CHAPTER
1

Getting into Real Estate

In This Chapter

People the world over dream of owning real estate. Even better, people the world over have been successfully navigating the real estate business for hundreds of years, so you don’t have to reinvent the wheel if you want to invest in rental property.

Owning real estate can be a lot of fun and a great way to make money. However, like anything related to business, real estate also comes with some risks. In this chapter, you get a better idea about what’s involved with owning rental property. Do you have the time to manage it? Can it really make you money? Can it contribute to your investment goals? What type of property is right for you? Armed with the answers to these questions, you can better shape your rental property goals.

Understanding Real Estate

If you’re thinking of getting involved with real estate, before acquiring any piece of property, you first need to ask yourself what kind of real estate you want to buy. Maybe you’ve always wanted an apartment building or a timeshare. Maybe a condo or cooperative intrigues you. Maybe you want a single-family home you can fix up and rent out.

Why does this matter? Because your local laws might prohibit you from handling your rental property a certain way. If you want to buy a condo and rent it weekly, for instance, you might discover later that this arrangement is against your local regulations. As another example, it’s against the law to rent out a residential property in New York City for less than 30 days, so buying a condo in this area for investment purposes might not be the best idea if you’re looking to rent it on a short-term basis.

Keep in mind, too, that real estate jargon is different in different parts of the country and even different parts of the world. For example, a unit in a building on the U.S. East Coast is called an apartment, but in Europe, the same piece of property might be called a flat. So know your market, and understand the terms you’re dealing with.

Types of Real Estate

Let’s review the types of real estate available for you to invest in. For the purposes of this book, we focus most of our attention on investing in a single-family home versus a condo, but it’s important to know what other types of real estate are available for you.

REAL ESTATE ESSENTIAL

Real estate agents are licensed on a state-by-state basis and are called Realtors only if they’re a member of the National Association of Realtors. Agents are divided into two categories: a broker is an agent who has at least 2 years’ experience and has the overall responsibility of the office; a sales agent is licensed with the state but must hang his or her license with an official broker. It’s becoming popular for states to regulate mortgage brokers. In California, for example, mortgage brokers are required to be licensed real estate agents.

Apartment  An apartment is a residential unit located in a larger building. A tenant leases an apartment from a landlord for a specific period, often a year at a time. Individual apartments cannot be bought and sold, but the larger building where the apartments are housed can be bought and sold.

Apartment/multiunit building  An apartment building is a larger structure made of several apartments. The building is owned as an entire complex. Individual units are not independently owned, as in a condominium building.

Owning an apartment building offers the potential for higher cash flow and means you’re spreading your income over multiple tenants. However, it also means you’re responsible for maintaining the entire building’s interior and exterior, including the common areas and each individual unit.

Buying an apartment building is a little more complicated than buying an individual unit, so you need to know a bit more than the basics. For example, buying a building with up to three units is similar to buying and financing an individual condominium or single-family home. However, buying a multiunit apartment building with four or more units is more like getting a business loan and requires much larger upfront fees than typical residential mortgages. The good news is, once an apartment building has been properly financed, any new owners can take over the mortgage.

Condominium  A condominium, or condo for short, is a residential building with multiple units in which each unit is individually owned. Each owner has exclusive right to his or her own unit and has a “common” interest in the common areas. Condo can also refer to a single unit within a condominium building.

Flat  A flat is a condominium that’s generally an older, single residential property that’s been subdivided into condominium units with one unit per floor. This term is more often used in European countries.

Tenants in common (TIC)  A building with multiple units and multiple owners. Each owner has an undivided interest in the whole property.

WATCH OUT

Don’t invest in any TIC without first learning more about the unusual rules connected to TICs. For example, you can sell your interest in the TIC, but you can’t will or bequeath the property to your heirs. Ask your real estate agent to obtain the building’s specific rules, and have a real estate attorney review them before you purchase.

Cooperative ownership (co-op)  In this situation, you buy shares in the corporation (partnership or trust), but you do not specifically own your own apartment unit. Basically, you’re a stockholder in the building. Co-ops generally limit how you can rent your property and may not produce the highest financial returns.

Duplex/triplex  A residential property under one ownership that may contain two or three units. Each unit has its own outside entrance. Also known as an attached single-family dwelling.

Townhouse  Also referred to as a row house, a townhouse is a hybrid of a single-family home and a condominium. These individually owned residential properties are connected by a common wall, and the owner owns both the structure and the land beneath the structure and generally part of the common areas, like sidewalks, open spaces, and recreational facilities.

House/single-family residence  A self-standing residential property under single ownership, designed to be inhabited by one family.

Timeshare/partial ownership  In this newer form of communal ownership, you buy the right to use a property for a fixed amount of time, with expenses prorated based on ownership percentage. This type of ownership is often seen in resort areas and is designed more as a hotel alternative rather than investment real estate.

Unfurnished Rentals

When you think about rental properties, you might automatically think of 12-month unfurnished rentals. For a long time, this was your only option when it came to investing in real estate.

