Want to know the number one reason that youre broke?
You can work as hard as you want. You can hustle around the clock seven days a week, but not change the dynamics of your finances and timenot unless you get to the root of the problem. By no means am I a financial guru. However, I can tell you that I have personally seen a significant change in my income and real net worth by rewiring my thinking about moneyand grasping and practicing this one key fact. The top reason most people are broke and stay broke is that theyre consumers, not investors. Some might make a good six figure income and have a nice job title, car lease, and big house. Still, most of those people are still broke. Most have zeroor more likely a negativenet worth, virtually no free time, and little truly disposable income. If you want to have more control over your time, have more financial security and freedom, or just put an end to being broke month after month, be an investor, not a consumer. Related: 12 Reasons Youre Poor Now, that doesnt mean you cant spend money. It doesnt mean you cant enjoy nice things. It does mean that you invest first. Then you let your investments pay for all of these other things. Anything I earn, I invest in myself or in real estate deals. I put my money into things that increase my worth and passive income, instead of buying things that go down in value over time. Here are some examples of that. Education The most important investment you can make is in yourself. Ask any billionaire, and theyll tell you it is the best investment you can make. Invest in your knowledge, skills and performance, which will ultimately help you earn more, because you can bring more value to the marketplace. Obtaining skills along with knowledge are things that people cant take from you. However, if youre considering investing in a college education, think twice before accumulating that bad debt. Those are years you wont get back. Often spent on irrelevant information, and those loans will keep taking money out of your pocket for years. Instead, consider books, seminars, events, and training with a mentor. This information tends to be more transferable to the real world. Do what you can afford, and as it pays off and increases your income, keep dedicating a part of everything you make to more learning. Cars Cars are easily one of the top two or three things that keep Americans broke. For most, it is inconceivable not to be driving the most expensive car they can possibly get a loan or lease for. That means they are always tapped out on their income. A big portion of their income every month goes into an depreciating asset. Buy a new car, and you are instantly throwing away half of the money on the price tag. Now, once you have already invested, and if that money will be coming from passive income from investments and cash you dont have anything better to do with, then absolutely treat yourself to a sweet ride. Houses The same goes for houses you live in. For most, this will be the biggest expense of their lifetimes. Buying a home can be a somewhat smart financial move. Still, few get how much they really pay for a home when they factor in interest and taxes and other fees and maintenance. Like cars, most max themselves out to the limit. They chain themselves to those big piles of bricks that can hold them back from many other things theyd prefer to be doinglike free time or the ability to pick up and move elsewhere. Related: 4 Steps to Buy the Car You Want Within the Budget You Can Afford Invest and let your investments in income-producing real estate pay for your own home. Dont sacrifice your ability to invest for a home that is a burden as soon as you get those keys. Summary The number one reason people in America are broke is simply because they are spenders first. Those who arent broke are those who invest first. This article shows some classic examples where you can change the odds in your favor and get control of your money. If you ever get stuck in deciding how to use a dollar, just remember to ask yourself whether that purchase or investment will take you closer to your goals. If not, its taking you further from them. Were republishing this article to help out our newer readers. Whats your opinionis consumerism the top reason Americans are broke? Comment below! https://www.biggerpockets.com/renewsblog/top-reason-youre-broke/
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In the past couple of years, I have talked to hundreds (if not thousands) of aspiring real estate investors looking to house hack. What have I found? Most cant find a deal.
Why? Because they cant find a duplex within their price range. Or if they do, there is no way the rent from the other half will cover the mortgage. If this is you, dont worry. You are not alone. I can confirm that there are thousands of you throughout the United States with the same problem. The goal of this article is to help the aspiring house hacker solve this problem. Why me? Well, I live in Denver, which is a fairly expensive market. But for the past two years, I was able to get creative and house hack in such a way that I cash flow $1,000 or more each month for each property. For my first property, I purchased a 2-bed/2-bath duplex (1/1 each). I made a quasi-bedroom out of the living room, where I slept. This enabled me to rent out the top unit AND my bedroom. For more details on this deal, check out this blog post. I know this sounds crazy, and I do not expect everyone to do this. However, because of this, I was able to save up for my next property, and just like that, one year later, I purchased my second house hack. The second one is a 5-bed/2-bath single-family property about 10 miles from the office. This article is going to dive into the second house hack. It will explain how I found it, how I financed it, and how I hacked it with all of the numbers. Related: 6 Different Ways to Hack Your Housing (Find One That Works for You!) How Did I Find & Finance My House Hack? I found it on the MLS. With the strategy I was planning on deploying, almost all of the properties under my search criteria would have worked. So the golden nugget here iswhat was my strategy? Well, my plan was to find a single-family residence that I could do a 5% down conventional loan on. I wanted my own bedroom, so I knew that I wanted to occupy one room while renting out the other four. I knew I could get much more in rent by renting by the room, and I certainly did not mind living with roommates. Ive done it my entire life. With that being said, I am an agent so I set up my criteria to be a 1,900+ square foot house with 3+ bedrooms and 2+ bathrooms. I know I just said I was looking for a 5-bedroom place, so why would I set my search criteria for three? There is a high probability that a house with more than 1,900 square feet either has non-conforming bedrooms OR an unfinished basement where bedrooms can be added. By either adding or conforming bedrooms, you add significant value to your house as well as the ability to increase total rent for the property. With that search, I saw many properties pop up that I liked. I made offers on seven of themand finally, one was accepted. The Property & Numbers Lets do more of a deep dive into the property itself. I ended up finding a place that was a 4-bedroom, 2-bathroom raised ranch on the Thornton side of the Denver/Thornton border. I intentionally purchased a place that was close to a bike path so I could continue biking into work. The property was listed at $350,000, and we negotiated it down to $343,000. I put $17,000 (5%) down and then another $13,000 into the rehab. The rehab was not anything majorjust a few minor things that added up, including adding a bedroom, installing a new garage door, putting ventilation in the downstairs bathroom, re-working some electrical, and adding a closet downstairs. After the rehab, I was all in for about $30,000. With the 5% down loan, my monthly payments (includes principal, interest, taxes, and insurance) were about $2,000, and I was able to rent the other four rooms for a total of $3,100 per month. I set aside $400 to add to my reserves and am cash flowing $700 per month while living for free. Not too shabby. Quick tip: In the Denver area, I have found that Facebook Marketplace has surpassed Craigslist in terms of getting people interested in renting rooms. So if youre looking for or trying to rent a room, I strongly suggest Facebook Marketplace. Related: How I Hacked a Half-Million Dollar House in LA as a Full-time Student & Violinist Conclusion There you have it. My second house hack. This really isnt anything too out of the ordinary, which is why this has been one of my shortest blog posts. To recap: I bought a single family home that was listed as a 4-bed/2-bath. I rehabbed it to turn it into a 5-bed/2-bath such that I could occupy one room and rent out the other four. I make about $1,100 over the mortgage and about $700 after I set aside the reserves. What do I do with that $700? I certainly dont go out and buy the latest iPhone or Fitbit. Instead, I plan to save it for the next deal. With that being said, stay tuned. I plan to buy another house hack in 2019 and when I do, I will be sure to share all of the details with everyone. Any questions about this deal? Think its possible in your market? Weigh in below! https://www.biggerpockets.com/renewsblog/second-house-hack-denver The One Email Wonder: How I've Built a System Where I Can Buy Deals by Sending a Single Email10/27/2018 Some might call it a hack. Some may call it experience. You might even call it a load of hooey that you would never try.
