By Linda Pliagas
Happy 2021, investors. It’s a new year, and everything is moving rapidly. Now that everyone has had to adapt to a “new normal”, an era of living during a pandemic, we’re going to be seeing many shifts ahead.
Fasten your seat belt as we prepare for drastic changes in government policy and economic trends, as well as global and local social shifts.
If 2020 wasn’t bumpy enough for real estate investors, now even more new changes will be heading our way. Policies that will impact every aspect of our lives.
Already scores of businesses around the country have closed up shop. The pandemic demolished family-run restaurants specialty stores, and countless others, many of which had been thriving for generations. Government aide in the form of PPP loans were simply not enough.
Retail is still bleeding, and has been slowly dying for many years — in case you didn’t get the memo on how Millennials are changing the economy. Many once-bullish office and single-tenant NNN investors are preferring to enter safer ground: Multifamily rentals. Hence the huge appreciation in this sector.
Although change can be difficult, stressful and fearful; we must also be open to the many opportunities that transformation can bring.
Some incredible opportunities being seen today are in hospitality, of course; this comes as no surprise. Many small to mid-size hotels are being lost in foreclosure or are being sold at unbelievable pricing. While some investors may fear this sector, others I know are looking for chosen properties to convert into studio rentals. In California, housing is at a premium and “micro-units” are desperately needed in our economy.
Familial moving trends are also causing homes in once-sleepy towns to be sold at premium, thanks to many families who are exiting urban areas to fully take advantage of the new “virtual” economy.
Other savvy urban developers are paying close attention to living trends and profiting. One company I know is creating single-family units with multi-generational living in mind. These three-level units were designed to offer flexibility and privacy for extended families or numerous housemates.
Changing home trends, economic shifts, policy reforms, it’s already here. But certainly, expect even more change on the way in 2021.
With life being at such a whirlwind and so many unknowns how can investors be confident in their decisions? Although governments, businesses and cultural norms change, one rule remains constant. If we are to build wealth, we must FIND EQUITY.
For it is equity, not cash flow, that will make one become an accredited investor faster. According to DQYDJ, there are an estimated 12,417,040 accredited investor households in the US, which accounts for over 9 percent of all American Households.
Case in point: The local market has increased easily 20% since 2019. Let’s use our friends, a local couple who own a local portfolio for this illustration. For privacy reasons, let’s call them, “PJ”. They currently own five properties under their belt, and they saw a huge gain in their portfolio in just one year.
Here are the actual numbers of their five-property portfolio:
- Property 1 – Appreciated $25,000 – 2 bed/1 bath PUD – Home in a Planned Urban Development, 950 sq. ft. / B market rental
- Property 2 – Appreciated $15,000 – 1 bed/1 bath Condo, 525 sq. ft. / C market rental
- Property 3 – Appreciated $70,000 – 3 bed/2 bath Single-Family Home, 2,050 sq. ft. / owner occupied, A market
- Property 4 – Appreciated $50,000 – 3 bed / 1. 5 bath Condo, 1,250 sq. ft. / B market rental
- Property 5 – Appreciated $40,000 – Luxury Condo 2 bed / 2 bath + loft 1,050 sq. ft. / A- market rental
The appreciation in one year alone was $200,000!
Notice that the appreciation of the property is relative to the type of property it is. Appreciation also fluctuates depending on the property size, as well as the area it’s in, plus many other factors.
The $200K gain is not bad considering the pandemic created such an economic disaster last year. Also, the time spent on management is merely a few hours per month. As a a bonus, the rents of these properties will be increasing as well, creating about $425 in added monthly cash flow in 2021.
Plus, Zillow predicts properties to appreciate over 10% in the same area this year. That will make take it to 30% appreciation in just a matter of years.
The monthly income is just the icing on the cake; the sweet spot is the appreciation, which added $200,000 to the PJ’s net worth. Now, they can utilize that appreciation and buy another property, which is exactly the game plan.
The bottom line is if you invest in high-appreciating markets and also purchase right. By right, meaning finding under-market gems that require rehab that “force” appreciation; or buying an equity-rich property — one that is severely priced under-market for some reason or another.
Remember investors, the money is made at the PURCHASE. Savvy investors only buy properties that they know are real winners. Also, it’s a fallacy that all deals need tons of work. Not true! We’ve purchased properties where one could eat off the floor at COE (close of escrow), yet they were still drastically under market. Why? The buyer was merely MOTIVATED.
Many deals that the PJ’s and other savvy investors make are with local senior investors, many in their 80s who are simply ready to retire and cash out. Some need the cash to enter a retirement home or they move in with the kids. Others do not have heirs, or they have children who don’t want to become landlords. You see, to them and many, rental properties are seen as a “headache”.
