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Structuring win0win real estate deals in 2021

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The million dollar question all investors have now is “How, What and Where is the safest place to invest now”. We have been in uncharted territory for the past year and 2021 is starting off in that same uncharted territory. This all makes me think of the famous Quote from Warren Buffet. to be “fearful when others are greedy, and greedy when others are fearful.”

Now, please do not for a minute think you should go and prey on the fearful. As you know many people have had many challenges and they do not need investors to come prey upon them. Instead think like a knight in shining arbor. You can make a difference in the eyes of the unfortunate by solving their problems.

Yes, you can get great deals and help them in the process. When people are down on their luck often their greatest desire is to get out from under their financial burdens while leaving their credit intact. This often allows us as investors to structure win win scenarios. Scenarios where you can buy a property for under value and help the seller get out from under their obligations meanwhile putting a few bucks in their pockets and be left with a little dignity.

How to Invest

As investors we can prey on the unfortunate and make big dollars (Don’t ever do this, Karma will correct these wrongs) A better solution is to be a great negotiator. Think of creating win win scenarios. Find the problem that the seller has. Let them know you want to help them while creating a win win situation for both parties. your investing business will thrive when you do this and believe it or not these people that you help will become an advocate for you. They will introduce you to more people that creates more opportunity for you. Now doesn’t that sound like a much more sustainable investment worth owing.

What to Invest in in 2021

When you attend real estate investment masterminds or when you read articles or follow podcast you will repeatedly see the big debate as to what the best real estate for you is to invest in. Single Family homes, Multi family Homes or perhaps commercial property. Everyone has their own opinion. But all the comments are of course just their own opinion. The Best investment for you is the one that in your opinion is the best investment. The investment strategy that you find most appealing and that you have the most passion for is the investment that you will best excel at.

Like everything in life there are pros and cons to each investment class. The investment class that you best resonate with is most likely the investment that you will excel at. If you are not quite sure which resonates with you, here are just a couple of examples of pros and cons for Single family homes versus multi family investing. Which one fits your investment criteria the best.

Single family pros:

1. Fewer turnovers; tenants tend to call a single family (their home) they tend to own more things and as they are happy in their home with more belongings they tend to live there longer. This equates to less tenant turnover and less expenses for the owner.

2. More controlled expenses: On a single-family rental the tenants typically pay for all utility expenses. The only expense paid by the owner are the standard taxes and insurance (perhaps a mortgage) this provides for more predictability over the cash flow.

3. Higher equity growth: Appreciation is one of the best wealth building principles and tends to be best captured in the single-family market. The best equity growth position will of course be the property that will sell to a retail buyer at the time you sell. Retail buyers are buyers who want to buy for themselves to live in. The single-family home has always been the most highly sought after and liquid real estate investment class. Obviously buying the right property in the best market for equity growth position is paramount to capitalize on this equity growth.

Single Family Cons:

1. One tenant: (on lease) when the property is vacant there is no revenue coming in. Another reason location is so important. Always want to own rental in a highly sought-after location where housing is in highest demand.

2. Price per unit: the cost per unit (commonly referred to as per door cost) is higher than the per door cost of a multifamily property. This higher (per door cost) often reduces the cash flow on a per door basis.

3. Higher repair costs: with one unit there is no economy of scale pricing so repairs can be more expensive. Property management fees may be higher as well.

Multi-family pros:

1. Economy of scale pricing: with multiple units you can often get better pricing. Better price on property management as well as repairs.

2. Financing: Loans for Multifamily properties are tied to the financial merits and performance of the property. When buying one-to-four-unit properties the loan is considered a conventional loan and these loans will be tied to your income and credit worthiness, usually requiring great credit scores. When buying 5 units and larger, these are considered commercial loans. They rely on the financial merits of the property as opposed to your personal income and expenses.

3. Higher cash on cash returns: when seeking higher cash on cash returns, Multi- family delivers. Economies of scale are working for you, for example You have one roof that may needs repair which covers multiple paying tenants to help pay for that repairs. Or you have multiple units to manage so a property manager may discount the fees.

