Most blogs out there give tips like getting pre-approved for a mortgage or other things you already know. Let’s take a contrarian approach and talk about the pros and cons of investing in real estate, and whether you should even be considering it in the first place. If you are ready to be an investor, we give you new tips like how to cover your closing costs with a cashback rebate at closing or only working with a specialized real estate attorney instead of a generalist.
Being a landlord is not for everyone?
Before you invest in real estate, think carefully about whether you wish to be a landlord. It comes with commitments and responsibilities. Buying a property is different from just buying a stock and receiving the dividends. While you might get lucky with a good tenant, you could just as quickly have a bad one who rarely pays rent and is impossible to evict!
One will also have to deal with a myriad of upkeep, maintenance, and other property-specific problems. Owning an investment property is just like owning a business. It comes with all the responsibilities of running such an undertaking. Do you have time to devote to this?
What are the alternatives
You can consider investment alternatives for your spare cash, especially if you plan on being a passive investor. Think about it. The opportunity costs may be too high. For instance, dividend yields on US equity indices are currently the same as cap rates on most New York rental properties: right around 3%. For illustration purposes, buying an S&P 500 replication ETF (such as “SPY”) comes with zero responsibilities and zero liabilities and an effectively almost 0% expense ratio. On the contrary, buying a home in NYC as an investment means you will have no way to escape maintenance and property taxes that may increase every other year.
Furthermore, if you buy a multi-family as an investment, you will have to deal with law, city codes, regulations, repairs, and anything else that might happen from someone slipping on your sidewalk to roof leaks and broken boilers.
Buy a home you could live In
A piece of advice we usually give is to buy a place that you wouldn’t mind living in.
Some people get their first real estate investment property by renting out their original home to a prospective tenant and upgrade to a bigger apartment or move to another city. Once someone gets married, beginner investors may opt to rent it out vs. selling it.
The essential advantage of this approach is that you’ll be intimately familiar with the property that you are renting out, considering that you have lived there for years and will explain to your tenant how to make use of the apartment and how to maintain his home. These insights will cause fewer issues and costs.
Lastly, since it’s a place you wouldn’t mind living in yourself, you always have the option of moving back in. For instance, because the rental market is slow or because you’re ready to downsize.
Wait for a buyer’s market: “buy low”
Buy low and sell high, right? Real estate investing is easy if you wait for market disruptions, such as what we saw in 2007-2008. You should buy when there is widespread market panic because it’s so much for a novice investor to buy when the whole market is for sale!
During a healthy real estate market or even a slow market like in 2019, real estate cap rates are around 3% in the five boroughs of New York. Listings are watched by thousands of professional investors on Streeteasy.com, both large and small. Do you want to compete against the professionals and fight for properties trading under 3% cap rates? If you do manage to buy what seems to be a deal, there’s probably something wrong with the property.
If you wait patiently until there is market disruption, such as what we saw in 2008, it is easier to come in as a real estate investor. You have a large inventory of properties for sale. You can bid a number which makes sense from an investment point of view, and you won’t be forced to outbid against yourself into a bidding war.
So the best tip may well be to be patient and to wait for the right opportunity, which makes sense for you. When no one wants to buy, and properties are selling for fire-sale valuations once again, it is probably time to buy.
Choose an experienced buyer’s agent
It’s essential to work with a skilled real estate agent who can guide you through the purchase process and not work with a family friend who is as new as you when it comes to investing. This error could lead to poor outcomes and sometimes broken friendships.
We recommend staying loyal to one buyer’s broker. By working in good faith with your buyer’s broker, he will be more incentivized to hustle, look for properties for you, and negotiate the best deal possible.
Get a cashback commission check
The best way to increase your returns as a real estate investor is to receive up to 2% cash back rebate at closing, which essentially is a split of your buyer broker’s commission. The seller pays a commission of 6% of the property purchase price, which is split equally if the buyer has their broker. As a result, your buyer’s agent earns 3% of your purchase price on any transaction and could give you back some of this commission as a cashback rebate.
Now several companies offer this service in the US, such as Redfin or NestApple. You should be represented by an experienced local broker, who has already agreed to give you back up to 2% of the purchase price. This money will be paid to you at closing and can be used to cover your closing costs or pay for your next vacations. This cashback rebate paid by brokers is legal in 40 states and viewed as an adjustment on price (vs. income) by the IRS.
Hire a skilled real estate attorney
Besides having a buyer’s broker as your advisor, an essential member of your team is your attorney. We recommend clients to work with an attorney based in their city who specializes in real estate transactions. This seems obvious right as you would not ask a divorce attorney to fight a driving ticket! We often hear horror stories of buyers who unwittingly decided to take a friend of a friend who is an attorney and ended up working with a generalist lawyer who was a family friend. The generalist lawyer will be entirely out of his or her field of expertise and will cause delays in the negotiation and due diligence process.
Real estate transactions can be quite tricky, especially in markets like New York City, where contracts are lengthy and customized with riders. A generalist who doesn’t even live in the city will not be able to understand much of the language and standard practices when it comes to negotiating a purchase contract for a sale. We’d be glad to introduce you to a few highly experienced real estate attorneys we have worked in the past.