, or one single property). You could diversify by investing in REITs, but make sure you get one with low fees and diverse holdings. Vanguard has a REIT index fund that meets those criteria: 0.24% expense ratio and holdings in varied segments: office, industrial, retail, residential, and something called specialized REITs (not sure what they are). Obviously this would be a passive type investment, but at least you could feel you are invested in real estate and you could start tracking some of the properties in the portfolio...maybe while at the same time having a day job some aspect of the real estate industry. I should also add that I wouldn't suggest anyone put all their investment funds into REITs - most advisors would probably suggest you also put money into stocks and bonds.
posted by Dansaman at 3:03 PM on December 6, 2012

As Ruthless Bunny remarked above, the blowhard flippers on TV shows are mostly crickets now.

Nope. Google "Fortune Builders" or "Armando Montelongo Company". Both are consulting companies run by former cast members from a&e's Flip This House; both charge $10,000-$30,000 to teach seminars about how to flip houses; both companies made the Inc 500 list of the country's fastest growing for 2012, with revenue in the tens of millions. Go on, google it. Depress yourself.

Which brings me to my point Op -- it's a little bit under the mainstream radar at the moment, but there's a lot of guys like you put there, and a lot of people angling for your wallet as a newbie real estate investor. Be wary. I witnessed part of a Fortune Builders course last week; they seem decently informative enough, although I don't know if they were five figures worth of informative.

What's also interesting is that their evil twins--the "no money down" folks--are dead to the world as well.

That's definitely true. Underwriting is tight these days; in a lot of markets it's a lot easier to find renters than buyers.

One thing I would recommend to you if you're looking to dip your toe into this is that you get your real estate license in your jurisdiction, and maybe join the national organisation of Realtors as well, depending on what kind of MLS you have where you live. There are several reasons: 1) passing the license exam will force you to become familiar with a wide swath of local regs on inspections, appraisals, lead paint abatement, all stuff you're going to need to know, 2) you'll be able to access your local multiple listings service and get a much better sense of the market than you'll be able to get from public sources in most places --- difference between list and sale price, days on market, what amenities are popular, what agents are popular, neighbourhoods, etc. You can get assemble most of this info from public sources with sufficient diligence, but getting under the hood at the MLS will make it a lot easier to get savvy quickly. 3) when you are ready to buy something, you'll save thousands on commission, which will affect your profit margin substantially if you flip. All this for about $500.

Otherwise, on a broader scale--- what you have to decide is what you appetite for risk is, and whether and to what degree you're going to leverage your funds. Leverage is what puts the glint in people's eye when they talk about this stuff; leverage us what gets people in trouble. It's one thing to buy a property for full cash and rely on it for passive income; it's an entirely different, much riskier thing to buy a $100k house for $10,000 down and a $90,000 hard money loan at 15-25%, which is what a lot of these flippers do and the source of a lot of the wonder tales you get of the riches you can make flipping. Hard money lenders do not fuck around, and it's very easy for a bad inspection or an unforeseen problem to cause weeks or months of delays on a project, while your budget goes up in smoke.

Look, I'm not trying to freak you out unnecessarily, plenty of people do quite well for themselves flipping and you certainly seem to have the necessary prerequisite to make a go of it. But in order to succeed you'll need to be hard-nosed and driven, have built up solid relationships with qualified professionals who do quality work, know you market it quirks and the laws you'll need to follow cold, and be able to know before you plunge in, "if this goes bad on me, am I okay"? Start with the stuff you can learn without risk and with low cost --- get your license, learn the market, get to know the local contractors and their reputations and your building codes. If you start there, you'll be able to have a real realistic idea of what you can afford and what you're capable of taking on time wise. Then budget an extra 25% for fuck ups, and if the numbers still work, go for it. Good luck.
posted by Diablevert at 3:23 PM on December 6, 2012 [4 favorites]

Family friends made quite a fortune by buying and renting low-income apartment complexes. With the Section 8 rent guaranteed by the government, it did pretty well. They were the property managers though; they didn't pay someone else to do it. They eventually moved into real estate development, like buying land, building condos or apartments on it and selling or renting them.

