Triangle Area Real Estate News & Information

At any given time I'm always working with a handful of investors, most of whom have experience and who have very specific criteria for me to work with. In most cases these clients are looking to exchange a lump sum of money for a rental income cash-flow. Because of that, I've put together: A Beginners Guide to Investing in Real Estate for those buyers in the Durham, Hillsborough, Carrboro, Chapel Hill market.

In the past 6 months; I've been inundated with would be investor buyers; most of whom are discouraged by the almost non-existent interest their money is earning sitting in a bank, and many expressing concerns about the stock market. As I tell them, “Trust me; I understand exactly where you're coming from.”

What I know that most of them don't is that investing in real estate is rarely a passive investment, it requires work and like any investment it carries a level of risk with it. This surge in “real estate as an investment” reminds me of 2005-06 when there was a similar wave of inexperienced “house-flippers” and we all know that this played an good part in the ultimate crash of the financial and housing markets in late 2007. I also know that if you sampled these folks, many would tell you that they wished they had never gotten involved trying to make “easy money.”

I am extremely fortunate to be among a small group of top producing Realtors in the Triangle and anyone who knows me will likely tell you that I am always going at what seems like a hundred miles an hour as I work hard to meet the demands of my clients. Unlike less successful Realtors, I'm not concerned about any one specific transaction. I honestly want the people I work with to have a great experience, whether it's buying their first home, moving up or down into a new home, or buying investment real estate and for many would be investors the best advice I can offer them is “Don't or if you do, do your homework and proceed with care.”

I understand that this is completely counter intuitive and certainly not what sales professionals are taught. We're all taught to “make the deal” and that it's not our position to tell anyone what to buy or not buy. If as a Realtor your focus is self directed, then you're certainly not going to talk potential buyers out of buying. However if you believe in being honest and care about people, and you truly understand real estate investing, then sometimes this is the best advice you can give. I believe this philosophy has long term benefits that more than make up for any sales I may lose.

Given the recent interest in real estate as an investment and given the vast amount of bad advice being circulated (generally by those with their own agenda); I felt it made sense for me to post a Primer on Investing in real estate that I hope saves some folks from having a bad experience and from losing money. (That's why this Beginners Guide to Investing in Real Estate is so important for folks to understand!)

Real Estate Investing: It's in the Numbers

Investing is about the return on your Durham NC Real Estate investment or ROI. Nothing else really matters and for beginning investors the best advice I can offer is do not count on appreciation. Appreciation and any tax benefits you may be able to derive are the “icing on the cake” and not what you base your investment decision on. While I believe that long-term real estate will always appreciate, Real Estate markets go up and down and cannot be timed by anyone -- ever. If you meet someone who claims to be able to time the market and who can tell you how to “win” in any market, do yourself a favor and run away from them as fast as you can!

I've been in the Real Estate market for 30 odd years and I still can't time it, I may do better than many others, but even I don't get it right all the time! Your chances of having perfect timing are indeed slim.

Investment properties in North Carolina need to generate an immediate ROI. There are various “formulas” that investors use that I've come across over the years. One such formula is: Monthly rent times 100 equals purchase price. This would generate a gross ROI of 12.5% and most savvy investors would tell you that after factoring in vacancies and maintenance you should be netting approximately a return of 8-9%.

Experience has shown me that this is very difficult to find here in the Triangle (I can't really speak knowledgeably about any other market) Still difficult but more reasonable is Monthly rent times 120 which will give a gross ROI of 10% and a net in the range of 6-7% after vacancies and maintenance are factored in.

Remember if you're buying in a development where there are HOA fees, then these need to be deducted out of the monthly rent. In other words, if the monthly rent is $1200 and there's $150 in monthly HOA fees, then the adjusted rent is only $1050 which would indicate a total purchase price of between $105,000 (100 month multiple) to $126,000 (120 month multiple)

Financing your Real Estate Investment

To begin with it's important to understand that investment property does not qualify for the same mortgage rates than primary homes do. Typically the rate is 1% higher than a first home rate; and depending on the type of property you're buying you'll be required to put a minimum of between 25% - 30% down.

Investors regularly ask me if the rental income the property will generate will be counted by the lender when considering their mortgage request. A perfectly reasonable question and it can be considered; however in order for it to be factored in; a buyer needs at least 2 years of documented experience as a Landlord. This means copies of signed leases, income and expense statements and it must be shown on your tax returns. Obviously if you are a first time investor this won't work for you so your income must be sufficient to support all your current finance obligations as well as the additional obligation you're looking at taking on without the benefit of the rental income being counted.

Finally, financing an investment, skewers the numbers. If the property you're considering is able to generate a net ROI of say 7.5% and the interest rate on your mortgage is 5.5% (which is today's average rate) then basically you're netting a 2% return. I question why anyone would want to assume the work and risks involved for a paltry 2% return.

What's involved in Becoming A Real Estate Investor

In the past I have managed between 250 – 300 properties for myself and others, and as I will often tell would be investors, I also used to have more hair and it wasn't white. (Though I prefer to think of it as silver). Now admittedly most investors aren't thinking of managing hundreds or even dozens of properties, but whether it's one property or a dozen that you hope to own one day, you need to realize that there is work involved and then you need to think about whether you're ready, willing and able to do it on your own or whether you would be better off having a professional property management company handle it; though of course this means giving up a portion of the income. In our area most property managers charge somewhere in the range of 8-10% so if you're going to use one, this needs to be factored in.

Property management includes such items as showing it to perspective tenants, handling both routine and emergency maintenance calls, collecting rents and on occasion handling evictions, drafting leases and maintaining proper records of security deposits, handling calls from neighbors if the tenants aren't considerate, inspecting properties after tenants depart and dealing with security deposit disputes. etc.

What every Real Estate investor who plans on renting needs to understand is that if you rent long enough and hard enough that eventually you're going to have some bad tenants. This is a given and no one can predict when it will happen, it could be your first tenants or 3,5, or even 10 years down the road but rest assured it's going to happen. You need to accept this and have an action plan designed to minimize your losses; you also want to know the laws in your state regarding tenant rights, handling security deposits, and your own rights as a landlord. These vary from state to state and any good action plan includes making sure you're on the right side of the law.

Summary for Beginner Real Estate Investors

Investing in real estate can be rewarding, many people have created significant income streams for themselves acquiring investment properties; but like most investments it requires some work and planning. It's not a passive investment. Would be investors should be prepared to run their numbers carefully when evaluating potential properties, and should have a clear vision of who the perspective tenant will be and what their going to require in order to maximize the appeal of your property when it goes on the market for rent. If you're in the market to buy your first investment property, it makes sense to find a buyer broker who is knowledgeable and who can afford to be honest with you. And always remember if it sounds to good to be true, then it probably is.

First Time Home Buyer? Here's more information on buying a home for you to look over!

Have more questions about A Beginners Guide to Investing in Real Estate ? Leave a comment below, I try and answer all of them personally. If you are considering a home purchase in the Durham, Chapel Hill, Cary marketplace, send us a message online or call Larry Tollen with The Home Team at 919 659 5173.

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