Intro to Real Estate Investing – 1: Finding the Why and How
Christopher Shank NMLS 2562885
“The secret to becoming wealthy is hard work.” Said one of the wisest men that I have known.
“No, really?” I replied, dryly. “Tell me more”.
Well, it turns out that my sarcasm was a bit premature. Clearing his throat, the wise man continued. “The secret to becoming wealthy is hard work. Personally, I prefer to let my money work hard for me so that I can be lazy.”
It’s been several years since that fateful conversation, and yet, I’ve seen far too many examples of this concept playing out in reality to know it as anything but true.
I’m talking about investing. In simplest terms, spending money with the goal of that money eventually returning a profit. My intent is for this particular article to be the start of a series detailing investing practices and methodologies. That said, I believe it best to start from the ground up.
In all I do, I strive to be transparent- it makes for a healthy marriage, social life, and professional relationships. I am a loan officer- my family is when I help connect clients with lender solutions to realize their real estate dreams. I would be lying if I said that one of the reasons I write these articles is not to generate interest in my business and find new clients. That said, I genuinely am fascinated with the world of finance and investing, and I genuinely do not think that I would be where I am today, had it not been like wise people (like the man mentioned in the beginning of this article) taking time out of their days to share the things they know about generating wealth. To that end, I have a moral obligation to continue this charitable chain and will do my best to be that wise mentor for those who want to listen.
Okay, personal introduction done, it’s time for me to talk about the real reason you’re reading this article- real estate investing.
One of my clients is fifty-one years old. She owns five six residences- her own house and five rentals. Of those, she owns her own house and three rentals outright, and is currently financing the other two. On average, she earns $1,300 per month in rent from each rental, and the mortgage payments on the two houses she doesn’t own fully are around $700 per month. Rough math, she’s earning around $5,100 profit every month. If she wants, she can easily retire early and live comfortably for the rest of her life. Should an emergency arise, she can liquidate a property for a quarter million dollars and make that emergency go away. If she wants to expand her empire, she can access the equity in her properties via a HELOC to purchase the new rental outright and simply pay the HELOC back down with the proceeds from renting out the new house.
To me, my client has attained the true goal of real estate investing- financial security. This woman has succeeded to the point where she is not financially dependent upon a job to earn income to support her family. Even more, she is so financially independent that she can use her own assets as collateral for future financing, which means that she can self-fund her own major purchases.
When I start a professional relationship with aspiring investors, before we even talk about the ins and outs of financing and all that jazz, I open a discussion as to why that particular client wants to invest in real estate. I do this because, like all investment ventures, there are pros and cons that must be considered.
PRO: Real estate prices are steadily increasing across the country. Most realtor investors can stand to make a sizable profit by simply buying and holding property.
PRO: Equity. Every payment toward a traditional investment loan pays down the principal on that loan, which increases the equity one has in that property. Additionally, as referenced above, equity can be liquidated via a HELOC or similar product to finance additional acquisitions.
PRO: Income to Expense Ratio. Most investors that I have worked with structure their financing such that the projected rental income is greater than the cost of the loan, taxes, and insurance. A positive income to expense ratio can be leveraged for future investments.
CON: If an investor doesn’t want to work with the minutiae of managing their property, they will need to insulate themselves via a property management company. This step of removal comes with a cost that must be offset in order to maintain profitability.
CON: The larger one’s empire grows, the more administration that must be managed on the back end, oftentimes this costs money that can eat into the profit margins of a group of properties.
I have a bit of a recurring theme when it comes to financing- every individual situation is unique, therefore each individual situation requires a unique solution. Case and point- financing.
Most lenders are going to want at least 20% down on an investment property purchase. Now, it’s possible to go lower- I have a few who will finance with even less down, but the trade off in rate penalties and mortgage insurance usually isn’t worth it. That said, the biggest obstacle that most hopeful investors encounter is affording that down payment. I mean, think about it- even with a $200,000 investment is going to require around $40,000 as a down payment… that’s a lot of money!
Thankfully, there’s ways around that. Right now I’m working with a client who has $10,000 in a savings account. However, this client also has between $30,000 and $40,000 in equity saved up in the home he purchased a few years back. Tapped by way of a HELOC, he can combine these assets to cover the down payment of a decent rental property, he’ll just need to ensure that the projected regular income from this property covers not only his new mortgage, but the repayment terms of his HELOC, as well.
As a loan officer, I am blessed by the fact that my family’s wellbeing depends entirely upon my ability to understand the complex concepts that goes into residential and commercial financing. Through my experiences, I am a firm believer that if someone has a dream of property ownership, that dream is almost always achievable- it sometimes will just take a bit of dedication and effort. Sometimes to achieve our dreams, we need to put a little blood and sweat into them.
That said, I will conclude this article the same way that I finalize my initial meeting with potential real estate investors- with a question.
“Now that you understand what motivates you on this journey of ours, what’s stopping you from making your dreams of real estate investing a reality?”