Smart Money: Getting Started in Residential Real Estate Investing

I love investing in real estate. It gives me the most control over my money and is an asset I can manage, care for, and be involved with on a daily basis. Unlike the stock market, this is a market I know well and understand. It is straightforward. You buy a property, and the rents create cash flow. It is strictly a numbers-based model, which makes it simple to understand for everyone. It involves effort and time; however, it is an investment that has solidly made many real estate investors wealthy throughout America.

In this post, I will introduce you to residential real estate investing and provide you with an avenue to become a savvy investor.

My nephew, who graduated University of Wisconsin-Madison in December, asked me two months ago what real estate he should buy. He is a super-smart kid who saved his money and has squirreled enough away to buy his first home. I suggested he buy a duplex.

Why?

Because the duplex can both provide a roof over his head and generate income for him at the same time. He can live there reasonably and collect rent while the asset is appreciating. It feels like a house, but it is an asset he does not HAVE to sell if he relocates or the housing market crashes. If you’re thinking about going down this path, here’s my top advice:

Duplex/Multi-Family:

1. Buy properties in the areas of highest appreciation (location)

You’ve heard it before and I’ll say it again: Location, location, location. Your expert Realtor can help you select the right area for the best return. Listen to the experts. In Wauwatosa, Shorewood, and Milwaukee’s East Side, block-to-block makes a difference in appreciation. Other BIG money investors have come out of the woodwork into the Milwaukee area from California this year. They know something you should know. Milwaukee duplexes are a GREAT investment.

2. Acquire the property at the lowest price possible

I am seeing many cash offers today.  As a new investor, that is tough to compete against, considering you may not have made your money yet. If this is the case, I recommend providing other contingencies in your offer to make it stand out above the rest. I recently wrote an offer on a duplex in Shorewood where there were 16 offers for the property. Yep, we got it. Learn how. We can help. That property standing still is worth more now than what my buyer paid for it, and that is how you acquire property.

3. Conduct a Title Search BEFORE you make an offer

Your Realtor can do a title search for you to see if there are any liens or judgements on the property before you buy it. This should take about a day.

4. Treat your real estate investments like a business, including setting up an LLC exclusively for your real estate holdings

My agents and clients are probably sick of hearing me say this, but if this is going to be a part-time business for you, form an LLC. It is very simple to do online. If this is NOT your primary residence, this is a MUST DO! There are financing benefits from keeping a church and state separation between your personal finances and your business ones, tax benefits, and liability protections. 

5. Account for possible property tax rate increases

This will happen in the hottest communities, so plan on it. After you close on the property, it’s highly likely the assessment will be re-adjusted to the sale price.

6. Have a Maintenance Fund and/or a Property Management Company

If you are handy and can handle fixing issues and making minor improvements, and have the time, handle it yourself. If not, ask your Real Estate Agent for recommendations.

7. Work with an expert (Real Estate Agent) who specializes in investment properties and duplexes.

An experienced, well-educated Real Estate Agent is the best friend you can have to help you begin this journey. Find one who has experience in the communities you’re interested in and is an investor themselves.

Flipping Houses or Tear Downs:

Go very slowly here. If you “think” you want to flip a home, start with a “grandma” house, a home the same person has lived in for 50 years and hasn’t update or remodeled. Those are usually the cleanest and easiest homes to purchase, remodel, and flip. I have been guiding investors with their flip homes for 16 years, even though the last recession. Most of the flippers I have helped started with their own homes and held them two years before they sold them to avoid penalties. Make sure you check the tax laws before diving into the world of flipping homes. Start small and work your way up. Here are my top recommendations:

1. Check with the municipality first before planning your flip—NOT all houses can be torn down

2. Select your contractors ahead of the purchase

3. Develop a budget and stick to it

4. Select ALL of your finishes up front to minimize cost overruns (this gets easier as you get more experience)

5. Secure a bank that has experience in flips and tear-downs

6. If you are using a builder or contractor, validate builder construction draws (use someone like Land Gorilla)

7. Hire an architect independent of the builder who is familiar with the municipality

8. Check costs for lumber and steel, as they have sky rocketed about 30% over July 2018 primarily as a result of the new tariffs

To sum it up, residential real estate investment is a smart investment strategy. Start early and go slow, and start with a duplex or two-family/duplex first (the duplex is a buy and hold investment). Also, when you are ready to buy your first single-family home, keep the duplex as rental income. In an uncertain world, you will be grateful you did this early in your life. It will always produce an income for you in the worst and best of times. This is your rainy-day fund for life! Location, location, location, AND save, save, save!