FAQs about Getting Started
Deaton works with many first time buyers. In fact, one of our most rewarding experiences is watching first time buyers grow into experienced, wealthy real estate investors. At risk of sounding cliché, we've seen it happen. It's not done overnight or with the first property but with patience and street-level buying experience, being a successful real estate investor is within reach. Here are many common questions, and our answers, pertaining to multi-family real estate investing.
GENERAL
Why should I invest in Real Estate?
The answer in one word is "control". With Real Estate you have the ability to manipulate the various aspects of the investment to alter the financial outcome. You have no control over the value of your stock. Those that try to manipulate stocks wind up in jail.
What are specific financial reasons why Real Estate is such an attractive investment?
Leverage is probably the greatest advantage of Real Estate. A very simple way to look at it is as follows: $200,000 in cash generally buys $200,000 in stocks, but $200,000 can easily buy $1 million in Real Estate. If both the stock and the real estate increase in value by 10 percent, the stock has a 10 percent return but the Real Estate has given you a 50 percent return.
Other financial reasons include:
- The possibility of buying for less than market value just because the seller wants out now. With stocks, the price is the price.
- On-going debt reduction/Equity build-up.
- Tax shelter.
- Appreciation potential.
- Cash flow during holding period.
Are there other reasons Real Estate is attractive?
Yes! Here are just a few:
Ability to increase value through renovations, additions, subdividing, converting to an alternative use and raising rents.
Ability to enjoy or leverage your profits without paying taxes by refinancing and exchanging.
Real Estate tends to be less volatile than stocks. You can take a vacation for a month without fear of a market crash.
Since leverage is one of the great advantages of Real Estate, please explain it more completely.
One of the reasons to buy Real Estate is to acquire some amount of debt for the simple reason that as the debt is reduced; the asset against which the debt is secured usually goes up in value. You are essentially renting money, but your tenants are paying the rent.
So, is all debt good?
No. Debt on depreciable assets like cars, stereos and boats is bad debt. Pay it off. Debt on appreciating assets is good debt. It will make you rich.
So, if leverage is a good thing as it applies to real estate, should I try to borrow all the money? Can I really buy Real Estate with nothing down?
Absolutely, you can! However, the better question is how much can you buy? The answer to that is only as much as you can afford to pay the negative cash flows on that you are likely to generate with this approach.
How much leverage is too much?
When it creates a negative cash flow! Not everyone agrees with me, but I've seen too many people choke on negative cash flows. I've experienced it myself and it is not an approach that will keep you in the Real Estate Investment Business for the long-term…which is how real wealth is built.
What are the advantages of multi-family over other real estate investments?
Residential properties carry lower risks than retail, office and industrial properties because the income streams tend to be more predictable. Additionally, multi-family property provides better cash flows than single-family investments.
Multi-family income streams have lower catastrophic risk than office, industrial or retail. With those investments, the economy could "tank" or a company could downsize and your property might stay vacant for years.One-year leases on residential properties allow you to raise rents faster in an improving market.
I'm a first time investor, where do I start? And do I need to get my real estate license?
Relative to real estate licensing, if you want to become a Real Estate Agent, go for it! If not, it may not be the best use of your time. All education will help you, but your time may be better spent doing other activities such as reading Real Estate books, interviewing other investors, and attending investor meetings.
Another class/seminar that can be of tremendous value to real estate investors is the CCIM introductory course. CCIM, or Certified Commercial Investment Member, is a professional designation earned by commercial real estate professionals with exemplary track records in their respective markets. This intro course however, is a great first step into learning how to "crunch numbers" on investment property and understand one of the most crucial concepts in real estate: the time value of money. Learn more about it here.
We also recommend reading as much as you can. Look at trade publications, such as National Real Estate Investor, Multi-family Housing News and Southeast Real Estate Business. There are also countless books on real estate investing and general wealth building, here are a few selected by Deaton professionals:
- "Be Your Own Brand" by David McNally and Karl D Speak
- "The Experience Economy" by B. Joseph Pine and James H. Gilmore
- "Good to Great" by Jim Collins
- "Think and Grow Rich" by Napoleon Hill
- "Who Moved My Cheese?" by by Spencer Johnson and Kenneth Blanchard
- "The Millionaire in You" by Michael Phd Leboeuf
- "Rich Dad, Poor Dad" by Robert T. Kiyosaki
- WCAA – Wake County Apartment Association
- TAA – Triangle Apartment Association
- TREIA – Triangle Real Estate Investors Association
BUYING PROPERTY
I want to buy some Real Estate. What's the best deal you have?
The best deal I have is the one that fits your specific investment needs. How much time do you have available to manage it? What type of location best suits your needs? How much money do you have to invest? (On and on and on…) You see, the best deal for one person is not the best deal for another person. I must first understand you and your needs before I can help you answer that question.
So, can you offer me some general buying tips?
Look at a lot of properties. Get familiar with the market before buying.Try to make money when you buy or at least know how you are going to make changes to the property to add value in the short-term.Buy from motivated sellers.Focus on the deal, not the property.Learn how to negotiate.Be a contrarian. Don't do what everybody else is doing.
What does "AS IS" mean?
After wrestling with this issue for years, we decided that "AS IS" really should mean "AS IS". Therefore, we do not accept offers on our listed properties that have inspection contingencies. The buyer is welcome to do whatever inspections he desires prior to making an offer. In fact, he may even negotiate verbally with the seller about price. However, no contract will be signed until the buyer is comfortable accepting the property in absolutely "AS IS" condition and ALL inspection contingencies are removed from the offer to purchase.
