Hi, I’m Desert Dimensions Properties Designated Broker / Owner Joe Maggiore. Realtor Ryan Simon and I recently addressed what it takes to invest in residential real estate on Facebook Live (see the video below). The Phoenix market is seeing residential rents rise while interest rates drop, so it’s time to talk Real Estate Investing 101! We will cover some of the myths, first steps, and basic action items you will need to consider ahead of purchasing an investment property.
First, let’s start by busting some myths.
Myth #1: To Be A Real Estate Investor You Need Cash
CLAIM: You need cash to buy investment properties.
MYTH BUSTED: While it is helpful to have some cash, you don’t need to have an “all-cash purchase” or have massive cash reserves. Getting a loan gives you the ability to buy more than one home. You can buy multiple homes by putting money down on each property instead of throwing all of your cash into one property.
I like to leverage the bank’s money and get more properties.
Myth #2: You’ve Got to Have Cash Flow to Really Consider an Investment Property
CLAIM: You have to have a low enough mortgage payment and charge high enough rent that you have profit coming in each month. (In other words, if you’re purchasing a property as an investment it’s got to be generating cash each month to you.)
MYTH BUSTED: At the end of the day, as long as you’re breaking even, you’ll benefit from the appreciation in value the Phoenix Metro area is seeing. Plus, people often forget that each month the tenant pays your mortgage by paying you rent.
Although you might not get cash each month, you ARE making money.
Myth #3: To Be A Real Estate Investor, You’ve Got To Be A Super Savvy, Aggressive Businessperson
CLAIM: Real estate investing is only for the most experienced, risk-tolerant investors.
MYTH BUSTED: Just no. The reality is that we have clients who are far from savvy business people – everyone has to start somewhere. Your education or profession doesn’t matter.
The majority of investor clients I work with are buying their first investment property. In other words, they’re not real estate moguls picking up four properties at a time. These people are dipping their toes in and have not had experience before (by the way, this is why having an experienced Realtor is so important – we protect your best interests).
Buy one property and see how you like it. If you don’t like it, you can always sell it – it’s a great way to get your feet wet. If it’s something you enjoy, then buy another one.
Myth #4: Flipping Houses is the Best Real Estate Investment
CLAIM: To make a killing in residential real estate, you need to be aggressive with scooping up cheap houses and re-selling them for top dollar.
MYTH BUSTED: There are two scenarios that most residential real estate investing falls into.
- The ‘Fix and Flip’
- The ‘Buy and Hold’ or ‘Buy, Fix, and Hold’
With a Fix and Flip, you’re going short-term and high-risk by buying a house and fixing it up quickly to (hopefully) sell it for profit.
Or, with a ‘Buy and Hold’ (or ‘Buy, Fix, and Hold,’ where you buy a property in need of a remodel before you lease it), the plan is to purchase a property and hang on to it for a while. This strategy allows your investment to grow in value while you pay the mortgage down. You will be in it for the long haul, usually with a long-term renter who leases for a year at a time (or longer).
The ‘Fix and Flip’ is the most dangerous of the two scenarios. This is because:
- You have to get the property at a great price when you buy it.
- You’ve got to carefully manage repair / remodel contractors and their costs, or do the work yourself to keep remodeling expenses to a minimum and profits to a maximum. If you’re hiring somebody to do the work, you likely can’t pay retail rates and make money. Many times, the people that have succeeded in this scenario are handy and can do a lot of the work themselves (but they’ll also be the first to tell you how risky this option is!).
For most people getting into real estate, a ‘Fix and Flip’ is not as secure a way to enter into profitable real estate investing as a ‘Buy and Hold.’ Consider the security of a long-term investment.
Your First Steps Into A Residential Real Estate Investment Property
Second, let’s talk about how much money is required to purchase an investment property.
In most cases, you will need to prepare to make a down payment that is 20% of a property’s purchase price (sometimes less, but usually you’ll want to be ready to put about 20% down). You can certainly put down more and borrow less, but in my opinion, you might consider leveraging the bank’s money if you’re borrowing any amount of the purchase price. Then you only have to put down the minimum amount necessary to purchase the property.
Talk to us or your lender if you need help with this. The difference you’ll see in a mortgage payment by putting down 10%, 20%, or 30% of the purchase price is usually pretty small if it’s spread out over 30 years.
Keep in mind that even the nicest homes usually need a little love. You’re probably going to need to put some money into repairs or aesthetics (like carpet cleaning, touch up paint, and landscaping) to command top rental dollar. An experienced property manager will be able to walk you through what needs to be done and the budget you’ll likely need before you even make an offer.
If you want to learn more about getting into your first investment property, give Ryan or me a call at 480-270-5355, and we’ll be happy to answer your questions!
Designated Broker / Owner
Desert Dimensions Properties