I call in the One Email Wonder. And its how I automate the 90% of the investment process that I find tedious or boring. A few weeks ago, I wrote an article about what 15-year mortgages can offer. That article was packed with most of my thinking on the subject and hints at this part of my buying process. Here is an excerpt: First and foremost, most investors should make an effort to build relationships with smaller, local banks. These banks generally only loan 15 or 20-year money and offer: Quicker turnaroundFlexibility on credit score based on personal relationshipsKnowledge of local marketsNetworks of local attorneys, real estate agents, contractors, insurance agents, and other professionalsThe option of cross pledgingAbility to keep money local Lets take a closer look at one specific part of this advice and what this approach can do for an investor. The Network Its described many waysits all who you know or keep it in the family. Japanese keiretsu and the military-industrial complex are notable large-scale examples. More infamously, think the mob, Japanese yakuza, or the Cali cartel. All of these describe a powerful human toolthe network. Networks are groups of peopleor tribes (thanks,Seth Godin)with similar goals, like values, and interdependencies on which the individuals either succeed or fail. An investor either has one (or more) already or needs to establish one. I have heard of bulk mail letters that are blunt and frankly a bit rude. They might extend an offer to a real estate agent by saying something like, We are building an investment team in your area and want you to become part of it. I just find this concept offensive. The network is about who you know and trust. Sure, there has to be a starting point, but a cold call is counter-productive. New networks build slowly. Investors can spend days, weeks, or even months finding the right set of people to complement and support their goals. This will take initiative, tenacity, and maybe most importantly, mistakes. Over the last 20 years of real estate investing, I have built a core team, a network of local folks who know me very well. They understand my track record. I can anticipate their questions and requirements. They know what I am trying to accomplish. We are friends and talk about kids and vacations regularly. I have even given my favorite bank loan officer a piece of art I made that she proudly displays in her office. Anyone have any contacts with the Smithsonian? The result of the years (yes, years) of working with the same people, learning from mistakes I have made, and knowing the nuances of all the processes needed to close an investment have paid off. I am at the point where with a single email, I can buy a property. One note, and I can put all the goodwill and expertise of my team into motion. You may not believe it, but I dont even have to go to the closing. Here is how you can get to this point as well. The Team Start by identifying a core set of skills that you need to operate in your chosen nichenot someone for every possible need, but a core. My niche is single family residences (SFRs), so starting out, I wanted three partners: Real Estate AgentBankerLawyer There are always a great many real estate agents to choose from. Ask what their track record is closing investment property. Look for references or referrals from others. Look to see if they are active on BiggerPockets. Spend time buying coffees and just listening. With homework, you will come across promising candidates to start to work with. My agent knows the types of properties I prefer, has their own network of local landlords that regularly buy and sell, actively searches on my behalf, and acts as my signatory at closings via a POA since I work out of town. Lawyers are more straightforward. You may not have much of an option, especially in a small town. The best place to start here is by asking the real estate agent or a banker. A consistent relationship with an attorney means he/she will know your legal entities, risk tolerances, and possibly tax strategies to make purchases go smoothly. Bankers are where the rubber hits the road. This is the most important part of the core network. If an investor can build one or two long-term relationships with local banks, many opportunities will follow. Benefits are many and include: Access to REO deals that the bank may haveFlexibility on credit termsHigher debt-to-equity limitsRelationships with local professionals Over time, a fourth skill has become part of my core. It may not be obvious, but a reliable insurance agent is invaluable. Investors should look for an agent who can turn quotes around quickly, understands the local market, and knows all the nuances of insurance options for investment properties. That last one is important. Here is what my own One Email Wonder team looks like: With timeand as an investor develops a niche, say, house flippingthe core team may look like this: Whatever direction you decide to take, make sure to aligning yourself with good people, be genuine, and deliver value to them. Keep in mind, they will work on your behalf because your success means their success. And finally, make sure that YOU are someone they would want as part of their team. Have you successfully built out your team? Any questions about creating your network? Comment below! https://www.biggerpockets.com/renewsblog/one-email-wonder Early on in my real estate investing career, one of my goals was to buy one rental property a year. I used to dream about having them all paid off, free and clear, by retirement.
Keep in mind that this was at age 29, just after I passed my real estate exam and bought my first investment property. My theory was that since real estate agents dont usually have much of a retirement plan, I could either cash flow off 20 houses or even sell one each year in retirement. Then my goals quickly morphed. One year, I bought seven rental properties, followed by nine more properties the next year. At 40, I was well on my way to having over 100 units like many of my investor friends. But then my dream changed again. I realized that by using creative financing to increase cash flow and by incorporating some tax and note strategies, I might not need to have that many units to have the lifestyle I wanted. Instead, I could improve the real estate deals I already owned, bringing them from good to great, while also adding new alternative investments to my portfolio. Related: 4 Actionable Ways to Find Real Estate Deals, Even in a Red Hot Market Whats an Average Deal? When it comes to real estate investing, every deal is unique, but the average real estate deal varies based on your market. For my friends and me living outside of Philly, the average deal was a 2 to 3-bedroom twin or row home that could rent for $750-$1,000 a month, and it usually cost well under $100k. I know some of you are probably thinking, theres nothing like that around where I live,but just hang in here with me. Id pick up a 3-bedroom house for $40k-$45k, and after repairs and closing costs, Id be all in at approximately $65k, with an ARV (after repair value) of about $100K. If I sold that house for $100k, less real estate agent fees and transfers taxes, I would be at $93k, netting approximately $28k before taxes. Since its usually less than a year from start to finish, I might net approximately $19,600. If I couldnt sell it or didnt want to, Id go to the bank, and theyd give me a 20-30% down, 30-year mortgage, and Id probably be glad to cash flow $300 a month (or maybe a little less on a 2-bedroom). Deals like this one were common amongst real estate investors in my area. We also purposely didnt keep big properties due to increased maintenance costs, and we preferred those that were easy to rent. 3 Ways to Improve Your Real Estate Deal Youre probably wondering how you can take an average deal and tweak it to make it better. Its easy. Try to save money on taxes wherever possible, find the highest and best use of that property at that time, and utilize the best financing available, either through terms or the proper use of equity to increase cash flow. Now, I know, I just said a lot. Lets break it down. 1. Save on taxes whenever possible. For real estate investors, the biggest hit usually comes in the form of a capital gains tax when selling a property. One of the simplest strategies to avoid the more expensive, short-term capital gain tax is to wait a year and a day before selling. At that point, it would be considered a long-term capital gain, which is usually subject to a lower tax rate. There are three other strategies that come to mind, all of which may help to reduce the amount of taxable gains from the sale. One is a strategy my friend, Mark Halpern, uses all the time, and thats selling on a lease-option.The second strategy for those of us with sizable portfolios is to keep the recently acquired property thats just been renovated and sell an older property from your portfolio, maybe one with a bigger gain and less depreciation deductions left. Theres no harm in juggling your inventory every once in a while.My third strategy is to possibly sell with owner financing (and with a nice down payment), and then maybe sell a partial of the note to try to recoup the rest of your capital. Related: This Simple Advice From Warren Buffet Guides Me to Deals No One Else is Finding 2. Pursue your propertys highest and best use. Pursuing the highest and best use of a property could mean a range of things. Personally, Ive done everything from adding two bedrooms in the third-floor attic to putting a new kitchen in the old dining room and adding