Five simple rules that will help you make a smart investment in real estate.
You don’t have to be rich to make money in real estate, but you do have to be smart. We caught up with Associate Broker Darrin Fryer to find out which cards to play before it comes time to sit down at the closing table.
#1) It’s all about the numbers. The most important equation in any real estate transaction is to look at the numbers and determine what your costs are versus how much income the property will bring in. There are several variables in that equation: the interest rate of your loan, your monthly payments and expenses, plus allowance for maintenance issues and vacancy versus how much income the property will bring in. At minimum, if your income can equal your payments, then over a long period you’ll be making more and more money as you’re amortizing your loan. That’s a good long-term investment. But if you’re cash flow positive, then you’ve made a good investment in the short term. You always want to look at the cash flow part of the equation. The numbers won’t lie.
#2) Remember that market value can change. Always consider that appreciation is not guaranteed. There are always going to be market swings. Sure, I’ve had clients who made more than 15 times their money in equity in just a few years because they bought at the right time, and leverage can be a beautiful thing. But on the flip side, if you buy at top of market, like so many people did back in 2007, your property can depreciate to where you end up in the negative. So it’s really important to always be conservative in your approach. I always recommend getting a long-term fixed interest rate mortgage just in case things go south. The bottom line is the cash flow equation: how much the property costs you each month versus how much income it brings in.
#3) Assess potential for maintenance assessments and repairs. If you want to be strategic you should look at properties that don’t have a lot of deferred maintenance: the newer the property, the better. If you’re in a condo complex that was built in 1978 and they haven’t replaced their roof since 1990, you can bet that in the next five years you’re going to receive a nasty notice for a new roof and you could be out $10-30,000. If it’s an older building, make sure the windows and roofs were recently replaced as those are some of the most expensive repairs.
#4) Take a good hard look at your Homeowner’s Association. It’s important to look at how many people are sharing into the Homeowner’s Association fund and how much money they have in reserves for future repairs. Be careful with a small HOA unless it’s a brand new complex and you know you have a good 10 years before any major maintenance will need to be done. During your title period, you should do your homework. Review the HOA Profit and Loss bank statements. Interview the President of the HOA and ask to look at the most recent meeting minutes to see if there is discussion about any major work that might need to be done. You can make a judgment about the health of that HOA by how much money they have in the bank. It should be a very serious process. I always say newer is better. Even if the purchase price is more, you’re going to make more money on your investment. To think you’re saving on the purchase price by buying a less expensive property is small minded. You have to look at the cash flow part of the equation. The newer property is probably always going to yield more money in the long run.
#5) In a ski town, the rental market is just as important as the real estate value. If you look for the lowest price point with highest rental yield there are affordable investment opportunities, even in a ski resort like Steamboat Springs. The rental market at the moment is just so strong; it’s gone up 30% in the last 2-3 years. For single-family homes, you’re always going to benefit from an accessory unit (mother-in-law apartment) that you can rent out to offset your cost. Also keep in mind that short-term vacation rentals can also be very lucrative. Some people will rent their house out Christmas week. Say you get $8,000 for a week and your mortgage is $32,000 for the year. If you rent it over Christmas and one other week that’s going to offset your cost significantly. Or with online services like Airbnb you can rent out a room in your house and bring in extra income that way. Being in a resort you have a lot of opportunity if you’re willing to be flexible.
The last word … Interest rates have been so low recently, now is a really good time to buy!