Multi-family Cons:

1. More transient tenants: one of the largest expenses to the owner is the turnover cost of tenants. Apartment dwellers tend to be smaller families or individuals who move more often. Resulting in higher cost and less predictable returns.

2. More tenant issues: the more people living under one roof the more domestic challenges you encounter.

3. Additional maintenance cost. All common areas such as hallways maintenance, paint, electricity and cleaning as well as lawn care and snow removal (where applicable) are the owner’s cost. These costs reduce the controls the owner has over expenses.

As you can see there are pros and cons to both investments. Deciding what is most important to you will help you narrow down the best investment for you.

Your conclusion:

Who tends to buy the single-family investments: the investor looking for a nice passive investment where they can hire a property manager and not have to worry about a variety of issues arising? These investors simply want a nice safe and sustainable investment secured by real estate. They have a larger desire for a nice mix of cash flow and equity growth.

Who tend to invest in multifamily investments: this investor tends to be more actively involved in the investment? Even with a property manager they understand they will have to be involved with the decision-making process to the variety of items that arise from the number of units they own. This investor tends to have a bigger desire for cash flow than for equity build up as the values of the building is tied to the rents that are generated.

And Finally, Where to Invest:

You guessed it Location. So where in 2021 is the best place to Invest.

I like several Markets for 2021 such as Kansas City, Boise, Atlanta, Orlando, Tampa, Jacksonville, Ocala, Birmingham and a number of other cities that fit my standards for sustainability.

7 things I look for when investing to create a more sustainable investment

1. Population growth: A city that is growing in population maintains constant need for housing and creates competition in the rental market keeping strong rental rates.

2. Job growth: Finding markets where the city has a desire to grow and the local governments have programs in place to attract new industry and businesses into the area will provide plenty of jobs for your tenants.

3. Job Diversity: Remember how Detroit (Motor City) was a booming and thriving community until the auto industry packed up and started moving away. The city is still trying to recover from the loss of this economic powerhouse. It was a big industry, but the cities’ survival was dependent on this one industry and when they lost it they lost all sustainability to prosper or even survive. Insuring plenty of job diversity in an area you wish to invest in is paramount to maintaining sustainable tenants that will remain employed somewhere and continue to be able to pay rent.

4. Sustainable employment: An area where the unemployment is equal to or less than the national average insures you have a location that will maintain sustainable employment.

5. Path of progress: Okay. so you found a city with all the above elements now to put your investments on steroids you want to invest toward the path of progress. As an example all of the city is growing to the north end of town that is where the demand is. The north end of town is where people will pay larger rents and when it is time to sell you can maximize your exit strategy and sell to the retail buyer who is also looking for this higher demand location.

6. Affordable markets: For a home to be considered affordable you should be able to purchase a home for one third of your annual salary. Which means the area’s median income should buy and pay for a median price home for 33% of its gross annual salary. When you can find a market, which requires less than 33% of the median income to pay for a median price home you have an affordable market. Currently there are great markets such as Atlanta Georgia where you can buy a median price home for only 20% of the area’s median income. This shows sustainable growth as the home values can rise by 13% before even being considered a balanced market. Now when you add job growth and population growth etc. the fundamentals will continue to grow exponentially.

7. Rent to purchase price ratios: Locations where the rental rates in comparison to purchase price are equal to or greater than 1% of the purchase price. Known as the the 1% rule. If you buy a property for $100,000, the monthly rent should be at least 1% or $1000 per month.

Real estate is a tangible asset that gives you controls unlike any other investment. It encompasses all 5 wealth building principles, and it is in fact Housing. Housing continues to soar in demand as our population continues to rise and family formation now soars. Now that millennials are turning the age of the average first-time home buyer in record numbers, real estate will continue to be a strong and dominant player in the world of investing.

Happy Investing

Finopulse

Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by Finopulse.
Publisher: Larry Arth

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