a first-floor bedroom where the smaller obsolete kitchen used to be. Ive rented the garage in the alley to a third party, and Ive even built more garages to increase property value and cash flow. What can you do with the property to get the most bang for your buck? 3. Think outside-the-box with financing. Another way to improve the profitability of your deal is to get creative with financing. This can be anything from taking out a longer-term loan (i.e. 10-year fixed, interest-only mortgage to jack up cash flow) to utilizing the equity in your property through a HELOC (Home Equity Line of Credit) to lend as private money to another rehabber. The latter is a form of arbitrage, which would allow you to make additional money on the spread. Another strategy would be to accelerate the pay-down of debt. Personally, I love when my returns from investing pay down my debts for me. Were republishing this article to help out our newer readers. So, what are your favorite strategies to maximize your real estate deals? Do you use any tax strategies or finance hacks? Please share below! https://www.biggerpockets.com/renewsblog/great-deal-out-of-a-good-deal OK, Ill admit it. Im a tool guy! Yes, I can wander in Lowes or Home Depot for hours at a time drooling and dreaming. I dont ever have to have areasonto buy a new 18v DeWalt drill set. I mean, you never know when your current drill will break. The only thing that could be better than a new tool is a new tool with technology, right?
My company recently closed on a 125-unit town-home deal in Lexington, KY. At the time of our purchase, the previous owners paid for all utilities for the tenants except electricity. Instead of collecting the actual charges, they simply required the tenants to pay a flat fee of $60. This fee included water, gas, trash, and pest control. The tenants were only responsible for their own electricity.Since the water and gas were not individually metered, on the surface it seemed like a flat fee was a good way to collect fees. In reality, it turned out to be a terrible plan. We noticed during our evaluation of the propertys T-12 that the cost of water and gas alone came in at $160,000. Unfortunately, the property owners were only collecting a total of $80,000 in fees from the tenants. This one item resulted in a loss of over $80,000 for their ownership team. As we dug in more, we found that the year prior to our purchase, the property used a total of 12 million gallons of water. With 125 units and the propertys occupancy averaging just under 90%, the water used per occupied apartment equated to 107,000 gallons. We spoke to Ion Energy Solutions, a smart metering company out of Louisville, KY. They informed us that this was approximately twice the expected consumption for a property of similar size and occupancy. We were told that there was most likely a good sized leak which would be relatively easy to pinpoint using their technology. Related: 12 Creative Ways to Add Major Value to Apartment Buildings When laying out the underwrite for our investors, we detailed how we would attempt to recapture this terrible waste of money and resources. In our talks with Ion, they assured us that with the installation of their wireless smart water meters, we would save millions of gallons of water. They also offered wireless smart thermostats that we installed as well. The Real Work Starts Once we had a signed purchase contract, we were able to perform thorough on-the-ground due diligence. We questioned the site manager about the excessive water usage, and she casually mentioned a leak in the pool. Upon further questioning, we learned that the pool water level dropped eight inches each and every day. I asked what they had done to fix the problem, and she told me that they dragged the hose out every morning and filled the pool back up againas if it were no big deal! So, it appeared we had found one of the big leaks. The biggest question was how much it was going to cost us. With hard money down, we were already committed to purchase the property regardless. There was no turning back. Unfortunately, it was November, the pool was closed, and we couldnt get an answer until spring.We had a good suspicion that the leak was along the top edge of the pool somewhere. When spring came and we finally opened the pool, we called in a local company. They revealed that there were leaks in all of the skimmers. The eight inches of water lost per day were resolved for less than $500 dollars. Problem solved, right? But wait, why was our water billed still jacked? Lesson Learned After some unexpected post-closing headaches, we finally contracted to have the smart meters installed. Unfortunately, no one, including the utility company, could locate the shut-off valves for more than one-third of our buildings. Due to the unexpected delay, the project dragged on for more than four months and the high water bills continued. Once we finally got the system up and running, it was eye-opening. The reporting capabilities and ease of use were astounding. I was able to log in to the site and look at a number of reports documenting the water usage for each apartment and for the complex as a whole. Its an understatement to say I was surprised by what we found! We did not find one or two big leaks, but a handful of defective toilets and tons of defective toilet flapper valves. In fact, as many as half of the toilet flapper valves in the entire complex were non-functional. As the whole system came online, I began to receive alerts on my email and cell phone each time an apartment used more than 60 gallons of water in one hour. I would get as many as 25 alerts a night. We found that one faulty flapper could leak as much as 5,000 gallons of water in a single 24-hour period!We sent our maintenance crew out on new search and repair missions each morning, guided by the alerts I received the night before. Slowly but surely, we hunted down all the leaks. What we thought was going to be one or two major repairs turned out to be hundreds of small repairs. Because the tenants had no skin in the game (to conserve) they would leave their toilets running for hours, if not days, at a time. Without the smart water meters, we would never have been able to find all of the leaks. The Bottom Line Now that we have the leaks under control, we are beginning to transition new and renewing tenants to direct billing of their water usage. Those who are careful abouttheir usage should be able to reduce their utility costs. Those who abuse the situation will now get to pay for their abuse. With the transfer of billing responsibility back to the tenants, our ownership group will be able to bring a huge uncontrolled expense in line. We will be able to pass these savings directly on to our investors, and the strategy has paid off in another tangible way as well. This individual metering system qualified us for a green loan from Freddie Mac. The installation of this system dropped our loan interest rate by 20 basis points. With the savings on the interest rate, we were able to offset the expense of the metering system, which was a win-win for all. Related: How to Calculate the Value of Multifamily Real Estate In retrospect, about 75% of the shortfall in utility payments were directly related to water and about 25% was related to gas expense. Our smart metering system also included smart thermostats. We intend to begin to bill back the tenants for their gas usage in the fall, and that will complete the savings of $80,00. I will update you on our experience with the smart thermostats once that transition is complete. After seeing firsthand the tenants lack of motivation to conserve, I was appalled. I quickly determined I would never buy another multifamily property without the ability to bill individual tenants for their own utility expenses. The smart system has done exactly what we had hoped!And if all of that was not enough to convince you to do the same, lets take a look at the value proposition. A whopping $80,000 of recovered utility expense will be added to our NOI. That $80,000 when divided by a 6% CAP rate upped the value of our property by $1,333,333. Not a bad take considering the smart metering system cost us just under $75,000 all in. In less than 12 months, we will have turned a $75,000 investment in smart metering technology (which was mostly offset by a lower loan rate) into $1.33M of appreciated value. We also expect it to be good for the planet, saving between 4 and 6 million gallons of water in the process. Were republishing this article to help out our newer readers. How about you? Bought any real estate tools lately that returned a 17.7x multiple the first year? Comment below! https://www.biggerpockets.com/renewsblog/75000-green-investment-turned-1-3-million-12-months-and-buy-multifamily-property-1-tool/ As someone with nearly two decades of experience acquiring, financing, and developing real estate, Im used to being asked for advice on the most tax-efficient ways to invest in real estate. There are investment vehicles that offer ways to defer capital gains taxes, which can help real estate investors in no small waybut what if, in addition to tax deferment, an investment vehicle could also reduce your current capital gains taxes and eliminate future capital gains taxes upon your exit? These tax advantages are not theoretical. Theyre now available to real estate investors through a new legislative change called Opportunity Funds. Thanks to a provision in the Tax Cuts and Jobs Act, real estate investors can now access unprecedented tax incentives over the course of the next decadeor longer.
