How to Build a Real Estate Investment Portfolio with Minimum Risk
The percentages vary from one report to another but there is no question that a very high percentage of multi-millionaires attribute their financial success to real estate investments. That doesn't address how much money they started with or what connections they had to get started. After all, Donald Trump didn't start with zero assets. Most of us will never create a real estate empire and are not ready to mitigate the risk in doing so but are dedicated to embarking on a conservative real estate investment approach to building a retirement nest egg.
The television screen is proliferated with Info-commercials promoting the investment property buy to sell(flipping) concept of attaining wealth. Investors who buy low to sell high take substantial risk but the rewards can be significant if all goes well. Residential real estate has lower or more manageable risk factors than commercial investments and requires far less knowledge and experience. The downside of flipping is the intangible expense associated with repair costs, extended marketing time and other unforeseen factors. Properties that fit into the "handyman special" category are frequently not so special when repairs are underestimated or unforeseen problems surface. This is an investment that can provide a sizable return on the invested dollar but that doesn't happen as frequently as new investors are led to believe. The opposite is far more prevalent.
Many successful real estate investors started by buying their first home and found that when it was time to move up to a larger or more comfortable home they could rent their existing home for more than their monthly expense. The key factor is the financial capability of handling the expense of purchasing the new property without compromising the equity gained in the existing property. Mortgage lender's qualifying criteria requires that 25% of the rent be allotted to vacancy and maintenance factors. Whereas in most cases, expenses are not likely to be that high, this is an important consideration. Some houses, town homes or condominiums lend themselves to becoming rental properties and others do not. For example, older houses, charming as they might be are likely to require above average maintenance expense. Condominiums regardless of association fees can make excellent rental properties because those fees normally cover insurance, all outside maintenance and sometimes certain utilities. Investment experts frequently recommend renting properties slightly below market. Twenty five dollars per month is a lot of money to many renters and just a couple of months of vacancy can erase gains from higher rents.
The second move up frequently falls into the "dream home" category and it may be more difficult to keep the current home as a rental property depending upon price range, equity requirements for down payment and the expense to improve or furnish the property into the dream home echelon.
Many investors buy second homes with the idea of converting them to rental properties at some point in time. Seasonal properties in highly desirable vacation locations with close proximity to beaches, golf or skiing can be excellent investments. A few months of rent over the season can cover expenses for an entire year leaving the property available for personal use during off season months. The complexity with seasonal rental is that the properties must be furnished, well maintained and usually need to be placed in control of a management company. Astute investors are aware that those who live and work in resort areas expect to pay comparatively higher rents than in less exciting locations and may opt for a local yearly tenant; a less risky option. Ten minutes from the beach is a feature that commands higher rents even for many local residents.
If the long term goal is to create financial independence for the retirement years the residential real estate investment game is a relatively simple proposition but there are some basic rules.
Over time, it does not take exceptional income or wealth to build a substantial real estate portfolio that will make the retirement years very comfortable. It does take a stable source of income, a stable personal environment and a commitment to stay the path. The conservative or low risk approach not only provides peace of mind but allows for small mistakes to be made without compromising the ultimate goal.
The television screen is proliferated with Info-commercials promoting the investment property buy to sell(flipping) concept of attaining wealth. Investors who buy low to sell high take substantial risk but the rewards can be significant if all goes well. Residential real estate has lower or more manageable risk factors than commercial investments and requires far less knowledge and experience. The downside of flipping is the intangible expense associated with repair costs, extended marketing time and other unforeseen factors. Properties that fit into the "handyman special" category are frequently not so special when repairs are underestimated or unforeseen problems surface. This is an investment that can provide a sizable return on the invested dollar but that doesn't happen as frequently as new investors are led to believe. The opposite is far more prevalent.
Many successful real estate investors started by buying their first home and found that when it was time to move up to a larger or more comfortable home they could rent their existing home for more than their monthly expense. The key factor is the financial capability of handling the expense of purchasing the new property without compromising the equity gained in the existing property. Mortgage lender's qualifying criteria requires that 25% of the rent be allotted to vacancy and maintenance factors. Whereas in most cases, expenses are not likely to be that high, this is an important consideration. Some houses, town homes or condominiums lend themselves to becoming rental properties and others do not. For example, older houses, charming as they might be are likely to require above average maintenance expense. Condominiums regardless of association fees can make excellent rental properties because those fees normally cover insurance, all outside maintenance and sometimes certain utilities. Investment experts frequently recommend renting properties slightly below market. Twenty five dollars per month is a lot of money to many renters and just a couple of months of vacancy can erase gains from higher rents.
The second move up frequently falls into the "dream home" category and it may be more difficult to keep the current home as a rental property depending upon price range, equity requirements for down payment and the expense to improve or furnish the property into the dream home echelon.
Many investors buy second homes with the idea of converting them to rental properties at some point in time. Seasonal properties in highly desirable vacation locations with close proximity to beaches, golf or skiing can be excellent investments. A few months of rent over the season can cover expenses for an entire year leaving the property available for personal use during off season months. The complexity with seasonal rental is that the properties must be furnished, well maintained and usually need to be placed in control of a management company. Astute investors are aware that those who live and work in resort areas expect to pay comparatively higher rents than in less exciting locations and may opt for a local yearly tenant; a less risky option. Ten minutes from the beach is a feature that commands higher rents even for many local residents.
If the long term goal is to create financial independence for the retirement years the residential real estate investment game is a relatively simple proposition but there are some basic rules.
- Keep your eyes on the prize. Be patient and focus on the long range plan. Building equity in your home and just two or three rental properties over twenty plus years can set you free financially.
- Don't take a second mortgage or cash out refinance your real estate even to buy more properties. Compromising one good investment to create another is seldom a good plan.
- Know your marketplace or thoroughly research markets that you are unfamiliar with. Be careful of the "deal that is too good to be true". It usually is but conduct your research. Unless the seller is a rich relative that just wants to cut you a deal, there is usually a very good reason for an under priced property.
- The real estate market is constantly changing. Watch for opportunities in every economic environment. Don't procrastinate or waver when instincts say the deal is right.
- Make sure your personal and professional life is in order. Divorce and career set backs are the major causes of an investment plan that falls short.
- And most of all do not stretch your financial ability for the purpose of taking advantage of an opportunity. Rainey days occur in almost everyone's life and like any investment, staying power is critical to staying the course.
Over time, it does not take exceptional income or wealth to build a substantial real estate portfolio that will make the retirement years very comfortable. It does take a stable source of income, a stable personal environment and a commitment to stay the path. The conservative or low risk approach not only provides peace of mind but allows for small mistakes to be made without compromising the ultimate goal.
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