I now it’s difficult for you and I to believe that there are individuals who do not see the value of owning real estate. Yet, it’s true. It’s happened over and over again in our market.
So how do you find EQUITY RICH deals that will make money on the purchase? Here are some tips I’ve acquired from personal experience that will help secure your next legacy property:
- Know Your Market – Whether you invest locally or across the country, a sophisticated investor knows their “farm”. This is the area that is going to produce income. One needs to know exactly what the properties are going for. Learn your farm like the back of your hand. A sophisticated investor instantly knows a deal when they see one because they know their market so well. We know if the deal has equity or not. If you’re ready to invest, study your markets daily, spot the deals, and call the listing agents right away to get the scoop on the property before anyone else does.
- Leverage Existing Equity – The old adage, “It takes money to make money” is often true in real estate. Knowledgeable investors can structure deals with OPM (other people’s money), but until you can convince other individuals or a private-lending company to invest in your deals, you alone will be the responsible party. Figure out how much cash you have right now. How much cash can can you get in 30 days? What are your assets? What are your liabilities? Can you qualify for a traditional 30-year mortgage at 3.5%? Will you be rehabbing instead of purchasing long-term? What’s the least you need to put down to qualify for a short-term private money loan at 10%?
- Have Cash/Financing Ready to Go – Financing is key for every deal. Yes, someone has to put in actual money to close escrow. This goes back to tip number two. Get pre-qualified for a loan first, talk to a capital partner to understand exactly how much you will need. Will they finance the rehab as well? Will you have to pay repairs separately? The bottom line is: Deals, especially those with a lot of existing equity, are being chased by many investors. In this market, competition is fierce. The deals with equity are always going to be snapped up by those who are prepared and ready to CLOSE.
- Let Agents/Brokers/Wholesalers Make Money Too – It’s very difficult for an investor to do every aspect of a real estate deal. Sooner or later they’re going to need people, a team of experts who can help them. Don’t be greedy on your journey towards millions. Never burn people on their commission of a few thousand dollars. Agents and brokers make their living solely with commissions, please respect their time and knowledge. Building great relationships with realty professionals will encourage them to contact you before that equity-rich property is shared with world on the MLS (Multiple Listing Services).
- Venture Outside Your Market – The time will come in every investor’s career where they will have to venture outside of their market. Perhaps they live in an expensive area or they get tapped out by high and quick appreciation. Gong to a second or third market can help one continue to grow a portfolio, but do so cautiously. The first rule of Know Your Market applies to every city. Remember, pricing can change from one BLOCK to the next. Study your target city and become familiar with it. One way is by tapping into the regional MLS, which is generally free and public though the local Board of REALTORS. When I choose a target area to invest in, I also like to start reading their local newspaper online. You’ll discover a lot of information that can help you, plus learn who the Top Producers are too — successful brokers always advertise in their local media.
- Get Creative in Your Deal Making – Some markets are so expensive that a single-family home will not cash flow. In these circumstances, it’s time to get creative, perhaps consider transforming the property into a residential assisted living (RAL) home? What about a sober living facility? Or, sometimes renting them out by the room to students or singles also increases monthly income. If you are living or investing in California, consider transforming the garage into a legal studio apartment, plus adding an ADU (accessory dwelling unit) in the back of the property. By doing so you’ve essentially turned a single-family home into a triplex! And, it’s all legal, thanks to state laws that passed in 2019 to help solve the housing shortage in California.
- Build Solid Relationships – Any industry is difficult to break into at first. As a newbie, people may not take you seriously. Or perhaps, some may dismiss your ambition due to your age, gender or experience level. That’s why it’s important to align oneself with successful, honest and ethical people. Professionals who are in it for the long-term and who take pride in performing honest work. After 25 years as a landlord and 16 years as a licensed agent, I’ve seen so it all. To stay safe, I recommend asking for referrals and take it slow when developing relationships with people. Get to know them before doing any actual business.
- Close Escrow or Go Home – Don’t waste time nor burn your bridges with wholesalers, agents, sellers, lenders or private investors. The “fake it ’till you make it” mantra doesn’t set well with established professionals in this industry. Gossip about bad business dealings gets around locally, and nationally, very quickly! Nobody likes shady flakes, deceitful investors, or greedy manipulators…especially in real estate! Investors who engage in deceitful practices may one day awake to discover a Rip Off Report about them or find themselves being served with a lawsuit. Please take real estate, and the industry laws and ethics that govern it, very seriously.
I hope these suggestions help swell your existing net worth in 2021. Remember, the key to multiplying wealth with real estate quickly is to buy equity. Hidden gems are out there waiting for sophisticated buyers, your job is to find them. Best of luck.
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