But what is the best way for real estate investors to access an Opportunity Fund? It may be instinctual to stick with the way youre accustomed to investing in real estatewhether that means doing it yourself or using professional investment management. But in order to maximize earning potential, evaluation of a new investment option generally requires fresh examination. In this article, well examine important considerations specific to real estate investors when considering operating your own Opportunity Fund or investing in a professionally-managed oneand ultimately how a real estate investor can maximize after-tax return potential through the Opportunity Fund. What Are the Tax Incentives of Opportunity Funds? Before we look at how to maximize the tax incentives of Opportunity Funds, lets examine the tax incentives that Opportunity Funds offer. An Opportunity Fund is a new investment vehicle made possible by the federal Opportunity Zone program, which was created under the 2017 Tax Cuts and Jobs Act. Opportunity Funds must invest at least 90% of their holdings in specific investments (including types of real estate investments) within one or more qualified Opportunity Zones. An Opportunity Fund can self-certify to the IRS, but its also responsible for ensuring that it abides by the guidelines of the Opportunity Program in order to be eligible to access tax incentives available under the program. If the Opportunity Fund meets qualification requirements, it has full access to each of the tax incentives available, including: Tax Deferment: If any investor invests realized capital gains into an Opportunity Fund (within 180 days of realization), they can defer tax payment until up to December 31, 2026, with those taxes becoming due in April 2027. If the investment is divested before then, the gain will be taxable the year that the investment is dispositioned.Tax Reduction: Taxes owed on the initial realized capital gain can be reduced by 10% if the Opportunity Fund investment is held for at least five years prior to the end of the deferment period (December 31, 2026). Taxes owed can be reduced even further to a total of 15% if the investment is held for at least seven years prior to the end of the deferment period. Tax Elimination: Earnings from Opportunity Fund investments held for at least ten years can qualify for permanent exclusion from capital gains taxes. Theres no limit on how long an Opportunity Fund investment can be held, so capital gains earned on a decade-old or older Opportunity Fund investment can be realized tax-free when an investor chooses.Doing it Yourself While Opportunity Funds offer an appealing set of tax incentives, they can be difficult to execute due to their complexity on several fronts. There are advantages and disadvantages to operating your own Opportunity Fund and personal considerations are key when determining which investment method fits best with your goals and resources. As previously mentioned, Opportunity Funds can self-certify without the need for permission from the IRS. For those who possess all of the resources needed to operate an Opportunity Fund well, the DIY option offers investors the most control over the investment, which gives authority over the investments held by the fund. By handling all aspects of their investment internally, they can avoid having to pay a fee to an outside fund manager. In return for control over the fund, you shoulder the responsibility for the execution of the property investment. An experienced investor may be accustomed to this dynamic, but the Opportunity Fund is a new investment structure, which means that its unlikely that theyre used to operating in compliance of the complex requirements of this specific program. Related: The Latest Tax Reform Update and What It Means for Real Estate Investors Real Estate Asset Restrictions Firstly, the Opportunity Zone program places limits on the types and timing of real estate investments that can qualify for an Opportunity Fund. An Opportunity Fund can only invest in the construction of new buildings or in the substantial improvement of existing unused buildings. No other type of real estate can qualify. If an Opportunity Fund invests in the improvement of an existing building, it is required to invest more into the improvement of the building than it paid to purchase the property. Arguably the biggest challenge in any city with arduous zoning and permitting process, whether the building is newly constructed or a heavy value-add, the development must be completed within 30 months of the initial purchase of the property. These program requirements inherently restrict the DIY option to those who have the expertise and resources to manage full property redevelopments, conversions, and ground-up developments within a tight timeframe. For those more versed in stabilized assets, this is new territory that demands construction management expertise and extensive time commitment to run a development deal. Operational and Geographical Limitations Unlike other real estate investment options, the Opportunity Zone program restricts investment options to designated census tracts (i.e., Opportunity Zones), which limits the geographic focus for acquisition. There are more than 8,700 qualified Opportunity Zones in the United States currently, which constitutes roughly 12% of all census tracts in the country and its territories. Some Opportunity Zones offer more promising near-term growth potential than others and the ability to transact with the sellers of the most promising investments is crucial. Geographic limitations add more complexity beyond connections to acquisition prospects. Because Opportunity Fund investments are limited by geography, they require investors to be knowledgeable not only of trends of the overall area, but also of specific neighborhoods and census tracts within those neighborhoods. On top of that, investors also need the ability to operate locally. If you have previous experience within a submarket, such as Shaker Heights in Cleveland (which doesnt fall into any Opportunity Zones) and desire to acquire in a less familiar neighborhood now designated as Opportunity Zone, such as Ohio City in Cleveland, there will likely be challenges in finding and closing on a property where you have less of a network, reputation, and local knowledge. So, unless youre located in or near promising Opportunity Zones where you already have a deep background, youll need to find a way to get boots on the ground at the Opportunity Zone investment that youre considering. The Complexity of Compliance Lastly, and possibly most importantly, on top of these limitations, theres a complex compliance structure that Opportunity Funds are required to operate within. As mentioned previously, an Opportunity Fund is required to invest at least 90% of its holdings in Opportunity Zone-qualified investments, and the burden of certifying and reporting falls on the Opportunity Fund managers. The complexity of compliance that is innate to Opportunity Funds and the Opportunity Zone program is likely challenging for a small team or a single operator. Maintaining the required investment ratio while developing within a competitive environment and ensuring proper reporting throughout the lifetime of the fund requires specialized legal and accounting knowledge to navigate. Otherwise, you bear risks that could very possibly outweigh any possible tax advantages. Its nowhere near impossible to operate and Opportunity Fund alone, but the complexities of this investment vehicle restrict the DIY option to a small group of experienced and capable managers, who are able to make the investment worthwhile through their own efforts. You can also take some of the weight off your shoulders by enlisting the help of real estate operators, an accountant, and legal counsel. But these services also add expenses, which reduce return potential and also add new relationships to manage. If you employ the help of a team of experts, you very well may end up paying expenses and fees that are comparable to what a professionally managed fund would charge in addition to the time and effort of self-managing a complex, new fund. Investing a Professionally Managed Fund A professionally managed fund removes direct control from individual investors, which may be undesirable for some hands-on investors. But with that, it also removes the burden of operating within a tight