Investments are a way to get your money to work for you. They can lead you to your financial goals and build your wealth. There are several ways to invest your money, with real estate being one of them. This new series will highlight tangible real estate investment strategies and how they can contribute to your financial success.
Single family homes as an investment strategy
When thinking about residential real estate investing, we tend to lean towards the idea of large apartment complexes and well-known, wealthy investors. That’s not necessarily the case for all successful real estate investors.
Single family homes are a great way to start, and or grow your real estate portfolio. There are a couple of different ways that you can add single family homes to your portfolio. Let’s discuss how.
Resale is a common and well-known way to sell and acquire real estate. Existing home sales in 2020 were the highest since 2006, according to an article written by Diana Olick at CNBC. You can use an existing single family home to grow your portfolio. Here are a few tips from RPM Iowa’s Real Estate Investment Advisor (REIA), Seth Evans:
- Rehab work should be cosmetic and not structural. Cosmetic fixes are cheaper and easier to make than purchasing a home that needs a considerable amount of foundation work.
- Keep in mind that you may need to replace larger necessities. “The lifespan of a furnace is 15-20 years, and a roof can range from 20-30 years,” Evan notes. “Be on the lookout for these things when you’re searching for single family homes. If they aren’t noted on the marketing description, get your real estate agent to find out that information for you.” You can be better prepared to negotiate with the homeowners, or make room in your budget to replace these bigger ticket items if you know they’re coming up.
- Look for a home built no later than the 1960s. “You’ll want a home that was built in the 1960s at the latest,” Evans says. “If it’s a home that has been well taken care of, that means less maintenance for you.”
You will be competing with other home buyers in the market area, so keep that in mind as you go through the process. Have a few backup options available in case your offer gets beat out by other buyers or investors.
The Des Moines metro has been growing rapidly the past several years. It’s the perfect time to jump on single family homes that are under construction in developing areas. Up-and-coming areas include: Grimes, Altoona, Bondurant, and Johnston. Ankeny is rapidly expanding as well.
“Taxes are paid in arrears in Iowa,” Evans explains. “You won’t pay building tax on a new house for twelve to eighteen months. But you will pay taxes on the land.” Because you won’t pay taxes for up to eighteen months, you can make an excess amount of cash flow that first year. Almost double of what you would make than when your taxes kick in. “Remember, you’ll pay for it eventually. So use that extra cash flow money wisely.” Suggests Evans.
Evans notes some of the advantages to investing in a new build:
- There’s less of a chance you’ll need to replace large necessities to the home, since everything is brand new. When you buy an existing home, some of the big ticket items like the pipework or roof have been replaced at different times. In a new build, everything is brand new, so you don’t have to worry about that. You typically get a builders warranty for the first year, too.
- If the area you’re building in is up-and-coming, the value of the property might skyrocket. Meaning, if you’re ready to sell your home within a year or two, you’ll be getting high returns. “It’s important to note that if you hold onto a new build property for a year or two and then decide to sell, that you will have to credit the taxes to the buyer or pay for it when you close,” Says Evans, in reference to earlier in the article where we discuss tax benefits of new construction single family homes.
- You get to call the shots. Some builders who are developing new neighborhoods have what is referred to as cookie-cutter homes, but you get to decide the finishing touches, and sometimes even the layout of the home. So you’ll know for sure that you’re getting a move-in ready home in the exact way that you want it.
We’ve highlighted some of the areas that are expanding around the Des Moines metro in a previous 2020 rental market report article that you can find here.
The most crucial aspect and biggest question of investing: How much money should you expect to make? “Good cash flow in our Iowa market for single family homes is between two and three hundred [dollars],” Says Evans. “Anything above that is just icing on the cake.”
In order to properly formulate your rental rate, you’ll need to take a couple things into account. You’ll need to ensure that your mortgage is taken into consideration when figuring the numbers so that you can receive the proper amount of cash flow. You can talk to a local property management company that will use their internal tools to help you set a fair and beneficial rental rate.
You may need to be flexible with your property. The rental market is ever-changing, same as the stock market. Be prepared to make rental rate cuts or offer incentives to potential renters in order to get your property off the market.
How do I get started investing in single family homes?
Connect with a REIA or real estate agent that focuses on residential. Don’t be afraid to ask questions – whether it be about the home buying process, or investment properties. Use them as a tool to get connected with real estate investment groups and other professionals.
There are local investor groups and clubs in your area. Consider joining a few! ?There are so many opportunities offline,? Evans says. “Connecting with people in real time, even if it’s over a phone call or a socially distanced group meeting, can help you learn.”
A REIA will be able to help you set a plan of attack that’s specific to your needs. You shouldn’t allow your current financial situation to hinder you from making the move if you feel you’re ready for it. An educated REIA can advise you on what’s best for you.
Ready to talk to a REIA today? Reach out to us. We’d love to help in any way we can.
Haven’t read the first part of our series that introduces the different kinds of investment strategies? Follow this link.