Grow Your Real Estate Investment Portfolio: Expanding Your Empire.Renters Warehouse.
By Noel Christopher
Are you looking to create wealth for the future? The shocking reality is that 42% of Americans have less than $10,000 saved for retirement. And with the cost of living on the rise and inflation continually driving the value of the dollar down, it’s increasingly important to take your future into your own hands to build long-term financial security.
As we’ve seen time and time again, socking away a bit of cash here and there isn’t the best strategy for growing wealth. Creating passive income streams and building your investment portfolio is a far better approach, one that will allow you to build reserves far more quickly than you’d be able to with savings alone.
Enter: real estate investing by buying property and renting it out to generate cash flow each month, a strategy my firm calls “Rent Estate™.”
One of the things that makes a rental property so valuable is the fact that it can serve as both an immediate source of income as well as a long-term investment for the future. This is further compounded with each income property that you buy: successful investors amass multiple rentals as quickly as they can with the goal of creating a passive income that will replace what they’re earning in their day job.
Rent Estate isn’t a get-rich-quick scheme, it is a long-term strategy for creating solid wealth. And it has a proven track record. If you’re in it for the long haul, real estate continually comes out ahead. After all, there’s a reason that real estate consistently ranks as the No. 1 investment vehicle of choice for most Americans when it comes to growing wealth.
In terms of long-term rewards of equity and appreciation, as well as immediate benefits of cash flow and tax advantages, Rent Estate can’t be beaten. It’s also one investment where you can use leverage (read: other people’s money) to grow and generate returns on your investment at a much faster rate than you’d be able to on your own.
First, let’s explore some of the key benefits that real estate investing has to offer.
As you pay down the mortgage and as your property, ideally, appreciates in value, you’ll build up equity. Equity is a tremendously valuable asset. You can withdraw from it someday if you need to, pass the wealth on to heirs or, better yet, borrow against it to secure an additional property.
In most cases, rental property is an appreciating asset. While it’s true that property is subject to peaks and dips in the market, when you take a long-term view, property value has always recovered — and is consistently increasing. Nationally, home prices have increased 18.4% between 1980 and 2016.
You know the saying “cash is king”? Well, it’s true when it comes to investment returns. Sure, the benefits of long-term appreciation and equity growth are valuable, but they aren’t the only benefits of investing in real estate. Real estate’s true value comes from a combination of these rewards plus the immediate and tremendously valuable cash flow you’ll get each month in the form of rental income. Tangible income you can use to pay down the mortgage or have in-pocket, once your property’s paid off? Priceless.
Owning or managing rental property offers another benefit as well: the chance for valuable tax breaks. Understanding which deductions you qualify for can considerably reduce your salary income, meaning less tax to pay. Consult your tax advisor for more information about:
• Property management fees: Property management costs are tax-deductible.
• Maintenance and repairs: Any reasonable repairs are deductible in the year in which they occurred. This includes painting, some plumbing, fixing drywall, doors/locks, broken windows and more.
• Advertising: Fees for advertising your property can also be partially or fully expensed.
• Depreciation: You can deduct a certain percentage of your lost value depreciation. Land is not a depreciating asset and not included in this deduction.
• Travel: Any travel to/from local or long distance rental properties can be expensed as mileage. The standard mileage rate for 2017 is 53.5 cents/mile.
• Interest: Mortgage interest is often the single largest deduction available to landlords. Interest on credit cards used for the rental may also be deductible.
• Insurance: Insurance premiums for your property can be deducted as well. This includes policies for fire, theft, flood and liability insurance as well as additional optional protection plans.
Another valuable benefit of real estate investing is leverage, the concept of using other people’s money to grow your investment. While you might have a hard time convincing the bank to loan you money for investing in, say, stocks or shares, they’re usually happy to loan money for real estate investments and regularly cover 80% or even 90% of the cost of a property — leaving investors only to make the down payment. This means your money can go much further, and your returns could be a lot higher. So instead of having to pay 100% cash-in-hand for a property, you can invest in multiple properties by making just the down payment. This generates cash flow and appreciation returns from multiple assets, instead of just one, growing your wealth at a much faster rate.
Real estate investing is also a good way to diversify your investments. Even if you do invest in stocks or shares, most financial advisers will advise against putting all of your eggs into one basket. Rent Estate allows you to benefit from different sources of income, a great way to build security for the future.
Finally, real estate investing gives you the advantage of owning a tangible asset that puts you in control. With stocks or shares you’re largely at the mercy of the market, but with real estate, you’ll always have something with intrinsic value — after all, people will always need homes.
Let’s explore practical tips and strategies for starting and growing what I call your “Rent Estate” portfolio.
Start strong by doing your research ahead of time. This means reading and soaking up information from helpful books, podcasts, and informative websites and blogs (I like Bigger Pockets, InvestFourMore andLandlordology). Once you understand the ins and outs of successful real estate investing, you’ll be able to take the next step toward buying your first property.
Establish Clear Objectives And Investment Criteria
Next, you’ll want to identify what exactly your goals are overall and with each investment property. Having clear criteria will save you from risky investment decisions based on vague qualifiers, like “It seems like a good deal.”
