Note: This is my next installment of my blog series ABCs of Buying, Selling and Investing in Real Estate. I pick a letter (U this post) and write a fictional story around it. The story is fake, but the advice is very real(ty).
Ulysses called me one wet November afternoon. He was one of many lost real estate investors listening to the sirens of the real estate investment advice game. He said that he had listened and read so many “experts” on real estate investing that he felt paralyzed by all the analysis he had done. He needed a straight talking real estate expert to tell him like it really was. He had originally been interested in doing flips of single family homes. Then, he attended a seminar that stressed buy and holding property and using equity as a way to build wealth. One expert podcaster insisted that syndication of large apartment complexes was the gold mine he was seeking. He was told that building a LLC was important and then told it wasn’t as people could still go after your personal assets. To put it simply, Ulysses was now so confused, he wasn’t sure what he needed to do to get started investing in real estate. He asked me what I thought was the best model for real estate investing.
This is what I told Ulysses about being in the real estate investors club.
I told him the best model was the one that fit his numbers the best. I advised him to make sure he had some realistic goals and objectives on what he wanted to accomplish with his real estate investing. If he was looking to make some good capital quickly, he could think about flipping, although the competition to find good possible flips is fierce right now. If he wanted to build wealth slowly over time, he might consider buy and holds. Syndication is a good plan for silent investors who are not into the property themselves, but the return on investment. As far as building a LLC, I told him that this was always my advice despite how some believe it is not the best course of action. I consoled Ulysses that I believed he was one of many real estate investors facing this same “analysis paralysis. ” He needed to take a deep breath and start looking at properties to see what he was really into doing. He could read, watch and listen to advice all day long with no idea how things really work. Sometimes, you just have to brave and take the first step. By looking at some properties and running specific numbers on these properties, he can begin to forge his own real estate of choice. I did finish by telling him about three underappreciated investments that he might want to consider.
1. Land – I referred Ulysses to a blog post I published earlier this year about buying land as an investment. It was generated by a fellow investor (Tim Bishop) who makes a good living buying and selling land. I do know that from a realtor’s standpoint, land can be a hard pill to swallow. It is very difficult to really gauge the value of land based on sales comps alone as normally there are not a lot of good reliable comps for land. I always tell clients interested in knowing the value of land that they need to speak to an appraiser specializing in the process. Land is also very difficult to sell for most realtors as compared to improved land (with properties) with it sitting on the market for months at a time. Despite the struggles I face as I realtor, the post did point out some good tips about buying land as an investment. You can get some of it at reasonable prices because many land owners are looking to unload the land. There are plenty of opportunities to buy land, sometimes at 10 to 30% of market value. Finally, as with any investment, it does come with some risk. For example, the reason land is sometimes so cheap is because of title problems with the land. It is a good idea to find a good title company to work with in order to iron out these difficulties before investing.
2. Mobile Homes – I was introduced to this type of investing by another investor on biggerpockets, who owns quite a few mobile homes that he leases out for some outlandish ROI numbers. He had a very low entry into the market because of the low cost of initial purchase, but then could charge market lease rates. So, a mobile home bought for under $40K can be rented out for $800+ a month, making this one of the few buy and hold investments in north Texas that can actually obtain the 2% rule. I found a great article written by Matt Lloyd, who runs the Mobe blog. In it, he lists four reasons why mobile home investing is a great venture to undertake. First, you will have no problem finding tenants for mobile homes as renters get desperate to live some where affordable. I have written a lot about this topic recently as there are over and above more people living below a income level that allows them to buy a home, or even rent a traditional single family home. Matt also goes into a little more detail about the great ROI you get with mobile homes. Finally, because it is so underappreciated as an investment, you won’t have much competition in this field.
3. Self-directed IRAs. – I wrapped up my advice by telling Ulysses about one additional possible investment he could make with his funds. If he put his funds in a self-directed IRA with a custodian open to real estate investing, he could see some good returns in this way. Real estate investing through self-directed IRAs is perfectly legal. It is just most people hear about IRA investing only in stocks and bonds. You have to find a self-directed IRA that fits you risk tolerance and investment goals. For example, Sterling Revenue Group(which I am a full realtor partner and receive commissions for sending them referrals, Check here for more information. ) has one program that invests in predeveloped land, land that has not seen any improvements but has been made ready for them. At last look, this IRA was seeing as much as a 20% return annually. Sterling also has a program for rental properties that sees about a 8% return annually. One drawback to these self-directed IRAs are the fees involved with each investment made in a property. You can get around this by having “Checkbook control” through an LLC that has the self-directed IRA as a silent partner. Since the IRA funds are invested in the LLC versus the property directly, you can control the spending and avoid many of the fee associated with the self-directed IRA. I did recommend that Ulysses use a certified IRA real estate agent if he decides to go in this direction.
Ulysses seemed a little more confident by the end of our discussion and less lost like so many newbie real estate investors. He told me he knew what he wanted to do with his investing. He appreciated me telling him about how land can be a good investment without a lot of overhead but does tend to sell slowly. He thought the mobile home idea seemed viable since it looked like you could get a good rental ROI with them. Finally, he said he liked the IRA idea since he already had a large savings built up in his 401K that he could roll over to a self-directed IRA.