Unfurnished rentals are houses, apartments, and other types of residential property that come without any furniture and utilize a legal lease, typically for 12 months. Rent is typically paid at the first of the month, with one month’s rent collected as a security deposit. Sometimes the last month’s rent is also collected in advance. Some utilities, such as water and garbage collection, may be included in the rent, but other expenses such as electricity and cable are generally not included.

Continuity and consistency are two benefits of investing in unfurnished rentals. You know what your monthly expenses are, you get paid on a specific day of the month, and you know exactly how much income you’ll receive, assuming there are no unexpected maintenance issues or bad tenants. We think of these types of rentals as “blue chip” stocks, or a good standard investment that will have consistent returns in both a good and bad economy over time.

Corporate Monthly Rentals

Another kind of rental you can own is a corporate monthly rental. You lease this residential property to a tenant for a minimum of 30 days on a month-to-month lease. The rental is completely furnished with housewares, a fully equipped kitchen, and electronics. Most utilities, including cable and internet, are included in the monthly rate.

Corporate housing was originally used by corporate travelers, hence the name. But today, corporate monthly rentals also have become lodging options for all travelers and even displaced homeowners.

Traditionally serviced corporate housing properties are a multibillion-dollar industry in the United States, according to statistics released by the Corporate Housing Providers Association, and they’re growing as an investment opportunity for owners of private residences. We refer to corporate housing rentals as “technology” stocks; they have some ups and downs on consistent revenue returns, but they give you, the investor, an opportunity for higher returns.

Vacation Rentals

Vacation rentals are residential properties in resort areas leased for less than 30 days to vacationing individuals and families. According to statistics released by HomeAway (homeaway.com), the world’s largest marketplace for vacation rentals, the vacation rental industry is made of more than 3.3 million individual rental properties and generates more than $85 billion in annual rental income.

Vacation rentals are rented on either a nightly or weekly basis, with some repeat clients. Many properties are also seasonal. For example, Lake George, New York, enjoys its most popular season during the summer, when rental requests are high. The rest of the year, however, rentals are much slower but not nonexistent. Other vacation rentals, such as in Hawaii, enjoy a consistent rental season year-round.

Vacations rentals can be very lucrative for you, but know that they require a lot of your personal time investment to find regular, weekly tenants. When one renter leaves, you must find the time to prepare and flip the property. Be sure you research the seasonality of your vacation rental market before you buy an investment property. Determine the length of the vacation season in that market as well. Renters might want a vacation spot for only a few months out of the year.

DEFINITION

There are two kinds of flip in real estate. When purchasing a property, flip means to buy, fix up, and sell a property for a profit within a short period of time. In reference to rentals, flip means to clean, inspect, and prepare the property for the next tenant’s arrival.

A vacation rental may sound perfect, and the rental rates are high, but if the actual high-demand season is only 2 months long, you might not be getting the annual return you were looking for from your investment.

Remember, too, that private residences rented less than 30 days are subject to lodging tax and may be prohibited or restricted by the city or your community’s homeowner’s association.

Student Housing

One of the best ways to achieve rental property success is to find a niche rental market with consistent demand and provide and manage rentals in those markets that produce higher returns than just a traditional unfurnished rental condo.

Student housing is one of those niche rental markets. It’s not for everyone, but it can be an interesting investment opportunity. If you have the patience to deal with students, you may find a great income opportunity in this area.

Generally, you’ll work with two groups of students, graduate students who have a normal rental budget, and undergraduates on tighter budgets who typically house-hunt in groups, looking to split the costs among three to eight people. Although each individual might have a smaller budget than, say, a professional couple or family, house-sharers have a buying power that should not be ignored. A property that might be out of the range of a single renter could be in high demand if marketed to a group of renters instead.

If you’re considering investing in student housing, take time to visit the housing offices on local college or university campuses and ask what’s currently available, what the students are looking for, and if there’s an easy way to connect with students looking for housing.

Decisions, Decisions

Now that you know the different types of real estate properties available to you as an investor, what’s best for you and what makes a better rental? Is it best to purchase a single-family home or a condo? Should you opt for an apartment building or a cooperative?

There are many factors to take into consideration when deciding on the right type of investment property for you. In the following sections, we discuss some things you should keep in mind while determining what property is best for you.

How Much Time Do You Have for Upkeep?

How much time do you have to take care of your rental property? Some types of property take more time and upkeep than others. For example, single-family homes, especially if they’re older properties, take more time to manage and require a more active, hands-on landlord than a condo might. Single-family homes typically require regular yard maintenance, exterior painting, roof repairs, and more.

On the other hand, if you own an individual condominium, you’re required to maintain only the unit’s interior. Generally, the homeowner’s association (HOA) maintains the upkeep of the exterior and the common areas. As the unit owner, you pay monthly fees to the HOA, the association creates a financial reserve from these fees, and then it uses that money to manage major exterior updates or repairs, such as a new roof, when necessary. For investors with little time, a single condo can be a great, worry-free way to go.

DEFINITION

A homeowner’s association (HOA) is a regulatory body established to govern a building or community. HOAs are generally run by a professional management company and governed by an elected group of homeowners.