You may find it helpful to set long-term investment goals first. For example, to replace your current day-job income, or to meet a certain benchmark that allows you to retire securely.
At this time you’ll also want to determine what exactly constitutes a good investment for you. Savvy investors usually set a percentage, such as a 12% rate of return, that they’ll want to be able to generate on each investment property. Usually, they’ll determine which type of property they’ll focus on as well, be it duplexes, single-family homes, only local properties, no HOAs, etc.
From there, you can break it down further. Determine how many properties you’ll need in order to reach your financial benchmarks. Maybe you’ll need to secure 10 investment properties over 15 years, each one valued over $150,000 and producing a 10% rate of return. Or, maybe you’ll want to own five rentals at $200,000 each, each one producing a 15% rate of return. Your goals may look very different. The important thing is that you take the time to determine what you want to get out of your Rent Estate investments. The more specific you are with your goals, the easier it will be to reach them.
When buying an investment property, you’ll want a clear idea of how much you can afford and a plan for how you will obtain financing. Know your credit score, ensure you have enough for a down payment and talk to a few different lenders to see what you qualify for.
Aim Below Market Value
Another key step is securing properties that are below market value. The better the deal you can negotiate on a property, the higher your returns will be. Consider those that have been on the market for a while — have a look at Trulia and Zillow, or try to find properties in need of some repairs. You’ll also want to consider visiting your local real estate agent to be set up with an MLS search to alert you when properties that fit your criteria become available. Finally, don’t be afraid to negotiate to get the price you’re after. This is easier to do when a property has been on the market for a while or is in need of updating.
Consider Good Rental Performance
Not all homes are created equal. Property varies considerably in terms of how it will perform as a rental. Generally, properties that are in the middle of the scale — located in decent areas, near good jobs and schools — tend to make great rentals. These homes generally have no trouble attracting qualified applicants, and you’ll avoid many of the costs associated with properties at the high end of the scale and those that require more maintenance.
Calculate Your Returns
You’ll also want to run the concrete numbers to see how well the property will perform financially. Once you have a property in your sights, searchZillow and Trulia to see what similar properties are renting for. Run a cash-flow analysis and calculate your cash-on-cash returns to make sure the returns are in line with your requirements.
Numbers to crunch:
• Cash flow: The amount of cash you initially invest in the property compared to the income the property will generate. This simple calculation doesn’t factor in appreciation or tax benefits, but it helps determine the return from income alone.
• Cash-on-cash returns: Annual before-tax cash flow as compared to the total cash invested, expressed as a percentage.
• Cap rate: Measures the net operating income (NOI) as a percent of sales price. The higher, the better.
Consider Multiunit To Start
Many investors find that making their first investment a duplex is a great way to get on the housing ladder. The benefit of a duplex — or triplex, or even four-plex — is you can live in one unit while renting the other(s) out. This allows you to live for free, or at a greatly reduced rate, while you pay down the mortgage far more quickly.
And if you’re a first-time homeowner, and as long as you occupy one of the units, you may be eligible for an FHA loan. This means you may only have to come up with a 3.5% down payment, and you may qualify for a lower interest rate.
If you buy a duplex in need of a few repairs, the deal gets even sweeter. First-time buyers are also able to apply for an FHA 203K renovation loan. If you meet the requirements, you can incorporate the cost of the repairs into the loan itself. Just be sure you carefully tally the cost of repairs. You’ll also want to secure a third-party inspection of the property, to ensure you’re aware of all of the costs to come in renovation.
You don’t have to go it alone. Many investors hire a team of professionals — accountant, attorney and property manager. Outsourcing the day-to-day work involved with rentals can save you from many of the headaches involved with hands-on property management. Plus, hiring a property manager enables you to continue expanding your rental property empire, add more properties to your portfolio and even invest outside your local market without having to be a long-distance landlord.
Noel Christopher is the SVP of Corporate Development for Renters Warehouse, the premier professional residential property management firm.
More than 13,000 investors in 25 states use Renters Warehouse to successfully and confidently manage over 19,000 single-family homes. Recently, the company moved into Chicago and has been shaking up the local property management industry ever since.
Renters Warehouse works with single-family rental clients, all with different goals for their investments. “From unintentional landlords who were just looking for an option other than selling in 2007, to the institutional property investors of today basing their buying criteria strictly on cash-flow and cap rates, we essentially work with anyone who owns or wants to own a rental property and would like to have it managed by the best partners in the game,” says Adam Clabaugh, also a Lofty Real Estate founder and co-Chicago Market Vice President at Renters Warehouse.
For Noel Christopher, Nast, and Clabaugh, their extensive experience, knowledge, and great customer service skills have allowed the company to flourish. Christopher, a Chicago real estate industry veteran, has worked in the national single-family rental space in many verticals. He has used his expertise to lead acquisitions and large portfolio takeovers, including seven property management company buyouts this year. ”I will go the extra mile to not only understand how to do my job but to understand my customer’s point of view. I am known to immerse myself in my work and never give up.” The Renters Warehouse team’s work in Chicago is just getting started.