and complex program from investors shoulders while still offering access to tax incentives of the Opportunity Zone program. Volume and Diversification of Assets By pooling funds under a professionally managed fund, investors receive the ability to invest in assets that would otherwise be out of reach of many individually. Theres no legal limit on the number of assets in which an Opportunity Fund can invest in, so by pooling funds this way, you can access dozens of property investments across both residential and commercial real estate. In addition to the practicality of accessing a larger volume of real estate investments, a professionally managed fund can offer greater geographical reach. Because Opportunity Zones are based on geography, some of the most desirable and fastest growing Opportunity Zones may or may not be local to you. Through a professionally managed fund, an investor based in Cleveland can realistically access Opportunity Zone investments in Dallas or San Diego or where the most promising Opportunity Zone investments may be at a given time. Additionally, the success of each investment isnt dependent upon an investor understanding the interdynamics and underlying elements impacting growth potential of individual census tracts. Related: 4 Different Types of LLCs and the Ways They Pay Taxes Speed and Ability to Develop As previously discussed, theres more to investing in qualified Opportunity Zone properties than simply buying a cash-flowing asset and improving it through minor renovations. The ability to develop a property from the ground up, convert an existing building to a new use, or substantially rehabilitate an asset within 30 months of purchase requires a greater time commitment, deep resources, points of contact and the ability to operate with speed in a competitive environment. Understanding local demand, community dynamics, zoning barriers, and other complexities will be critical in successfully executing on real estate developments in the limited number of promising neighborhoods. Additionally, in developing properties in a manner that improves the community, as the Opportunity Zone program is intended to do, requires taking into account the local vested interests at stake. If a real estate investor fails to operate properly in any regard here, they can risk opposition from many fronts. Managing Compliance With a Team The complexity of compliance is easier to bear with legal and accounting experts to navigate project requirements, manage the Opportunity Fund and more. A dedicated team available under a professionally managed fund structure enables the fund to move quickly while meeting all requirements. A do-it-yourself (DIY) operator will likely concentrate compliance risk to one Opportunity Zone property with a single 30-month development timeline and other program testing, which could have much larger economic consequences if there are unexpected project delays or unforeseen compliance errors. However, in terms of accessing the greatest number and quality of deals within the parameters of the Opportunity Zone program, youre limited by the expertise and reach of the fund manager. Although the burden operating the fund wont fall on you under this structure, the lack of direct control makes it that much more imperative to choose the right Opportunity Fund manager with expertise of, and ideally, experience investing in neighborhoods in or adjacent to now-designated Opportunity Zones. Costs Justified by the Value of the Service? The difference in costs between operating an Opportunity Fund yourself and following the professionally managed fund path is one of the most crucial considerations when choosing how to invest in an Opportunity Fund. A fund charges its investors fees and expenses directly where a DIY investor can directly and indirectly pay their own sets of fees and expenses throughout the lifetime of management of an investment. There is considerably more time and effort needed to manage the permitting, construction, and leasing required under an Opportunity Zone than the asset management involved in another investment structure, such as a 1031 exchange. With the DIY option, you can forgo fees that you would otherwise be charged by a professionally managed fund. However, if they end up relying on outside expertise and use services from real estate, accounting, and/or legal experts along the way, you will end up being subject to other fees and expenses that you were trying to avoid by investing in a professionally managed fundthe extent of which may be greater or lesser than what a fund would charge. The fees and expenses charged by a professionally managed fund can vary widely from fund to fund. Because the Opportunity Fund is a relatively new investment vehicle, there is no standard cost structure. This makes it imperative for an investor to be able to understand and compare cost structures of competing Opportunity Funds and the DIY model. In general, however, in terms of expenses, one main differentiator between the DIY option and professional management option is the ability of a professionally managed fund to benefit from economies of scale. A professionally managed fund pursuing a greater volume of investments can have greater leverage to manage Opportunity Fund legal and accounting setup. For example, this can include standing up the opportunity zone fund in terms of legal, tax, and accounting, maintaining the ongoing code and regulatory compliance as it is released over the coming months and years, as well as the normal economies of scale of acquisition, financing, construction, and leasing in emerging neighborhoods. Choosing Which Path is Right for You Operating your own Opportunity Fund may be worthwhile if you have the expertise, resources, and geographic advantage to enable you to oversee this complex investment vehicle for at least the next decade. Managing the complexity of this investment vehicle alone can be a full-time job in and of itself. If you enlist outside help or if youre unable to gain specialized Opportunity Zone knowledge necessary to form and operate an Opportunity Fund and source a shovel-ready development within your 180-day rollover window, you may lose the possible benefits of the DIY option. On the other hand, because a professionally managed Opportunity Fund generally comes with several teams of experts, it has the capacity to execute more deals more quickly and possibly nationwide (depending on its strategy and geographical focus). Depending on its deal volume, a professionally managed Opportunity Fund may also benefit from economies of scale, which could allow it to lower management and development costs. However, under this path, investors will pay expenses incurred by, and fees for services provided by, the fund. Depending on which aspects of the DIY option and the professionally managed fund matter most to you, as well as your goals and resources, a cost-benefit analysis may be key in determining which method of investing in an Opportunity Fund is right for you. We created the Fundrise Opportunity Fund to offer investors an effortless way to access high-quality real estate properties located in the most promising Opportunity Zones with strong long-term growth potential across the US. In Los Angeles alone, Fundrise has invested or committed approximately $100 million in neighborhoods in and along the areas now designated as Opportunity Zones. Our technology-enabled investment approach coupled with our partnerships with leading expert teams devoted to Opportunity Fund management enable us to take a nimble, and cost-effective approach to investing in Opportunity Zones nationwide. Regardless of how you choose to invest, Opportunity Zones now offer one of the most tax-advantaged ways to invest in real estate. Opportunity Zones not only offer investors a way to substantially diversify their real estate portfolios and the ability to potentially double their after-tax returns over the course of the next decade. Are you curious what your after-tax returns might look like if you invest in an Opportunity Fund? Use this calculator to estimate how much money you could potentially save. https://www.biggerpockets.com/renewsblog/maximize-opportunity-fund-take-home-return-potential One of the biggest complaints I hear among fellow investors is how difficult it is to find a good contractor. Even contractors recommended by other people seem to fall short.
