Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected]
Question from Winston of Denver, CO: Brian, I’ve work full time as a middle school teacher for eight years, I’m still single, and living in a condo that I bought five years ago. Since buying my own place, I’ve been able to put another $9,000 in the bank. I don’t have any foreseeable need for the money. I really want to move the money out of the no interest savings account and invest it where I can make a decent return without too much risk. I’ve looked at traditional stocks and bonds but right now, the stock market looks like it’s taking another plunge. I’ve also looked at gold but it seems pretty flat over the past 3 years. Now, I’m looking at real estate because prices seem to be favoring buyers. What do you think I should be studying and what questions should I be asking? Thanks.
Answer: Hi Winston. It sounds like you’re an inquisitive person that asks questions before jumping into something new. I also assume that you’re a bit conservative with your investments since risk is high on your list of concerns. Fortunately, real estate investing is full of diverse investing strategies to fit almost everyone’s style. I’m going to assume that you are considering investing in tangible assets (brick and mortar) rather than paper products such as mortgages, tax liens, or REITs since you’ve already shied away from the stock market.
What makes real estate investing diverse are the many niches that you have to choose from. Everything from the traditional landlord who owns rentals to flipping mobile homes to owning storage sheds. Besides doing your own independent research, I suggest that you start building relationships with people that are already investing in real estate at your local level. Joining a local real estate investment group/club is a good place to start. You can google “Colorado real estate investing clubs” or find real estate groups on meetup.com.
As you begin learning more details about the niches you’ll come across, it helps if you start asking and answering questions about what you expect from investing. A few questions to start with are:
Why do I want to invest in real estate? The answer might be more complex than you first think. If you intend making it your primary income source, you’ll probably want a different strategy than if you want to build a nest egg for retirement a few decades from now. Or maybe you want to supplement your primary income as a teacher. In that case, you probably want a passive income from real estate so that it doesn’t interfere with your main income source. Flipping homes could be your strategy for a primary income or rental houses using a property management company works as a passive income. Being an active landlord works if you want tenants to pay off the mortgage so that you own it outright when you retire. Or sandwich lease option purchases are a low risk strategy that only requires you to put in time occasionally.
How long do you want to commit to your investment? Again, a retirement strategy is a long term commitment, flipping houses can be as short as four to six months, and lease options are in the middle averaging two to three years. Part of this question should be about how liquid you need your investment to be. Real estate is mostly a long term investment compared to the stock market. You can’t put in a sell order in the morning and have your money in the afternoon. Still, some strategies are more liquid than others and once you build equity in a property you can usually borrow against it.
How will you finance your investment? Winston, in your case, you said you have $9,000 to invest. Almost every real estate investment strategy is going to take more money than that. However, you have options. You could take out a bank loan if you qualify. Some are even non-recourse loans, meaning only the investment property is at risk, not your other assets. There are also places in the country where you can buy outright for $9,000 but will probably only collect $300 a month in rent when you can rent it. You can also seek out money partners (investment clubs are a good place to look). There are also hard money lenders for short term loans and FundMe websites with their unique requirements. Seller financing is an option and lease options are something you can afford with $9,000. Like you, there are many others who are afraid of Wall Street and have decided to invest their 401k retirement accounts in private mortgages. The fact is, there are a lot of ways to fund your investment when you look for them.
What promises the highest return on investment over the next few years? No one has a crystal ball to answer this question. Your tolerance for risk plays a big part here. For a medium to long term investment period, you need to know that real estate has a long history of going through cycles or phases. Today, the trend seems to be coming out of the seller’s market and entering a stable phase that is relatively fair to both buyers and sellers. A big question that no one can answer is how long each phase will last. Investors that bought at the bottom during the recession and sold at the top of the seller’s market made huge profits. But the time between the low and the high was close to ten years. The time from the stable market we are now entering until it becomes a buyers’ market could be as short as a few months or it may remain stable for a decade. History does tell us that property values do go up if you hold them long enough. Investing for retirement in a few decades has a history of being low risk.
Those four questions are only a beginning point. They should help you narrow in on an investment strategy best fitting your lifestyle and financial needs. Next comes honing in on specific investment properties. This begins by understanding the importance of the location as well as terms and conditions of individual deals. Always do your due diligence before investing your money.
Readers are encouraged to comment with their thoughts and experiences about what should be consider when deciding to invest in real estate. Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.