A friend of mine lost his shirt and his home by trying to do the same thing with properties 2,000+ miles away. He took out a home equity loan on his own home to finance purchasing a triplex in the slums of Rochester, NY. Then after 6 months of rising property values, he took out a loan on THAT triplex to buy another, and another. Only one property management company in town would touch those properties and they charged him ridiculous rates for everything. Any attempts to find other contractors to perform work was met with "yeah, we don't go to that part of town." Eventually his tenants stole all the fixtures, wiring, plumbing, doors, and windows and then filed some sort of complaint against him for making them live in an apartment with no wiring, plumbing, etc. He stopped paying on those loans years ago.

Despite having declared bankruptcy TWICE, those loans are still somehow hanging over him, accruing interest and missed payments for years and years because the bank won't repossess them and apparently told the bankruptcy court "oh that's fine, he doesn't need to pay us any time soon."

The best advice I've gotten, and what I generally see working for many friends and family members is buying a house you like and want to live in. Then, when you are earning more, you buy a nicer, second house to live in. Then you rent your old one. The reason to do it this way, rather than buying a second crappier house and renting it out, is that you have to pay a higher down payment, usually 30%+ for a rental. No bank will believe that you are buying a smaller house for yourself, so don't try to fool them.

A friend of mine did this twice. His first house is usually rented for years at a time. His second house has been rented by an insurance company to house a family displaced by a house fire for about the past 3 years.
posted by MonsieurBon at 4:59 PM on December 6, 2012 [4 favorites]

I think you have a very romanticized idea of real estate investing. First, you need to check for REI clubs or organizations in your area, join up, and go to their monthly meetings. You will learn a lot just by listening, but many of them closed down after the bubble burst so you might strike out there. Second, as others have said, the flip market still hasn't recovered yet so you probably need to put that on hold for a while. If you don't have kids in school and can move regularly, I think the best way to get started is the owner-occupied route. You can buy a multi family building and live on site for a while, or you can buy a distressed property to live in while you renovate for resale. That's really the only way to flip these days. (Do not buy properties in other cities, period.) Its all about cash flow. $500 per month is excellent, $300 is probably more realistic. That's $3000 per year, per unit, and can get wiped out pretty quickly with repairs or a bad tenant. not uncommon. So think about how many properties you will need to support yourself. You have to treat every tenant like a customer, and you're on call 24-7. It's not for everyone, and is more of a lifestyle than an investment. To make that $3000, you need to be able to do as much yourself as possible to keep costs down. You need a good banker, CPA, plumber, electrician, and handyman on your team. If you move forward, feel free to memail me. We're heavily invested in rental property.
posted by raisingsand at 6:10 PM on December 6, 2012

You may enjoy St. Louis Homes With Soul. It's a blog by a visionary realtor with an appreciation for the potential of the area's unique architecture. She posts many properties that would make great investments.

Check out The Real Estate Guys podcast. The commercials during the show are of the "get rich quick" variety, but the meat of the podcast is really good.

Read Landlording, a classic book about managing investment properties.

You've got to start somewhere, and it's not as scary as you may think. It does require a lot of hard work, but you can do it.
posted by Ostara at 8:43 PM on December 6, 2012

I bought my house at 26.

For me the biggest obstacle was having the initial investment money. It's hard to give you advice without a ballpark range of what type of dough you're willing to put on the line.

I put very little down and got a special loan for first time homebuyers and I got 5% interest (my credit is spotless). I lived in my house for about 2 years and made some improvements to it. My mortgage was less than my previous rent by a few hundred bucks so I basically took that savings and churned it over into improvement and now i rent out an extra room in my house and split utilities 50/50. I net about 250$ a month from it after fixing things that break from use of 3 people ratehr than 1. For me its a good place to start and I am working towards a point where I buy another house for myself to live in and continue to rent out my house now, except more as a whole house and less as a roommate situation.

I do this as a side thing, kept my 9-5.
posted by WeekendJen at 11:57 AM on December 7, 2012 [1 favorite]

My good friend/former roommate purchased a house with four bedrooms. He rented out all four rooms and lived in the basement, and the rental payments covered all the mortgage payments and utilities. He then purchased another house and filled it with renters. The bank decided his credit was so outstanding that they offered him a third mortgage with no money down, which he used to purchase a third home and fill with renters. He already has a pretty good income as a teacher, so he spends his summers and school holidays and vacations travelling. It's an insanely good racket.

I hate that guy.
posted by mullingitover at 2:19 PM on December 7, 2012 [2 favorites]

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