Someone thought they were great, though. So, why dont they work out? There are a lot of bad contractors out there, but the reality is, there are a lot of really excellent ones out there as well. So, if you cant find one, you should first look inward to figure out what you are doing wrong. 1. Your expectations are too high. As investors, we are looking for some unique combinations of qualities. We want our contractors to: Be amazingly fast and efficient.Always be available when we need them and be able to start projects on short notice.Be punctual, reliable, and always stay on schedule.Provide great remodeling tips and design ideas to improve projects.Have outside-the-box solutions to problems.Work with very little oversight.Provide professional invoices and quotes, have proper licensing, and provide insurance coverage.Give the highest quality work.Have rock bottom prices. Are you starting to see why its so hard to find the perfect contractor? Nobody can achieve all of these requirements. Manage your expectations or be prepared to pay more. There are a lot of contractors whocan cover many of the above qualities, but they will probably have the highest prices. The ones whoreach your goal #9 are probably lacking several of the other qualities. So, which will it be? Neither option really works for an investor. Too expensive and it will blow out the budget, while the dirt cheap guy will probably lower the after repair value and ruin your timeline. Instead, you can focus on finding the contractors with the right combination of qualities. Create a list of what is truly important to you, then have only those ones bid on a project. For example, you may have a project manager working for you, so you dont need a contractor whoworks wellunsupervised. You may have an awesome interior designer, so you dont need someone to come up with design ideas. The point is to take the focus on what you truly need in a contractor and not expect to get everything. 2. You always take the lowest bid. The conventional wisdom is to get a minimum of three bids, then take the lowest one. Its so ingrained that even the federal government follows this requirement when putting projects out to bid. Some people say the more bids the better. Ive actually read that one person got over 30 quotes just to get the lowest price on a water heater. Whos got time for that just to save a few bucks? Many people recognize the flaw in this system, and now its common to say it was built by the lowest bidder when disparaging things like body armor or other protective equipment. Related: The Investors Complete Guide for Hiring a Trustworthy Out-Of-State Contractor The problem is people believe contracting is a product and not a service. A product such as a book or an electronic device is standardized once you figure out which model or item you want, you can simply go find the cheapest price. You get the same thing regardless of what you pay. Contracting is a service, and you get what you pay for. Stop taking the lowest bid. So, lets just get it out of the way stop taking the lowest bid. The majority of the time, the cheapest bid will result inthe lowest quality work. Obviously, you dont want to overpay for the job, so how do we get the lowest price for the service you need? The key: compareprice for service. Start with the work you did in #1 and rank each contractor in each category. Some contractors may have great qualities above and beyond whats on your list, but remember, you dont need those. Focus on what you need to have and just keep those nice to have features in the back of your mind for now. Get rid of any contractor whodoesnt score well in all your need to have categories. Then start getting quotes from the rest. When you get the quotes from the contractors, put them in the same order as the service they are providing to you. If one price is considerably more or less than the others, immediately discard that. The costs for a job dont suddenly decrease, so low bids are suspect. Really high bids can be overcharging, paying for better service, or paying for more overhead expenses. Regardless, we dont need to pay for that either. Now you have a great list, and it should be pretty easy to choose the best one at the best price. 3. You get itemized quotes or push for labor-only quotes even on complex jobs. I know this one will be controversial, but I need to put it out there. I can speak tothis from the perspective of an investor as well as a contractor (Im licensed as a GC in my state and used to own a remodeling company). Essentially, the majority of really good contractors will never give itemized quotes and will give labor quotes only if they are getting paid hourly. People would ask for this, and Id say no. If they pushed hard on it, Id refuse to bid the project or walk away. The reason is simple the vast majority of people in the United States dont understand business basics such as overhead expenses. Also, there is a massive falsehood floating out there that a fair contractor markup is 15-20%. Let me explain. This is how contractors usually factor in overhead expenses. First, contractors have a lot of overhead expenses. Michael Stone runs a great website that helped me tremendously when I was contracting. He explains contractors overhead expenses best: Advertising, sales commission, job supervision (which isnt usually a job cost), office expenses (even if they work out of their home), insurance, accounting and legal fees, licenses, taxes, employee expenses, and their own salary are just a few of their overhead expenses. The typical remodeling contractor will have overhead expenses ranging from 25% to 54% of their revenue that means every $15,000 job could have overhead expenses of $3,750 to $8,100. Markup and Profit Additionally, every company should be able to charge a fair profit of 5-8%, which is money that can be reinvested for future growth. I can attest to this, as my company had a 25% overhead expense rate and a profit goal of 8%,for a total markup on each job of 33%. So a job that cost about $5,000 in labor and $4,000 in material would have an additional $3,000 tacked on to cover my overhead expenses and profit. Labor-only quotes kill contractors. Lets say a contractor got duped into giving a labor-only quote. The amount they should charge is $8,000 since their overhead expensesdont change just because you paid for the materials. Unfortunately, its too easy to look at the project length and quickly calculate the contractors hourly rate. You would balk at paying a labor rate 60% higher than what a fair wage is for a contractor. Related: 10 Expert Tips for Finding the Perfect Contractor for Your Latest Project So you shop around and find a contractor whoisnt quite as good with the business side of things, and he charges you $5,000. Well, his overhead expenses are still around $3,000, which means he is taking home $2,000. Lets say the contractor quoted a rate of $30/hour originally (166 hours at $30 is roughly $5,000). He is taking home roughly $12/hour after you subtract his overhead expenses ($2,000/166 hours). Do you still wonder why these guys disappear and go out of business? The exception is really labor intensive jobs with an unknown duration. Contractors hate itemizing quotes. Its actually really simple when you think about it. Every contractor inevitably underbids one part of a project and overbids on another there are just too many unknowns and variables to account for when bidding. Investors love to get itemized lists because they can beat up the contractor on prices. The problem is the contractor will have to lower the prices that are overbid, but he has no way to increase prices that are underbid. Result: The entire project gets underbid, and the contractor is guaranteed to lose money. The exception is that a contractor may itemize out a large item. Its common to offer a price with 2 or 3 scenarios, such as with and without an addition. Good contractors dont need your business. The title of this section says it all. Good contractors are really busy and dont really need your business. If you show any signs of a nightmare customer, they will simply walk away from the project. I had one customer whoI knew was going to be a nightmare, so I told them I was going to add a fee to work under their conditions. They accepted, and I added $3,000 to the project cost of nearly $30,000. I still lost money. Someone only needs to lose money once or twice before they learn from their mistakes. Thats why really pushing for these can scare away the best contractors and leave you with a pool of people whowill probably go out of business. 