So, you think you want to be a real estate investor?
As an agent, roughly 50 percent of my client base is made up of them, so I write a lot about investors and wannabe investors. I tell anyone interested to first learn as much as they can about it. And then, have an honest conversation with yourself.
Are you sure you’ve done enough research? Have you adjusted your spending? Or spoken with a lender? Are you familiar with the applicable metrics? Do you have realistic expectations when it comes to your market?
All of these things are imperative to consider. I’m not trying to make investing seem off-putting, but I am trying to help you get a handle on what it is and is not.
And here’s something fundamentally more important than anything else when it comes to investing: time is money.
The obsession with metrics (cash on cash, cap rate, 1%, 2%, etc.) often overwhelms investors, blinding them to the reality that the biggest enemy is time. Put simply, if you walk away from a deal to hit a certain metric, you just might lose big.
Let’s say you walk away from an early spring deal on a $300K property. You wanted the price to be $5K to $10K lower than what the seller was ready to let it go for.
But realistically, in a hot market, there’s a good chance that by summer, you would’ve recouped that cost in appreciation. In Denver, for example, we’ve seen 6 to 8 percent increases year over year, and you would’ve almost definitely experienced as much in the next 365 days.
In fact, for a house priced right, you could be looking to gain an average of $18,000 to $24,000 by next year—that is, unless you choose to walk away because the seller is unwilling to meet your standards.
The same situation speaks to the critical nature of knowing your market. And it’s really important to know where you’re at in life, too.
I created an all-female investing group here in Colorado. I have two investors that gravitate toward properties in the Midwest (Oklahoma and Ohio, specifically). While appreciation isn’t as strong there, they are cash flowing $500 per month on long-term renters. This is appealing to them because they are closer to retirement and need that money.
Alternatively, in a market like Denver or Colorado Springs, real estate prices have skyrocketed. Rents have increased to be sure, yet making $500 in cash flow is difficult—if not unrealistic—with a long-term rental.
But if an investor planned on holding a property for the next five years, it goes to stand that it would appreciate. And eventually, it just may cash flow because rents will surpass the mortgage. In the meantime, you may have to pay $100 to $200 out of pocket, but someone else is paying the bulk of your mortgage and/or cutting down your rent significantly.
Is chasing appreciation a fool’s errand? Maybe. But you can look at a city’s health and make some assumptions.
For instance, even though buyers are getting a little more power in Denver, the city still has all the hallmarks of a place with increasing home values: lots of out-of-state money flowing in, diversity of industry (i.e., healthcare, tourism, tech, and marijuana), and a very educated workforce.
I know, I know. To even suggest an investment that doesn’t cash flow is heresy, but similar to most money endeavors (ahem, the stock market), getting in early is the key to long-term financial success.
What doesn’t work so well is walking away over and over again because you fear you haven’t found the perfect deal.
Have you walked away from an imperfect deal and regretted it?