Property Investments 101

Why Invest in Real Estate?

The Colorado housing market has proven itself to be a lucrative force in the last decade. The state population has more than doubled since 1990, rental vacancy has been trending down since 2005, and average property values in the Denver and Colorado Springs areas have more than doubled in most parts since then. It’s no wonder that many successful property investors are ensuring that Colorado real estate is part of their portfolio.

Buying an investment home is a means of building wealth. Not only is it an asset with the potential of appreciating in value, it can also be a means of generating steady income. Much like an employer 401k or IRA, property investing is a retirement strategy for those wishing to ensure financial security for their twilight years. Unlike most 401ks or IRAs, though, property investing can also act as a hedge against sudden fluctuations and volatility in the stock market.

There’s more than one investment option.

There are actually numerous ways to invest in real estate. Each has its own advantages and disadvantages, but it allows investors to select the investing strategy that best fits their savings goals and tolerances for risk. Here are some of the methods that I’ll cover.

• Rental investment properties

• Flipping houses

• Real estate investment groups and limited partnerships

• REITs (Real Estate Investment Trust) and mutual funds

Buying Your First Investment Property

For a lot of people, the possibility of affording their first investment home can seem almost insurmountable. You might already have a mortgage on your primary residence and a host of other debts, including credit cards, car payments, and other routine living expenses. What you might not realize, though, most property investors are NOT millionaires or corporations with deep pockets. They’re regular people who have mortgages of their own. The only difference is that they took the time to learn the tricks and tools of real estate investing and applied them to work for their benefit.

As an agent who also invests in real estate, I have real-world experience in how to overcome the hurdles of making that first investment purchase. I’m here to help you learn, though, so keep reading and I’ll cover some basic info, below. When you’re ready to know more, simply give me a call or send me a message and let’s talk about it some more. I also network with a number of lenders across the industry and will happily refer you to a lending agent that matches your financing needs.

How to Finance Your First Investment Property

The simple act of saving money is by far the safest and less risky method if you’re planning to invest in real estate. However, it can also take decades to save enough funds to purchase a property with cash and in the meantime, your future property isn’t doing anything to generate income. Most people opt to finance their investment property with the goal that the income generated will pay for any interest charges from financing.

If you intend to finance your investment , you should expect to make a down payment of at least 25% of the property purchase price if you don’t intend for it to be your primary residence. This is a higher barrier to entry than you’d expect to see with purchasing your residential home, but it’s still significantly lower than trying to save enough money to buy the property with cash.

So what are some quick ways to get over that 25% down payment threshold?

1. Turn Your Home into Cash (HELOCs and Cash-Out ReFi): Any equity in your primary residence can often be cashed out for low-interest rate loans. Home Equity Line of Credits (HELOC) work similar to a credit card. This has the advantage of only borrowing money when you need it and you can then pay it back typically over the course of 10 years or longer. Cash-Out Refinancing, on the other hand, is a one-time payment loan and typically replaces or supplements your existing mortgage. Either way, the equity in your own home is being made to work for you.

2. Hard Money Loans: These are typically short-term (bridge solution) loans that are secured by real estate. Generally, banks do not offer hard money loans, and so hard money lenders are going to be private individuals and entities within the real estate industry.

3. Joint Venture Agreements: In this manner, the cost of a real estate transaction is shared between 2 parties. Although this can reduce the total returns on investments, it also lowers the risk to each participant in the agreement and also lowers the barrier to entry.

What to do with the investment property once you have it?

Renting to a tenant is of course the most popular option. It’s a good way to earn passive income while requiring less effort due to the length of a typical lease agreement. It’s not going to make anyone rich over night, but once the property is fully paid for, it’s an excellent way to earn additional monthly income during retirement. Not to mention, it’s also one more asset that can appreciate, be borrowed against for additional funds, and also sold if large amounts of cash become necessary.

Short-term rentals are also becoming more popular. Companies like Airbnb or Vrbo have made it easy for investors to offer short-term stays to travelers, often at a daily rate that’s higher than what one would expect to pay for a long-term lease agreement.

Both long and short term rentals are also made even easier by Property Management companies who avail themselves to manage the business for you. For a fee of about 10%, property management companies will do all the interacting with tenants and complete the activities that are necessary to generate income for your property. You simply have to sit back and collect the proceeds.

Then there’s flipping houses which is by far the most difficult and risky of the investment options, but if done right, it can also be the most profitable. Making improvements to a home that is purchased for cheap can be a great way to make sizeable income if the home is in turn sold for profit. However, since being successful with this strategy often means keeping renovation costs as low as possible, this method is really only best for individuals who have construction experience or are networked with contractors who can provide services at discount.

Investing in Real Estate Groups and Partnerships

Real estate investment groups (REIGs) are similar but slightly different to renting with property management companies. REIGs will buy an apartment building or condominium, and investors can then buy individual units within it. Similar to a property management company, the REIG retains a percentage of the rent and manages the property on behalf of the investor.

One form of REIG is known as a Real Estate Limited Partnership (RELP), which is a great way to make passive income while also removing a lot individual responsibility towards the investment. Similar to how a Hedge Fund manager will manage funds on behalf of an investor, RELPs will also have a general partner or manager who collects funds from investors and accepts all responsibility and liability for the property. These are incredibly low effort investments in real estate and the biggest responsibility on your end is to carefully select a competent and trustworthy partner.

More Classical Investment Strategies in Real Estate

There are alternative, more classical approaches to investing in real estate if outright ownership of a property isn’t your interest. This lets you avoid the hassle of having to manage a property and also the challenge of coming up with a 25% down payment.

Real Estate Investment Trusts (REITs) work very similar to classical stock market trading. They are publicly traded trusts who in turn own and manage rental properties. What’s exciting about these is that they can include different types of rental spaces, including commercial, office, and industrial real estate, too.

REITs tend to have high dividend payments because they are required to pay out at least 90% of their net income to investors. If the REIT meets this requirement, it will not have to pay corporate taxes.

There are also Real Estate Mutual Funds who primarily invest in REITs. They’re known as real estate operating companies (REOCs). REOCs work very similarly to REITs, except that they aren’t required to pay dividends and so they grow much faster.

These types of investments are purchased directly through a brokerage account.