Whether you have heard stories from a distant uncle, watched dramatic renovations on HGTV, or read dozens of books about real estate investing, there is a lot of misinformation floating around. It can be hard to know what to believe. The Urban Investor is here to divide fact from fiction and unveil The Top Six Myths About Real Estate Investing:
6. You need to have a business name, logo, contractor, accountant, attorney, etc. before buying an investment property. This idea of having everything lined up perfectly before buying a property is a chapter out of a generic “tips for successful business” book and simply not true. Don’t spend time and money on all of these things before you know if you even LIKE investing in real estate. One of the best parts of investing is that you can do as little or as much of it that you like. Start out small and stay small, or grow incrementally if you desire. If you get to the point of pursue investing as a career, you will naturally make connections with people that you need to know and be able to get referrals when you need to. Don’t worry about if you need to be an LLC or an S-Corp if you are just starting out. Focus on knowing the values of property in the market that you want to invest in. Be patient and get a good deal. It doesn’t have to be a home run, but start out with a winner.
According to Realtracs MLS listing service, there are 2,885 total listings for sale in Nashville, TN, within Davidson County’s borders. I got that number from Red Panda Properties, and I was informed that 616 of those listings are pending. The pending houses already have buyers lined up who have passed the inspection and appraisal periods, and are simply waiting until the closing date. Essentially those properties are already taken. That leaves 2,269 that are active listings, available for purchase. Out of those, only 147 are priced below $100,000, a meager 6.5% of the listings. There are plenty of markets across the country where $100k isn’t considered cheap at all. But in Nashville, that amount can buy only one out of every fifteen houses for sale. In short, there aren’t many options.
Corresponding with the dramatic drop of cheap house inventory, the quality of house that $100k buys has diminished as well. These available properties are typically not in highly desirable locations, and the houses are small and usually in desperate need of major updates, if not entire renovations. Some have moved into the category of being considered more for the land value, where the existing structure is simply torn down in favor of a newly constructed house. The result is that prospective homeowners and investors across Nashville are faced with fewer choices of houses, higher price tags, and a lesser quality product. Welcome to Music City’s real estate market in 2015.
Many aspiring real estate investors want to have a plan for how to succeed and build a strong portfolio. They want to build wealth and have heard stories about other investors making lots of money through flips or rentals. But what is the best first step? There can be so many “voices of wisdom” and so much “advice” that it can become paralyzing. New investors want to know how to get started on solid footing and make a strong first purchase. I know I did. So what is the best way to begin on the real estate road to riches? Is there a strategy or formula to follow? How do you start with a winner?
My real estate story started pretty simply, and I think that my approach is the easiest way to begin to build wealth through property. I believe that buying a well-appreciating primary residence is the best first investment. In 2002, when I was buying my first home in Nashville, TN, I took time to understand the real estate market. I learned how to look at every property with an eye toward its potential profit. I was searching for a good deal, for a property that already had some equity in it and one in which I could also increase its value through improvements. The more I looked at properties on the computer and in person, the more I started to grasp the characteristics of the different neighborhoods around town. I learned which neighborhoods were out of my price range, which ones were stagnant or declining, and which ones were improving. I soon narrowed my searching to two zip codes, with my focus being about 80% on the zip code that I thought had the most upside.
I wouldn’t consider myself to be a huge sports fan. I liked playing baseball and basketball as a kid, and the Cincinnati Reds and Indiana Hoosiers were my favorite teams. Pretty typical. After college I moved to Nashville, TN, and started rooting for the Tennessee Titans. I watched most of their games and followed the team news. The NFL became the only sport I really paid attention to. Three years ago a friend invited me to play in his fantasy football league, and I was hooked. Last year I played in two leagues, and this season I started my own. It turns out that the reasons I like fantasy football are the same reasons I like real estate investing.
The fantasy football season starts with the draft. Each of the ten teams take turns picking NFL players. When it is my turn to pick I analyze the available players. Who is consistently productive? Who is more injury-prone, and thus a higher risk? Who is a young guy ready for a breakout performance? This analysis is remarkably similar to the reasoning I use when examining potential real estate investment deals.
In August, 2014, I purchased an investment house in Nashville, TN that I found advertised on Craigslist. It was a rented single family house for sale by owner, due to a relocation out of state. I responded to the ad by email and requested the address of the property since it wasn’t stated. The address is required to move forward with any analysis, and to see if the deal is worth pursuing further. If I don’t like the location, I forget about it.
Next, I proceeded to do my usual information collection about a property. I look it up on the county tax assessor’s website to find out the lot size, square footage of the house, year it was built, zoning classification, past sales history, and appraised value. This data gives me an introduction to the property and lets me figure out the price per square foot. However, the square footage stated on the tax records is not always accurate, so it is wise to verify the actual area of the physical structure. In fact, the tax records were 600 square feet off from the actual area of my first primary residence.
The house on Craigslist had the two most important features that I am looking for in an investment property: location near a red hot neighborhood, and a cheap price tag. This house was just a couple of blocks from the historic Germantown neighborhood, and priced at only $72,000.
When calculating returns and “crunching the numbers” for potential investment properties, conventional wisdom suggests that one figures in a loss of income due to vacancy. This figure is typically in the range of 7-10%, but differs depending on the local economy. It is wise to be prepared for unexpected repairs and vacancies, but wouldn’t it be nice to have no vacancies? Wouldn’t it be nice to turn an expected loss of income into profit?