Despite the bleak economic forecast for some industries, real estate is gaining traction. Trends such as "18-hour cities" and millennial parents increasingly moving from urban areas out into the suburbs, according to the Urban Land Institute's 2016 Emerging Trends in Real Estate report released earlier this year, indicate that real estate as an industry is gaining strength with each passing day. "The next 24 months look doggone excellent for real estate," according to one lending officer at a prominent financial institution.
Because of these tendencies, Scottsdale real estate is a good area to invest and develop your wealth. Because of the housing crisis, flipped homes tend to sell fast and for a premium price, and the growing demand for rental properties among all age groups means finding tenants for your buy-and-hold properties should be simple.
These patterns also indicate that the Scottsdale real estate market is currently very competitive. You'll need to be very prudent in who you deal with and where you look for investment opportunities if you want to get into real estate investing. Read on for helpful tips on real estate investing for first-timers.
Assemble your real estate team prior to buying
Building trust with your team will allow you to make more serious bids that are more likely to be approved by sellers. You should have the following people on your team:
- A lender who can assist you in obtaining the best financing available for your transaction.
- A real estate attorney to go over the purchase contract and make any necessary changes.
- An appraiser who will create the appraisal for your Scottsdale real estate property, although you probably won't have a choice in this. Appraisers are sent out by your lender.
- An accountant with experience in real estate investing.
- If you're rehabilitating or buying a rental property, you'll need a good contractor for repairs.
- And of course, an experienced REALTOR® that will help you find your first investment property.
Where can I find rehab deals?
You need to make a decision to either acquire and fix up houses to put back on the market as soon as the work is done (flip) or buy and hold properties to rent out for monthly cash flow. Different available properties might be better for one of those choices than the other.
Once you make that decision, I can help you narrow down some homes in Scottsdale to view that are in our MLS. Many seasoned investors go straight to the courthouse steps to bid on distressed properties. This is not really for the novice investor, and I can't help you with that.
Flipping homes has the advantage of providing a high return on investment (ROI) in the short term. For example, suppose you spend $300,000 on a home and $50,000 on repairs. Your property is worth $400,000 after rehab, and you sell it for $50,000 profit.
This is a very simplified version of the ROI formula. There are numerous more aspects to consider to see if the statistics work in your favor, such as whether you are overpaying for the property at the outset, for renovations, or for holding fees.
When you're flipping houses, you'll have to spend extra time hunting for homes with good bones that need mainly cosmetic updates and that are priced under market value. In a hot market with rising Scottsdale home prices, these may be more difficult to come by. As an experienced Scottsdale REALTOR®, this was the most difficult part of flipping - finding a home where the numbers work to make it worthwhile. In addition to the purchase price, you'll also need to account for other costs such as home inspections, closing costs, and loan fees charged by your lender. And this is before you even start the rehab project.
Next are the actual repair/updating costs that should be included in your budget, whether you handle them yourself or use professional contractors. You'll have to pay your mortgage, property taxes, utilities, and insurance while you're renovating the property. The longer it takes to complete the flip, the more you will have spent monthly, which needs to be figured into your total costs.
We did some of the work ourselves and hired a contractor we met through another flipper to do the things we didn't want to handle. My husband grew up in a family construction business and he is a perfectionist. The contractor and some of his sub-contractors weren't so perfect, but we couldn't do it all on our own. My husband wasn't happy about the paint job, but the tile guy was excellent.
Finding a flip-worthy property in a good Scottsdale neighborhood might be difficult to come by due to ever-increasing property values. You might have to search in other areas that have lower prices than Scottsdale. However, once you know where to look for rehab possibilities, you can easily repeat the process by reinvesting the profits from a previous flip into the next home, which can be larger, in a more desired location, or filled out more lavishly, and therefore sold for more money!
The problem with finding properties to flip, especially for a first-timer, is the competition from large contractors that have been doing it for years, have their own sub-contractors, know what they're doing, and can get a flip done quickly. They can also use hard money loans, which are like cash. A cash buyer will always be at the top of the buyer list, especially on homes that need work. The seller won't have to worry about a lender requiring certain repairs prior to closing. There isn't an appraisal with a cash buyer either.
