18: Wealthbuilding Tip - How to prepare to invest in real estate

Welcome to the Purpose Driven Real Estate podcast. This is where passion meets purpose in an ever changing real estate market. I'm your host, Steve Valentine, former real estate agent turned real estate entrepreneur, speaker and guide to all things real estate. And this is my co host, Paige Tons, former D1 college athlete turned real estate adultrepreneur. Whether you work in the industry or you are a consumer of real estate, with each episode we intend to raise the bar in our industry and show you the purpose behind every piece of real estate in your life. What's happening, Paige? How are you?

Pretty good.

Good. What are we talking about today?

Today we have a wealth building tip. And the wealth wealth building tip is all about how to prepare to invest in real estate. And it's something that we've kind of talked about and want to provide everyone who's listening some some tips and tricks on how to prepare in order to invest in real estate.

So if they want to invest, knowing how and when and why and what it looks like.

Yes. So I wanted to start off with what are the top three things that you think will prepare clients? Anyone who's listening to prepare to invest in real estate. So what are your top three things for preparation?

Well, I think the top one that's top of mind for anybody should be the frame of mind to have the desire to invest in real estate. So once you have that frame in mind or that frame in mindset, then it's how do you get to it? But you first have to want to do it and understand it before you can get to those top three things. Right. So the first thing would be mind shift. The shift that real estate's a good investment. And what was the rest of the question?

Top three things. So right now, top three things. So first thing you've mentioned is getting your mind kind of actually like thinking about investing and just so just kind of like a jump start. What are some two other things that.

Will help you that really prepare is the knowledge behind what the investment looks like. So you know, if I said my second thing is just to know the ins and outs of the expectations of the investment. I think a lot of people jump into investment properties not knowing the good, the bad and the ugly and not knowing the cost. So really getting together with a professional, kind of like people go and they speak with a financial manager and they give them all the different things to do. That's what we do at the Valentine Group. So if you want to invest in real estate, you should know what it looks like and what it feels like and what the expenses are before you actually do it or think about it, Consider it type thing.

Okay, and then what's one other thing that one of their, like quick tip on how you can prepare. So we have, so we have mindset shift and really thinking about the actual investment and then knowledge and then do you have anything else or are those like your top two, then?

Those are the top two. I would say the top. The third most important thing would be to the preparation of it as far as having reserves, having those types of things. So really being prepared for the investment. Phone call.

Okay, so with that said with the resources piece, I guess I'll get right into this question. But so we talk about resources and having the reserves and that money. So where, where are those resources and those reserves? Where do you, where can you find your money and how can you utilize money in different areas of your life?

Right. Well, the typical type of real estate investing is looking for an investment property. So you've made the choice to invest and now you have to go through the process, which is what's the cost? So you're going to have a down payment and typically in this market you're looking at 20, 25% down on a single family home. And then you're going to be looking at some closing costs, which are about 2% of the purchase price. And then you're going to be looking at repair cost on top of that, repair costs and reserve. So depending on the condition of the property or the deal that you're getting, those are the things you're going to prepare for. Whenever we talk to somebody in that 200 to $250,000 price range, you're looking at probably somewhere around that 50 to $60,000. When it comes down to the cash needed to actually make that investment. Now there's certainly ways around needing $60,000 to invest in real estate, and that's the way a lot of people get started. You're a great example of that. It didn't cost you $60,000 to invest in your first property because you bought it as an owner occupant property, right? Correct. So now that you've bought it as an owner occupant and you decided that it was time to buy the second property, you, you only had the small down payment as an owner occupant, which allowed you time. You know, that's one of the great things when you're younger, like you are, you know, being in your late 20s, you'll, you have time on your side, so you have that choice of moving around and utilizing time rather than down payment.

So we're talking about, you know, whether that's 20,000 to $60,000 in order to invest. So where do most of your clients invest out of? Is it, are they retirement accounts? What kind of accounts, how do they utilize savings or something like that to, to invest in real estate and how can they prepare and like kind of bulk up those things in order to, to invest?

There's, I would say there's three different buckets when it comes down to finding those funds for down payment. One is not necessarily using your own cash but use utilizing time and your availability of doing it. Owner occupant, that's going to be the least amount of cash out of pocket. The second thing would be what we call moving equity. So you may own a home right now that has $100,000 equity in it. You would draw an equity line on it. That is all part of your qualifications that you'd basically moving equity from your primary home to the investment property which allows you to put that down payment, have repair money. Now you have to factor in the cost of that monthly loan payment with rents. But that's one way to get cash. That's where we've seen a lot of people where maybe they'll refinance their home completely and pull the cash out for down payment or they'll do an equity line that maybe they can pay off in a couple of years and then reuse it again for the next one. And then the third piece is really looking at people will use their IRAs or 401ks and it's actually moved from there into a self directed Iraq which allows you to utilize that as down payment. Now you have to have a little bit different type of financing which is called non recourse lending. And non recourse lending means is that if a lender lends on it, there's no recourse against the borrower for the self directed. So it's a different type of lending that typically is a little bit higher rate. But a lot of people do utilize those three things to really get started in, in the investment side of things.

