First-time investors are looking for advice on how to jump into the market—and agents need to be prepared to help these new clients
By Regina Ludes
While rising interest rates have forced many homebuyers to stay on the sidelines, a new breed of investor has entered the housing market in droves.
These first-time real estate investors are under the age of 40, are more knowledgeable about real estate and financing, and are less risk-averse than previous generations. They’re looking for ways to build wealth long term, often buying an investment property before a primary residence.
Higher interest rates aren’t a deterrent either. According to a survey by real estate investment marketplace New Western, 59% of investors said they plan to use cash or private money for their investment.
Still, these newbie investors have numerous questions about purchasing an investment property, and they’re unsure how to begin to sift through the different financing and housing options. CRS Designees who understand the investment market can help guide them through the purchase process, determine their financial goals and provide sound advice to make their investment dreams come true.
Understand investors’ motivations
Rychen Jones, CRS, associate broker with The GDP Group in Draper, Utah, estimates that half of the clients he has worked with in the past few years are new investors seeking better investment opportunities than cryptocurrency or the stock market. “Real estate gives them more control over the asset, plus property values and rents have historically kept up with inflation,” says Jones, a former financial advisor.
The biggest hurdle facing new investors, he says, is the lack of clarity about the investment market and their own goals and resources. There are so many options available, and they don’t know where to turn for advice. “When they don’t have clarity, people get frustrated looking at all types of properties. Unfortunately, some make an impulse buy that doesn’t meet their objectives,” Jones says.
Some helpful questions
Jones recommends clients look at real estate as a means to achieve one of several financial goals: increase cash flow, potentially reduce tax liability, diversify investment assets and create wealth to pass onto their heirs. He begins the discussion by asking a series of questions:
- What are their goals for the investment property?
- What assets do they have, and which of those assets are available to fund
the purchase? - Based on available assets, what price point are they looking at and what payment can they qualify for that they’re comfortable with?
- What type of property should they look for that will best help them meet their stated goals?
Jones also refers them to a CPA who has experience working with investors and recommends they meet with a qualified lender who can offer additional mortgage products or customize loan terms based on their specific circumstances.
Set realistic expectations
Mark Handlovitch, CRS, associate broker with RE/MAX Real Estate Solutions in Pittsburgh, Pennsylvania, says younger investors see the advantages of making money beyond traditional 9-to-5 jobs. They’re also far more educated and more comfortable with risk than previous generations because they’ve grown up watching DIY home renovation shows on TV. However, those shows have also set unrealistic expectations, he says. “Investing is much harder than it seems, and the shows don’t demonstrate the hard work and grief that goes along with buying and renovating,” Handlovitch says.
When he first meets with new investors, he interviews them to learn their goals and motivations, just as he does for traditional homebuyers. The first step they should take is to research various financing options.
“There are different ways to finance an investment property, and not every way will be best for them,” Handlovitch says. “I tell them to look at their situation and the opportunity they have. Then look at what they have to invest and what kind of return they’re looking for. Even though I recommend they put 20% down, every property will have its own financing set-up.”
As owner of his own property management company, Handlovitch often shares his experience as an investor. He recommends first-timers purchase multi-unit properties of two to four units, which are affordable in the Pittsburgh market. “First-time investors should start out slow. I don’t set them up to buy something that is beyond their capabilities, like a 10-unit building,” he says.
Not all first-time investors have heeded his advice, however.
Handlovitch recalls working with a couple who had purchased an investment property that needed some fixing up. He advised them of their ceiling of what they could put into improvements each year. The husband, however, put too much money into renovating the property above their ROI.
“Once you break that ceiling, you start dipping into your profits. That’s where you can begin to lose money,” Handlovitch says.
Guide their future plans
Purchasing a multi-family property as a first investment can help new investors create generational wealth while funding their current lifestyle, says Nancy Alert, CRS, broker associate with RE/MAX Allegiance in National Harbor, Maryland, near Washington, D.C. “They can live in one of the units while they rent out the others. Even if one or two tenants move out, they still have income from the remaining unit(s) to pay off the mortgage. They can hold the property for a long time. If they do it right, the income from the property will pay for the lifestyle they want,” Alert says.
She learned that lesson the hard way. In 2008, several tenants in the six single-family homes she owned lost their jobs and were forced to move. The homes sat empty for two years while Alert paid the mortgages. She finally sold them and lost a significant sum of money. When she started over, Alert invested in a multi-unit property that provided better protection of her investment.
Another advantage of owning a multi-unit property, Alert says, is the ability to obtain larger mortgages. Banks use both the investor’s personal income plus the income from 75% of the units to determine the mortgage amount.
Some of Alert’s investors have taken advantage of the Neighborhood Assistance Corporation of America (NACA) program, which provides financing with no income limits or restrictions. Alert says NACA pays the buyer’s down payment and closing costs, and offers low interest rates regardless of a person’s credit score. The program allows buyers to purchase a multi-family property as long as they live in one of the units.
Provide referrals and resources
Alert also provides referrals to attorneys, accountants and start-up consultants who can help new investors set up a business account. “Investing should be treated as a business. That way, if any legal issues occur, only the business would be affected and their personal assets would be protected,” Alert says.
Handlovitch advises clients to hire trustworthy contractors and check their references. “Reputable contractors will require some money up front to cover the cost of materials then require the rest to be paid later when the project is completed,” he says.
Jones recommends investors learn about fair housing issues before renting out units, and they should figure in the cost of a good property manager when deciding whether to self-manage the property or not. “Not everything will go right. They might have vacant units; tenants might get upset with them. There are a lot of unknowns that they have to be prepared for,” Jones says.
Take advantage of RRC’s Real Estate Investing Certification at CRS.com/learn/certificates.
Photo: iStock.com/amriphoto