We found our flip in a roundabout way. An old school chum, who is also a Facebook friend, contacted me to list his uncle's home, who had passed away. He had a tenant in the home and we were going to sell it in As-is condition. We listed it at a price that we thought would be acceptable, but the first offer we received from a contractor was much lower. So we figured we could offer more and it worked out. It was a lot of work and I'm not sure we'd do it again. Also, we've never been able to find a true flippable home since.
Locating rental properties to buy and hold
You purchase a buy-and-hold rental property with the intention of renting it out to tenants long-term. If you do your homework right you can receive additional income besides your regular employment. You will also be dealing with tenants. Our Arizona MLS has a selection of different types of homes that might work as a good rental property.
To determine whether you'll make or lose money each month, you'll need to carefully examine the property's operational expenses
as well as what renters are willing to pay for the space. Assume that the total cost (money out of your pocket, not the price of the property) of purchasing a Scottsdale condominium was $50,000, including the down payment and closing charges. Each unit costs you $1,000 per month (mortgage, taxes, HOA, etc.). You might expect to earn $1200 each month on the condo. Besides the aforementioned costs, utilities and management fees might be among your monthly expenses. You should also set aside some money each month for capital expenditures and maintenance/repairs. Your monthly expenses total $1100, according to your calculations. You'll have a positive cash flow of $100 after subtracting your expenses from your revenue.
Is that worth it to you? Will you be able to save money and continue to add to your rental property portfolio? If so, that $100.00 a month profit can add up.
Naturally, this is a simplified scenario that ignores the fact that difficulties will undoubtedly develop. Roof repairs, heating and cooling system failures, broken windows that need to be replaced, and other unforeseen costs can eat into your profits. Your place could be vacant for a month or longer or you may have a renter who stops paying their monthly rent.
It costs money to evict a non-paying tenant. They can also damage your place beyond normal wear and tear. It might not be so easy to get the amount of damage out of them beyond the security deposit, which you lost the value of when they stopped paying their rent. Now there are holding costs while you're spending time and money getting the property ready for a new tenant.
However, the better you are at anticipating issues before they occur, the easier it will be to recover from negative issues. Furthermore, renting out a property isn't the only option to make money. You can also improve your potential monthly income by adding amenities like coin laundry, even in a single-family home in Scottsdale. Truthfully, I only see that in apartments or condominiums though.
You'll need to decide how you want your rental property managed from month to month once you've found and invested in it. Most first-time landlords handle the management on their own, especially with a single-family home.
Choosing the correct property manager is crucial
Do you wish to manage your property yourself or hire someone to do it for you? You'll have to deal with insurance, fair rental regulations, and building code compliance as a property manager, in addition to upkeep, repairs, and tenant difficulties. Managing your own properties may not be worth your time and effort if you aren't an expert in these areas. But as a novice investor and landlord, it might not be worth paying a property management fee for only one rental unit, whether it is a condo or home in Scottsdale.
Investing in a skilled manager will save you time and money in the long run. While you'll have to budget for management as a fixed cost, your property manager will most likely know how to handle routine maintenance, tenant concerns, and maintaining a near-100 percent occupancy rate. This will probably make more sense if you are able to increase your rental properties and can hire a management company to take care of all of them.
I can recommend a trustworthy property management business to assist you in looking after your investment. My brokerage works with one specific company.
What is the best place for me to begin investing in local Scottsdale real estate?
Work with a qualified real estate agent who is familiar with the various communities - that's me! Well, depending on where you actually want to look. If I don't feel comfortable in an area that is too far from my main area, I'll find you a great local agent that I can refer you to. We can assist you in locating places that will work for your budget and location preferences. We can help you find the right property for your requirements, whether you're looking for a condo, townhouse, single-family home, Gemini/twin home, or multifamily property to maximize your rental income.
As an experienced flipper, I can help you determine if a particular property is worth flipping. I've seen so many flip homes that were in terrible locations or had such bad floorplans that even being fixed up, buyers were not interested and the flipper had to keep reducing the price, which also reduced their profit.
Contact Judy Orr at 480-906-1500 if you have any questions about buying your first flip or rental property.
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