Investing In Real Estate? Or How Many Mortgages Make a Mortgage Mortgage?

Too Much Money, Not Enough Mortgages...

There are many variables to consider when/if you decide to jump into real estate investment. Like...how do I do it? Can I afford it? Do I even want to do it? Before you jump into looking for your first investment property, here are some important considerations to make.

So much money to burn...

Investable Funds Sit down with your financial adviser (first step; get a financial adviser). Talk with them about how much can you actually afford to invest? 

What are your expenses? How much do you have set aside for emergency funds? Real estate investment will tie up your funds for some time and if you need to liquefy your assets quickly, this could become an issue. You may need to consider a moderate initial investment amount and strategize accordingly - investing in smaller deals, partnering with others or investing in assets that you can readily exit from or all the above.

Timing When do you want to get your principal back? When do you want to start getting a return happening in regards to cash flow? When is the latest you can afford to get your capital back? Knowing these answers will help narrow what asset types and deal scenarios will fit your needs. For example, if you need immediate and consistent cash flow but don't need the capital back at a definite time, then income generating rental properties may be a good choice. 

However, if you're looking at 'flipping houses' or to get in and out within a relatively short time frame with a potential for a significant gain, you'll need to look into more opportunistic deals that will give you that chance for a quick return on your investment.

If this is your Dad, lenders will like you better. 

Effort Owning real estate involves a fair amount of upkeep, depending on your direction. Anyone can be a slumlord or a house-flipper if you have the time, energy, enthusiasm for mandatory court appearances due to disgruntled tenants. How much effort can you afford to put into your choice or real estate investment? 

With each investment, you will have to put in time and effort into doing your due diligence, the negotiations, closing of the purchase, building/renovating your investment the of course the day-to-day upkeep once the investment is ready for sale or rent. Then you have to close the deal, if that is what you wish to do. 

While not all projects will go through all of these stages, any investment will require time and effort for you to properly evaluate the opportunities and to carry it out. If you're looking for something that you can invest in and be mostly hands off, you'll be looking at assets that don't require construction, remodeling, and dealing with the necessary permits and/or negotiations with the relevant trades. But if you've got the time and the incentive to take on more challenging projects, you will have more options. Generally, the more difficult and risky a project, the greater the returns you should expect. Fewer potential investors will mean less competition when it comes to final sales price. 

Distance & Travel It's true that nothing stops you from investing in a property 1000 miles from where you live, but what will you do if you need to take care of an issue that involves the property? What about a tenant problem? There are many rental management companies out there but in the end, most are only the primary contact for your renter and cost only a fraction of the amount compared to traveling and hotel stays. It could also take time...lots of it. But if you are able and willing to invest travel time and costs, you'll have far more investment options than if you're only able to look in your immediate vicinity. It will also diversify your investments across more markets and asset types, which helps hedge against area-specific risks such as new codes, rezoning, and tax increases.

If  either of these guys is your partner, lenders will like you better. 

Partnerships Do you only want to invest by yourself or do you have other individuals that want to invest alongside with you as partners? Both options have pros and cons. By yourself, you make all the decisions. Bookkeeping is straight forward. However you are not able to diversify your investments as much as you could if you invested with others because with partners you can pool your funds together. What about finding a partner you can work with? It's not as easy as it sounds. You want to finding investment partners with knowledge and skill sets that complement yours and can help you all make more informed investment decisions. However, investing with partners means decision making could be slower because consensus is typically required for decision making. Then don't forget how you will be splitting profits and initial costs. A proper legal framework should be drawn up and not just have a handshake deal in place that happened in the later hours of a family gathering. How will profit be divided? Who is putting in the work, who is putting in the money? Who decides what is fair? 

Examples.

Here are two real estate investors with different resources and motivations.

Mr. Hare. He has a small investment fund but wants to make big returns in a little amount of time. He's a high roller and willing to take on the risk. 

Personal Creed; YOLO

Mr. Tortoise. He has a large investment fund, due to many previous real estate investments. He likes the low risk factor, motivated to have a low but steady cash flow stream over time. 

It helps if you plan on being cyrogenically
frozen for 50 years too.

Investment Opportunity #1: The Fixer-Upper Flip

From this....

To this in 3 short months.

An older home requiring some significant remodeling work such as updating the colours, remodeling the bathroom and addressing some issues with flooring and roof. 

Potential Upside: the low purchase price and the comparable sales in the neighbourhood indicate that a good profit could be made with a quick turnaround. 

Potential Downside: You never truly know what may come up when you are fixing a house. One problem could lead to another, as pretty much every Fix-it and Flip-it show on television indicates. In fact, it's almost mandatory that however much you budget for repairing a house, add another 25% minimum for unexpected expenses. Some lenders may be hesitant to provide financing on an unsuitable for living property. 

Fit: If you want high risk/big reward, look no further. A huge television industry and their resulting sponsor products has been created specifically for this type of investment. A Mr. Hare personality would thrive on this idea. With his limited funds he will need to be creative with finding equity and debt to make the deal more than a possibility and probably also have to be actively involved with a lot of sweat equity on his part, perhaps even learn where those special nails are in the local home renovation center. 

Investment Opportunity #2: Rental Investment

Ghosts may be considered long-term tenants but usually have poor credit

A rental investment property in a strong rental market with little to no deferred maintenance items. It's a turn-key sale, meaning it's ready to be moved in immediately. 

Potential Upside: No hassles; no repairs needed. It's a solid rental unit that can produce a steady stream of cash for years to come. May appreciate in value according to the market. The rental income it produces more than covers the cost of the mortgage payments. 

Potential Downside: Attractive income producing properties tend to command premiums, so you’re unlikely to be able to purchase at a significant discount. Your gains will be slow as most rentals will command market value. May need to consider what may happen if a rental unit sits vacant for an extended period of time. Rental insurance would also be strongly advised. 

Fit: This is a lower risk investment because it is already producing a return (or could easily do so within a short period after purchase) and presents no renovations/construction risks. While the returns could be fairly small considering the purchase price, its prospects of stable cash over time are appealing to someone like Mr. Tortoise. He can expect a steady and stable return with the possibility of additional gains from future appreciation. And ghosts. 

epicninjabacon is going to be huge!!!

Whatever your personality, investing in real estate is not something to be taken lightly. Take your time, make informed decisions, talk with a professional.