The reason I first got into real estate as a career is because of the endless possibilities of ways to make money in real estate fascinated me. Learning about opportunities like rental income, flip and fixing, developing, equity through appreciation and even private lending…I knew I wanted in. When I first started my career in the summer of 2014 at 22, I had $400 in my bank account, waiting to make my first sale as a realtor and dreams of being able to invest in real estate. Now, summer of 2018 at 26, I own my own real estate firm, own two rental properties, I live rent free, have six figures in equity on my two properties, and currently looking for my third rental property. Let me make this very clear: YOU DO NOT NEED to “come from money” nor have a six figure salary to accomplish this. I did it with neither. There is still so much I don’t know when it comes to real estate, but I’ve definitely learned a few things in last years. Here are 5 key tips that I hope you can use to maximize your investments!
1. Start humble
You are not going to buy your dream house right off the bat. Just like your first car, you’ll need to buy a junker before you can get to the Mercedes. It may not be in the condition you want, it may not be in the location you’d like to live in, but it WILL be your foot in the door and the tool that will catapult you into becoming a true real estate investor. Take a deep breath and know like anything GREAT you create in life, you have to build it from the “bottom” up. My first home needed to be finished in the basement, numerous cosmetic updates, a radon mitigation system as well as exterior work including paint and brick work. It was also a block away from a busy street (Federal Blvd.) on the west side and a just 2 houses down from the I-70 Highway on the north side. But it was stepping stone I needed. It’s OK to start humble.
2. Look at it PURELY as an investment
Naturally, just as we are used to when making any other purchase in our life you’ll want to buy something you “like”. You will lean towards wanting to find a home which “feels homey” and matches your “style”. You need to remove these ideas from your mind and replace them with looking for an area with potential for strong appreciation or a layout which you could maximize the number of bedrooms aka maximize your rental income. How will this property make me money and be a strong long term investment? That’s what you need to be asking yourself…not whether or not you like the flooring or tile in the bathroom.
3. Rent small square footage
Fun fact that can help you increase your return on investment by a third: real estate has more value per square footage the smaller the size of the unit/home. A home of 4,000 sq feet (large home) will be cheaper per square feet vs. a home in the same neighborhood that is 900 sq feet (small home). Same goes with rental units. A 3 bedroom home with a basement in Denver can go for $2500 in rent. However, if you rent out each bedroom individually for $700 and then rent out the basement for $1200, your gross rental income will be $3300…a third greater than the initial $2500.
4. Don’t rent to friends or family
Everyone wants to help out friends and family right? But when it comes to you becoming a landlord for your own friends or family, I’ve seen time and time again relationships get ruined and owners losing money on potential rent. If you rent to a family member, chances are you are going to charge them less rent than you could get on the market…and you definitely will feel weird raising rent on them when rents in the market increase over the years. If they are late on rent or damage something, it may be a difficult situation to hold them accountable. You’ll save yourself many headaches and avoid losing out on maximizing your investment when renting to friends and family.
5. Buy as a personal property
Many people do not know, but when you purchase a property as a personal property in which you move into and live in, you have access to down payment assistance programs. This means better interest rates and only would need to put 0%-5% as a down payment. When you purchase a property as an investment property, minimum down is 15%, and more likely 20%. On a $300,000 home 20% is $60,000. Ain’t nobody got time fo dat! 1% down on the same home is only $3,000. Much better. Obviously you would need to move into the property, HOWEVER, the requirement is only that you will live in the property for the first year after purchasing it. As an unmarried young man, what I’ve done is simply move into one of the bedrooms and rent the rest of the bedrooms in the home to other individuals.
6. Buy with “progress” in mind
Last, but definitely not least, buy with “progress” in mind. If I had a client that wanted to invest in real estate and had the money to buy in say the Highlands neighborhood…or Five Points, I’d advise not to. Know why? Because these areas are already “nice” (code for gentrified). I’d advise them to invest in an area that is still “rough around the edges” but already showing signs of “improving” e.i houses getting flipped, boutique shops and close to downtown. Your appreciation on your property, will be much greater if you buy it and ride the progress of the neighborhood over the next 5-10 years vs. buying in an area that doesn’t have much room left for growth. This is also the perfect opportunity for people already living in these “improving” communities to stay and not sell their homes. They will be the ones benefiting from the most equity.
Potter Highlands Neighborhood year to date appreciation of homes: 4.7%
Athmar Park Neighborhood year to date appreciation of home: 16.6%
Same goes for the property. Even if you can buy a remodeled home, I’d recommend something that you could put some “love” into….nothing major, but a property that needs cosmetic updating. Finished remodels sell over value and fixer uppers sell under value (on average). So if you can put 5-10K into a fixer upper property, it may go up 20-25K after the repairs, and that’s 10-15K you just put into your pocket if you decide to sell it down the road.
Hope you found this blog post valuable! Any follow up questions or comments are always welcomed in the comments section below.
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