Congratulations on taking the first step to becoming financially independent, doing your homework. In this blog I will scratch the surface on Real Estate investing, a complex investment made easy.
5 Types of Real Estate Investing
- Income Producing
- Income Producing/Appreciating
- Commercial Real Estate
I will focus on the first two Income producing and income producing with appreciation.
These are properties that are not in high appreciating areas, while you don’t cash in when you resale the property the income you receive from tenants make it a viable option.
- Under $60,000
- Rehab required $5,000-$15,000
- Located in Revitalization zone (tax Incentives)
- Yearly Income $7,800-$13,200
These properties are relatively stress-free investments that require little capital to start up. They are mainly in Low-income High-unemployment areas so Tenant screening is a must. These properties will make up for what they lack in appreciation with a higher return on Cash invested.
Income Producing/Appreciating Properties
These are properties in desirable neighborhoods or growing sections in the state. They will not produce the same income just on rental income alone but offer a nice appreciation bonus when it comes time to sell your assets.
- Under $200,000
- Little rehab required
- Located in popular neighborhoods
- Yearly Income $16,800- $24,000
Typically a more difficult investing strategy but less of a hassle when it comes to payments and problems with the property. Finding good tenants is much easier with properties in these neighborhoods, mainly because of school zone. Most tenants will want to stay for more than 3 years.
More difficult to find a realistic price, never usually valued at a fair price without a knowledgeable realtor in the investing field. Have the ability to produce GREAT returns.
- Price: $150,000-$500,000
- Rehab required $20,000-$50,000
- Located in popular areas
- Yearly Income $13,200- $72,000
While multi-family seem great to the starting investor they do come with the problem of the sellers over estimated their worth greatly.
One property that comes to mind is one located over in Center Point Birmingham. It was a duplex listed for $68,900 which initially caught my eye until seeing the income and condition of the property. The property had two tenants that were both paying $550 a month, $1,100mo Total.
Lets Do Some Math
With expenses extremely undervalued (only using taxes) this property is generating a Net Income of $11,900.
Which is generating a 17.27% return on your investment, Great right?
Lets look into a few more costs that this property needs to account for
- Owner paid water (only one meter): $200+ a month
- Rehab needed: $10,000 (roof and overall condition of property)
- Maintenance per Year: $500 (low estimate)
- Property Manager fee: $1,330 (10%)
- Vacancy Cost: $1000 per year
So after we take out the realist expenditures this property needs every year we are looking at a measly $6,670 per year in Net Income. Then we take the after rehab cost of the property of $78,900. We are looking at very small 8.4% return on investment per year. While still better than the stock market this is a NO in real estate.
Aim for your real estate investment to produce at the minimum 10% per year. Property owners tend to think that since a property is producing income it is worth much more than if it wasn’t, while I do agree. There is a line to draw in the sand when it comes to something over priced like this specific property.