Although the real estate market continues to sizzle across the nation, some people have discovered it isn’t as easy to get some skin in the real estate investing game as they thought it would be.
Inflated values, outrageous asking prices, and steep competition in expensive markets are making it pretty challenging for a person who has a small or moderate investment budget to secure an income-producing property. There has to be another way, yes?
Whether you’re in San Francisco, Seattle, Manhattan, or Chicago, many of America’s biggest cities are becoming unaffordable. Ambitious young investors find the allure of real estate investments compelling — and for plenty of good reasons — but they imagine how they could possibly buy a decent piece of property (let alone multiple ones).
Expensive markets typically do one of two things to inexperienced investors. First, they deter. People see the prices and realize they probably don’t have the money to make it work, so they give up and do something else. Sometimes this is wise, but it can lead to financial regrets later in life.
On the other hand, some inexperienced investors go to the opposite extreme. They say, “I’m going to invest no matter what it takes.” Even though realistically, they can afford to buy only a $100,000 property, they somehow convince the bank to lend them enough to commit to a $600,000 property.
These investors struggle for a few months and may even break even for a short while. Then the house of cards tumbles down and the bank forecloses on the property.
As best-selling author Dave Ramsey likes to say, “You don’t get a pass on doing math because your local real estate market is expensive.” In other words, the answer isn’t to invest more than you can afford in the hope that everything will work out.
But it’s not an excuse to give up on investing altogether because you think there aren’t any opportunities, either. It doesn’t matter if you live in the heart of Los Angeles or the backwoods of Mississippi, anyone with a little financial self-discipline can become a real estate investor.
You just might have to get a little more creative, based on your zip code.
It’s not always about having the most money or being lucky enough to find yourself in the right place at the right time. The best real estate investors may be the ones who are the most creative.
As you navigate your own expensive market with limited financial resources, here are some helpful suggestions to consider.
If you live in San Francisco and have only a few thousand dollars to invest, you can’t buy a single-family home with a for-sale sign in the front yard. It won’t matter where you are in the city; this is out of your price range.
But before you try some of the other options in the list below, look around for alternative deals. Foreclosures, auction properties, and bank-owned REOs surface from time to time, and typically feature substantial discounts.
Who says you have to be a lone wolf in the real estate industry? Many excellent investors recognize the power of pooling their resources with other like-minded people. Could you build a team of three or four people to make investing more practical?
Perhaps you’re willing to hunt down a property, manage it, and contribute all the sweat equity. You know someone who has the money and is willing to handle the down payment, but doesn’t have time to devote to locating and negotiating the deal. This could make a solid partnership.
When you drop a pebble into a pool of water, rings of ripples appear around it. The further you go out, the bigger the rings get. They also become less intense and pronounced.
The same is true in real estate. Generally speaking, the farther you move from the center of the city, the more investment options there are and the less expensive they become.
Don’t be afraid to check the outskirts of town for deals. As the population grows and housing becomes more scarce in the downtown core, potential home buyers will push further and further out. Your “deal” could yield massive ROI in the coming years.
The practice of house hacking — where you rent out portions of your primary residence to generate enough income to live in a nicer property than you could afford on your own — has become popular of late. But it’s not for everyone.
If you aren’t crazy about having someone else live in your home, another option is to build a mother-in-law unit on your property and rent it out. “Many cities with a significant amount of single-family homes also have provisions for detached, or separate mother-in-law units on the property,” Real Finance Guy explains.
“For instance, my hometown of Seattle will let anyone with a 5000 sq. ft. lot to place an 800 sq. ft. mother-in-law unit on their property, as long as there is off-street parking and access to the unit from a back alley. The homeowner is also required to live on the property.”
You don’t have to buy a physical piece of real estate to get started. If you have a largely fixed income and don’t want to take on all the risk that comes with buying your own property, you could always put money into a real estate investment trust … also known as a REIT.
These trusts operate much like a mutual fund: They allow you to buy shares of income-producing real estate portfolios and earn a healthy return on investment. You can learn more about them here.
The Houston real estate market is somewhat unusual in that property values have increased dramatically over the past decade, but most of the options remain affordable to people in every economic class. Whether you want to get started with a single apartment unit, or dream of building a portfolio of 25 or 30 single-family rental properties, there are opportunities to go multiple directions.
At Green Residential, we’d love to help you accomplish your real estate investing dreams, whatever they are. From buying and selling to rental property management, we do it all. Contact us today to learn more about our services!
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