What Are You Willing to Pay Out Each Month?

Another factor to consider is what costs you’re willing to pay each month.

Single-family homes come with monthly costs like trash removal, heating and water bills, and lawn mowing fees. Some of these costs, such as heat and water, may fluctuate depending on the season and the occupancy of your property. Depending on whether your home is vacant, has one tenant, or has multiple tenants, your monthly costs will vary.

If you own a condo, you pay a monthly assessment, regardless of whether someone is living in the unit. However, most condos include the costs of heat, exterior maintenance, trash, building insurance, and water in the fixed monthly fees.

What Are Your Investment Goals?

Is your goal to build equity in your rental property? Create a positive monthly cash flow? Create a large tax deduction? Have a property you can use from time to time when you want to get out of town? Or rent it until the real estate market gets better when you can sell it at a profit?

Be sure you’re clear on your real estate goals, particularly what you expect to get out of the property and why. For example, if reselling your property for a profit is your goal, you need to remember that resale value depends on the property’s location, among other things. Typically, single-family homes are easier to resell and hold their value over the long term. However, a condo building with 500 units may have 10 or more units for sale at any given time, making it difficult to sell your particular unit at a competitive price. Co-ops generally limit who you can sell your property to and may not produce the financial returns you’re looking for.

You might be getting the picture that you have a lot of choices when it comes to investing in real estate and how to pay for it. Understand these options and decide what’s best for your financial goals, what’s best for the amount of time you’re willing and able to invest in the project, and what’s best for your property.

Think of it like this: what’s the best and highest use for your property? What will give you the best annual return and preserve your equity in the property? Sometimes the best choice is a combination of both.

Sure, you can always rent your residential property for 12 months or longer—unless, of course, your property is in a community that mandates renters. In high-vacation-demand areas like Naples, Florida, or Paris, France, for example, homeowner’s associations have become stricter and sometimes limit rentals to one tenant per year with a minimum 3-month rental. What’s more, some cities and states regulate the taxation of rentals more than 30 days but less than 12 months, so you need to understand whether you need to collect and submit tax on your property. This is something very easy to research prior to buying.

REAL ESTATE ESSENTIAL

Before you buy a property, research the builder. Sometimes Kimberly’s best investments have been the ones she turned down. Early in her career, she purchased some great condos. One day, she walked into a sales office selling under-construction high-end condos. Excited about the property, she assumed building permits and city checks were enough to build a great building. A few weeks before closing, however, she finally got to walk around the condo and was not impressed. The building had numerous structural issues. Had she researched the developer beforehand, she would have learned his previous developments were in court for faulty construction. Kimberly is still glad she decided not to buy the property.

Success Story

Adriane—an Arlington, Virginia, resident—took her first foray into corporate housing when she and her children accompanied her husband, a military officer, on his tour of duty. It was during this overseas assignment that she gained the valuable knowledge about temporary housing that would serve her well in the coming years as a real estate investor.

Upon returning to the United States, Adriane and her husband purchased their first income property. Soon afterward, they rented the property, and the income they collected as rent immediately began off-setting their expenses. Hoping to continue the trend, the couple expanded their real estate investment portfolio by acquiring a second investment property.

However, with changing market conditions, the couple wasn’t recouping their expenses. One property had a viable tenant, but the second sat idle for several months with no solid rental prospects.

“What started out as a real estate investment had gradually become a financial drag resulting from a lack of qualified leads in a tenuous housing market,” said Adriane.

Recalling her overseas housing experience, Adriane began researching the need for similar housing in her area. After consulting with numerous real estate experts, she decided to convert her investment into a corporate housing rental in hopes of attracting and increasing the pool of quality renters. Further research led Adriane to Eric Smith, founder of CorporateHousingbyOwner.com (and co-author Kimberly’s husband).

“I really came to rely on Eric’s professional judgment. He not only walked me through every step of making the transition, but also he helped me do so effectively and efficiently,” recalled Adriane.

This decision proved to be the turning point in a cycle of negative cash flow. After applying a fresh coat of paint and installing new carpet in their rental home, Adriane was able to create an environment worthy of their targeted audience by installing contemporary fixtures, high-end furnishings, modern housewares, and luxury linens. As a result, the couple secured their first tenant within 3 days of listing their fully furnished property with CorporateHousingbyOwner.com.

“Furnishing our unit enabled us to share our vision of what this home would look and feel like, making it easy for potential clients to see themselves moving in and living here,” Adriane said.

Her first tenant not only referred her to the next qualified renter, but is now a repeat customer. Adriane said, “CorporateHousingbyOwner.com has made a believer out of us, and we plan to list other properties with the company to realize our goal of earning passive residual income on real estate.”

That said, the couple realizes corporate housing remains a constant learning process. “We are learning as we go,” Adriane said. “We continually reassess our expenses and adjust our rates accordingly so we remain competitive in order to attract quality renters. Yes, it’s a learning process, but one we’re excited to be a part of!”

The Least You Need to Know