Okay, so what, what are, what are we waiting for? You know, should we be when. I guess a better question is what are some signs on how do you know when to invest in real estate? And you know, a lot of us or a lot of us are afraid to invest because we're like oh, the market's a little bit high or low and it's an always ever changing thing. So how do we Know when we can invest, since we've prepared Well, I.

Think it's the same question when anybody comes to us, now is now a good time to do it? Well, I think when you look at it, anytime is a great time to invest in real estate, depending on all the variables that are going on in your own life and in the market. So even in the market right now, you look back and people didn't think it was a good time to invest in 2008, 2009, but the reality was it was the very best time to do it. But it was harder to get financing, it was harder to find money. Money was more expensive on the non traditional side and it was harder to qualify for in the traditional side. But had somebody invested back then and really looked at the down market, they obviously would have had a lot of great upside to appreciation of the property. Now if you move forward to today, it's a little bit harder because interest rates are coming up. I mean, you look back then, interest rates were in the three and a half to four and now they're in the five to six. So three points difference makes a big difference, which means your buy box just has to change a little bit, which we talked about that in the last podcast on the wealth building tips. So the price range changes, the type of investment changes. It's still all relatively inside the single family residential spot, but that's really where we look at those shifts. But the market anytime is a great time to do it. The factors come into play, as are the payments going to be covered or mostly covered by the rents. Because even now with the higher interest rates, we also have much higher rents. So if you compare to back then to now, Even on a $200,000 house, if you're putting 20% down, you're still going to cash flow on that asset because the rents are much higher than what they were two or three years ago. I think the rents on average right now are probably close to that thirteen to fourteen hundred dollars a month for that single family property.

Okay. And then so with all of this, all of this different preparation skills and how to get prepared and when to get prepared, how did, and this will kind of conclude our little wealth building tip. But how did you prepare yourself in order to invest in real estate? Or how did, how did you lead to that?

So there's, you know, some of, you know my story, but really investing in real estate became a passion and something that I really had FOMO of the fear of missing out after seeing my dad work in the business for 40 years and then not investing in real estate, even though he knew it and he was working for other people, but he failed to invest in it over time. So if he had bought one house every decade over 40 years, he at least would have owned four homes that would have been close to being paid off. So preparation, again, I think, goes back to the mindset piece and also making sure that you don't utilize houses as credit cards, refinancing, taking money out and never getting them paid down. Because ultimately that's the investment, that's the retirement, and that's going to be the rate of return down the road. So, you know, my preparation was starting to put some money away, starting to have some reserves. Then one of our ways was buying our first house, moving into another house. That was where we really started. And then we started out as we had additional income or we found creative ways to finance things. That's one of the things that I think we'll cover in the next wealth building tip is really the creative financing piece. Just today we bought a home. There's two things that are pretty impressive about the preparing for investing is knowing when those deals come along and knowing the questions and the people to talk to. So, for instance, today I increased my net worth by about $50,000 in a property that I bought below market with seller financing. So seller financing is just another way that I think is definitely going to be a future option as interest rates go up to give a rate of return to the investor. But also your entry into the investment world.

Right.

So you have a lot of different things there. Mine was more mindset of this is the road I'm gonna go down. This is absolutely my best investment. And here's why. My mindset has always been around real estate. Because it's tangible, I can touch it, I can walk into it, I can rent it. It's always there, it's insured, it's covered. If you look at, you know, if you look at stocks, all the other things that you can invest in, some of it is guaranteed, you have a lower rate of return. Some of it is speculative, which means it's similar to gambling. And some of it, with the gambling, it's higher reward for higher risk, but there's nothing insuring any of that. And we always use that. That old company from Enron, when Enron, the big power company, went out of business and Everybody's retirement and 401ks just disappeared overnight, there was no insurance against that. Even though they were getting guaranteed rates of return, there was nothing there. The housing market. Even in 2008 when the bubble burst. If you had just a standard 30 year fixed mortgage in the $200,000 price range back then, the worst case scenario, if you weren't looking at the value of the property would have been you would have been a little bit upside down each month. But had you stomached the loss and went through it, that house would have been worth more than what it had been at the height of the market 15 years ago.

Right. Awesome. Well, do you have any last thoughts, tips, comments for anyone who's trying to prepare to invest in real estate?

I think this is one of those great conversations. I'm glad you asked that. Is that I think if you've ever thought about it and you've thought that over the last couple years the prices have been too high, I think we're entering into a market where it's going to be a more normal market. We're going to see a little bit more motivation. We may even see the prices move a little bit. Now, I'm not saying the market's declining, but I am saying that if houses sit longer, people become more motivated and it's having the conversation of being prepared to invest. So I always ask people and I always ask myself, I wished I would have had conversations with people in 07 and 08 when it started to decline about are you ready to invest? And I want you to be ready to run this race and be ready to have money, be ready to when I bring you a deal or bring you an opportunity to invest. So I think that now is a great time, if you've ever thought about it, to reach out and let's have a conversation about it so that you can start making plans so that when it's time, you're ready for it versus when the time comes you're not and you miss your mark.

Awesome.

Thanks, Paige.

Sounds good.

See ya. Thank you for listening today. If you loved this episode, please share it with somebody you think would also love it or be inspired by it. Without you guys, we can't create more purpose. Please leave us a review and a truthful comment or thought. And until next time, this is purpose Driven Real estate. It.