This way, both the Buyer and Seller know what they are agreeing to at the point of contract. The Buyer knows the true condition of the property and the Seller knows the true price to be paid.
This eliminates the frustration for both the Buyer and Seller concerning repairs or renegotiation of price. The Buyer hasn't invested unrecoverable money in appraisals, lender and attorney fees and the Seller hasn't lost marketing time or missed out on other potential Buyers.
Why shouldn't I have a financing contingency in my offer to purchase?
The short answer is that you shouldn't be wasting your time looking at properties to buy if you are not absolutely sure you can acquire financing on them. Meet with your lender first. Find out what you can and cannot do. Then, start looking for properties.It really is in the best interest of everyone that the Buyer be sure before going to contract that he can borrow the money. Without the financing contingency, the Seller will take your offer much more seriously. This approach, combined with the "AS IS" tool previously mentioned will make your offer almost irresistible to the seller.
What is the best location for multi-family investment property?
The best location for you depends on your needs. If you are basing your investment decision purely on numbers, understand that you typically get a choice between appreciation and cash flow. Inner Beltline investments generally appreciate well but don't often provide high cash flow returns due to the higher price you must pay initially. Investments in North and West Raleigh typically have a balanced mix of appreciation and cash flow. East and Southeast Raleigh have historically little appreciation but much better cash flow potential. In each market, there are submarkets that may follow different rules. The only way to know is to do your homework.
Should I consider any other factors than "the numbers" in my investment decision?
Absolutely! You must weigh all the costs in any decision. Those include time, physical, mental and emotional costs. You should consider what your strengths are and if they can be utilized in the investment you are considering. Who will manage it? How far from work and home is it? Does it need repairs, and who will do them? Is pride of ownership a factor?You see, "the numbers" are important, but many other factors can and should influence your decision. This is one of our strengths at Deaton - helping you determine which property really does suit your needs best.
How much down payment do I need?
When purchasing multi-family property with 4 units or less, you can finance the property using a loan program very similar to the loan used to finance your own personal residence. Investment interest rates are generally +/- 1 percent higher than a personal residence and it is usually amortized over 30 years with typically 20 percent to 25 percent as a down payment.
With 5 or more units, you'll need to finance the property using a commercial loan program which will usually require a 25 percent down payment. Commercial loans can have 3, 5, 7 or 15 year terms and amortization periods of 15 or 20 years. Commercial loan terms, rates and amortizations are very dependent on the strength of the borrower and therefore more variable than 1-4 unit mortgage loans.
These are only guidelines and there are many creative loan programs out there. Check with your lender to see which program best suits your needs.
Will the seller do any owner financing?
Selling financing is usually "market driven". The more money that is available from traditional lending sources, the less often one sees owner financian available in the marketplace. Therefore, sellers seldom need to provide financing. Most sellers either desire cash or are exchanging into a larger property and must have the cash to buy that property.
Also, sellers must pay taxes on the "recapture" portion of their capital gain regardless of whether they receive all their cash from the sale at closing. This could result in owing more tax than the seller has cash on an owner financed transaction.
Practically speaking, most owner-financing occurs because the seller decides he would rather receive a higher rate of interest on mortgage payments than some lesser rate with his money in CD's and he is getting paid a premium for his property by providing the financing.
Are your seller's motivated?
Yes! We will not work with a seller that does not have a reasonable motivation for selling his property. When we list a property, we have a 100 percent expectation of selling that property. We require our sellers to give us the information we need to close the property as well as list the property before we will start marketing efforts. Sellers understand that we mean business and you should too.
So, I should be able to get a low price on your listings, right?
The market determines value. Some of our sellers actually receive a higher price than they expected. You may want to read the newsletter article from November, 2004 on valuing Real Estate for further explanation.
TAXES AND 1031 EXCHANGES
What is the best form of ownership entity?
You can certainly own real estate under your name, just as you do your home or vehicle. You can also create a legal business entity if you prefer to take a more formal, long-term approach to your investing. It's all up to you. We do advise you to speak to a tax or legal professional about the specifics of each. For a general breakdown of ownership entities, see this chart.
What is a 1031 Tax-Deferred Exchange?
In simple terms, it is an IRS regulation that allows you to sell one investment property and replace it with another without paying any taxes on the transaction.
How do I complete an Exchange? What are the rules I must follow?
- The property you are selling and the one you are buying must be held for business or investment purposes. (No primary residences or second homes).
- You must take title in the same name as you sell.
- The property you buy must be of equal or greater value to be a totally untaxable event.
- You must identify the replacement property within 45 days of closing on the first property.
- You must close on the replacement property within 180 days of closing on the first property.
- You cannot receive the funds from the first closing. They are transferred to a qualified Intermediary (usually a Title Insurance Company) and the Intermediary sends them to the second closing when needed.
IMPORTANT! These are the basics. Consult your tax advisor and attorney for complete details.
PROPERTY MANAGEMENT
Does Deaton Investment Real Estate provide property management services?
No, we strictly focus on the brokerage of multi-family investment property. We can recommend several property management professionals to assist in the operation of your property.
How much does property management cost?
You can typically expect to pay between 6 % and 10% of rental income for management.