4. Your goals dont align. Another reason you may have a hard time finding solid contractors is that your interests dont happen to line up. Most contractors want to provide good quality work that they can be proud of, along with fair wages to support themselves, their family, and their employees. Quality and good wages are both subjective, so its easy for your interests to not align. There is good quality in $100,000 homes, and there is good quality in $1 millionhomes. Also, a frugal contractor might think a lower wage is fair, while a contractor with a big family and new truck might think a higher wage is fair. Many investors simply have different interests or goals than the contractors they are getting quotes from. If you want low-quality work at cheap prices, then you need a very different contractor than oneyou would hire for mid to high-end homes. Make sure your interests line up. Simply interview the contractor and get a good list of past projects. You can see what kind of projects they tend to work on, which categories look best, and what neighborhoods they are working in. If they primarily do bathrooms and kitchens in high-end neighborhoods and you need a basement finished in a mid-level neighborhood, dont waste your time or theirs getting a quote. Related: 3 Ways to Ensure Top-of-the-Line Contractors Will Want to Work for You Also, you need to make sure your needs line up with their business model. If you want top notch customer service and follow up, you may want the contracting company that has a back office and a dedicated support person or two.You may want to find a company that has salespeople or a design team if you need designs or engineering.If you are just a one-person show trying to get a flip done in an average neighborhood, you may just want a small crew with no other support.Changing Your Focus Its important to understand that finding good contractors is not the same as finding cheap contractors. If you are having a hard time finding and retaining good contractors, it is probably because you have the wrong focus. If you are focused mostly on price, you will always find your way to the low-quality contractors. Instead, you need to focus on the service they provide and thenfind the fairest priced contractor within that subset. Were republishing this article to help out our newer readers. Is there anything youd add to this list? If youre working with a great contractor, how did you find them? Let me know your thoughts with a comment. https://www.biggerpockets.com/renewsblog/how-to-find-a-good-contractor/ Would you like to invest in real estate but lack the capital? In this powerful episode of The BiggerPockets Podcast, Brandon and David dive deep into the topic to cover four unique strategies for building a real estate empire using other peoples money. In addition, youll learn why creative finance is SO important (even for experienced investors,) why equity is far more important than a down payment, and how to combine multiple strategies into one magnificent deal!
This is an episode where you may learn more about real estate investing than you have in the last year, so dont miss your chance for a content packed, highly valuable episode with Brandon and David sharing the tips THEYVE USED to build real estate wealth themselves! Click hereto listen on iTunes. Listen to the Podcast HerePodcast: Play in new window | Download Subscribe: Apple Podcasts | Android | RSS Watch the Podcast Here [embedded content] Help Us Out! Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it! This Show Sponsored By Roofstock is the #1 marketplace for buying and selling leased, single-family rental homes. Their marketplace of tenant-occupied rental properties makes it easy to invest in cash flowing properties across the U.S. and start earning cash flow day one. They even connect you with vetted local property managers, so you can invest and own remotely with confidence. To sign up for a free account and start browsing cash flowing rental homes, visit roofstock.com/biggerpockets. Deep Dive Sponsor Hiring the right assistant to help run your real estate business can help double your portfolio, hiring the wrong assistant however can lead to headaches and your business falling apart. Thats why you should use linkedin to find your next hire and grow your real estate empire! Visit linkedIn.com/bpand get $50 off your first job post. Fire Round Sponsor Check outSimpliSafeSecuritys DIY home security systems; an affordable, wireless, cellular, and customizable system that doesnt require a contract! Try it today with a discount:simplisafe.com/pockets In This Episode We Cover:Who no (and low) money down investing is forThe two keys to understanding creative financeTips for using partnershipsWhat you should know about the BRRRR strategyA deep dive into a specific BRRRR dealAdvice on finding hard money lendersHow to complete house hacksWhat exactly BRRRR house hacking isAnd SO much more!Links from the ShowBooks Mentioned in this ShowTweetable Topics:Borrowing credibility can even be better than money. (Tweet This!)In a sense, a hard money lender is a form of a partner. (Tweet This!)Rockstars know rockstars. (Tweet This!)Connect with Brandon and DavidHow to Invest in Real Estate (Pre-order Available!) https://www.biggerpockets.com/renewsblog/biggerpockets-podcast-299-5-no-money-investing-techniques-brandon-turner-david-greene/ All of the stories below are about people in my hometown. They are real, but the names are not.
There is a certain stewardship that comes with being a landlord. Its an understood or implied role when you invest in houses or apartments. And its not optional. Part of the job is doing the right thing. As landlords, we should not take the position lightly. We should not abuse the position by digging every last penny out of a person. Do not kick someone when they are down, but help them up maybe just help them maintain. Do right by the neediest of people and be service-minded when it comes to their welfare. We can certainly afford to help. Calamity With 20 years of landlording and over 160 units, I have had tenants from all walks of life. With few exceptions, at some point or another all tenants need help, need consideration, or need empathy. Jocelyn was a Section 8 tenant of mine that lived for about four years in a 3/1 that I own. She was always on time with her part of the rent. Always on time that is, until the police kicked down the door one night and arrested her and her boyfriend for selling drugs. Easy answer, right? No sympathy. Pack up your bags and get out. You are of no benefit to me. Time to move on. Related:Are You a Slumlord? Its not that easy for me. I couldnt just put the property manager between Jocelyn and me to keep her problems at arms length. See, Jocelyn had 4 kids, all under about 9 years old. Two of them had sickle-cell anemia and were in the hospital on and off the whole time she lived in the house. So Jocelyn got my sympathy. She did not appear to be a drug user to me, although certainly suffered from depression. Her boyfriend took advantage of and bullied her. He lived in the house at the time and was the cause of the drug dealing issues. Jocelyn was somewhat (though not completely) an innocent bystander. I made sure that she and the kids had a place to live for a rough 3-4 months by not kicking them out and taking whatever she could pay. I gave her money occasionally to order all of them pizza. Eventually she returned to making her part of rent on time. Yes, I lost a couple of bucks out of the deal, but the kids kept their normal routine while their mom worked things out. It was the right thing to do. Ms. Patrick lost a daughter who was about 10. Dont even know the reason, but she called the PM terribly upset and just did not know what to do. She had no money for a funeral. Should I have filed for eviction and charged late fees? No, her rent was forgiven for a month and no fees were assessed to help out. It was the right thing to do. Mr. Joe was in the local newspaper about a year ago.He was being featured as someone in the community who gives back by feeding hot dogs and other easy-to-make meals for hungry, mostly older folks in his neighborhood and church. Now I make a point of seeing Mr. Joe occasionally and giving him a few bucks to help out. Its the right thing to do. By the way, Mr. Joe is about 85 years young. James and Martha rented a house on Eaves Road in a rural area. The volunteer fire department was not able to respond in time to same anything meaningful. They lost everything because they had not listened to our advice to put renters insurance in place. Should we have said Sorry, not sorry? Or ignore them? We did not ignore them. We did not say I told you so. We put them up in a hotel for a couple of night and then moved them into a unit that was available along with some donated furniture at no charge for as long as they needed it. I think they moved into a new home after a month or so. These are just a few stories where I was fortunate to be in the right place at the right time. When you spend twenty years in the rental business and have over 160 units, bad things will happen to people. Life will happen to people. So much of what happens to folks can be the consequence of bad choices. But even though that is true, it is no excuse not to render aid and be compassionate when people genuinely need help. That is your cue to step up. Care-taking There in another way in which we are obligated to be service-minded as landlords. We provide a product to paying customers. That product includes a roof that doesnt leak, an air conditioner that cools when its 100F outside, and a toilet that flushes. Though they are just houses to us, they are homes to our tenants a most basic of human needs. This may seem obvious but. . . In my hometown there is a landlord we will call Slumlord Larry. Everybody knows him. Every banker. Every insurance agent. And certainly the city codes enforcement staff. Almost every renter has probably run across him at one point or another. He drives a trashy old pickup with a trailer (not hating on frugality here). Both are filled with garbage, leftover building materials and I suspect dead animals. He is a complete embarrassment to anyone that owns a rental property. My daughters friend used to live in one of Slumlord Larrys properties. It was an older mobile home on about an acre. Mom and Dad didnt make much money, but the family was tight knit and they made it work somehow. Related:Can Investors & Landlords Own Real Estate Anonymously (Or is Privacy Dead)? There was a hole in the main bathrooms floor that the family had to keep covered with a piece of wood because Slumlord Larry would not fix it. Every time it rained, the roof leaked into the house. The first few times they called Slumlord Larry and ask him to fix the ever-worsening leak. He promised to get by there, but never did. After apparently getting tired of getting calls to fix the water problem, he finally told them that if they wanted it fixed they would have to do it themselves. That was just wrong (and foolish) on so many levels, but it came down to Slumlord Larry not wanting to drop a dime on the trailer. Dont be a Slumlord Larry. Even when money is tight, get the job done. We owe it to our tenants, not simply from a business and contractual standpoint, but from a moral and humanistic standpoint, to take care of the shelter we provide. Its the right thing to do. Are you a landlord? Do you agree or disagree? Share your opinion below! https://www.biggerpockets.com/renewsblog/do-the-right-thing/ In my 15 years as a real estate investor, I have been asked the question is multifamily a good first investment many, many times, by many different people who are in many differing circumstances. My answer has always been and continues to be the same.
It depends. It depends on a variety of different factors. These factors include the investors disposition, their goals, and their experience. It depends on their financial situation and the amount of time and sweat equity they might be willing to put into an investment. It depends on the market they are trying to get into. In short, it depends on the person and where they are in their lives. It is something they have to answer for themselves. I always tell people that the best way for them to answer this question is to compare the pros and cons of multifamily investing with the pros and cons of another type of investment they might consider, such as single-family dwellings. Put pencil to paper and make a list. Then, think about yourself, your goals, and your financial situation to determine how the pros and cons match up to you. To help you decide, Ive outlined some of the basic pros and cons of multifamily investing below. Ive also included in these pros and cons some of the advantages and disadvantages of other types of real estate investments to give you a better overall view. Multifamily ProsMore Cash Flow Perhaps the best pro multifamily has going for it is the cash flow. Because there are multiple units, there is more cash flow. Theres not necessarily a better return on investment, but more cash flow. There is simply more cash coming into your pocket every month because you have more people paying you. A single family home, while it may offer a better return, will generally not generate as much cash. Everything in One Place With a multifamily property, there is only one lawn. There is only one roof. There may be only one water heater or HVAC unit. There is only one place to drive to. There is only one place to check on. In sum, almost everything is contained, which could help keep your maintenance and operating costs down. Single-family properties can be scattered all over the place. Plus, they all have the same components as multifamily properties, such as roofs and lawns; there are just more of them. Related: Why Your Chance to Land a Big Multifamily Deal Might Be Just Around the Corner Rarely Completely Vacant Tenants move and create vacancies. But multifamily properties are rarely ever completely vacant.This means there is always some cash flowing in, and someone is there to help prevent theft and vandalism. This is not the case with single-family properties and commercial storefronts. When they are vacant, they are emptysometimes for a long while. Fairly Easy to Find Tenants Everyone needs a place to live, and as long as you invest in a decent area and have a decent property, you should be able to find rent-paying tenants. Doing this with other types of properties, such as commercial, is not always so easy. Live in One of the Units Living in one of the units may actually be a great advantage, especially for a first-time investor. For one thing, you can get similar types of loans for smaller multifamily buildings (duplexes, triplexes and quadplexes) as you can for single-family dwellings. This helps keep your costs down. Further, if you live in one of the units, you can count the rental income from the other units on your loan application, helping you acquire the property. Multifamily ConsMore Difficult to Finance Multifamily properties, especially properties with five units or more, are very different from single-family properties when it comes to financing. They are considered commercial properties. Financing can be more difficult to secure. Larger down payments are often required. Interest rates are higher. The loan terms are shorter and usually include a balloon payment. These items could preclude some newer investors from being able to acquire multifamily properties. More Difficult to Sell The number of buyers out there for multifamily properties is much smaller than the number for single-family properties. Further, almost all of the people buying multifamily properties are investors who are looking for a good deal. So unless you have somehow increased rents or otherwise added value, do not always expect to be able to reap huge gains or get out very quickly. Related: 5 Amazing Benefits Multifamily Investments Offer (That Single Family Homes Dont) More People Problems Multifamily properties come with more tenants, and all of those tenants will have one common denominatoryou. Expect the amount of people problems to rise dramatically when owning a multifamily property. Also expect differing types of people problems depending on your market and class of property you buy. Higher- and lower-end tenants each come with differing sets of circumstances and problems. Management Expertise Required Running a multifamily real estate investment is a business. It is NOT passive. Are you ready to be an accountant, contractor, law enforcement officer, and psychologist? If not, are you ready to hire a management company and have a completely different set of headaches? The Sum Up Is multifamily a good first investment? Maybe. As I said in the opening to this post, it depends. It depends on the investor. It depends on their financial situation. It depends on their market. It depends a lot on their experience in dealing with people and running a business. If you truly want to get into multifamily investing for the first time, with little or no experience, perhaps it is best to start small. Start with a duplex or quadplex. With these types of properties, an investor can give multifamily real estate a try and determine if it is the right fit for them. These properties are generally easier to get into, easier to finance, and easier to manage. They are also easier to get out of just in case things do not work out. Is multifamily a good first time investment? Yes. But it depends. Were republishing this article to help out our newer readers. Are you considering multifamily as a first investment? Why or why not? Weigh in below! https://www.biggerpockets.com/renewsblog/multifamily-first-investment/ |
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