How to Take Advantage of a Hot Rental Market & More
It is age-old adage that owning real estate is the best way to build wealth, and that can certainly be true – especially if you’re investing in real estate outside of your primary residence. And while real estate in general is a good investment, rental properties in Spokane are doing especially well – Spokane is currently enjoying less than a 1% vacancy rate. While this fluctuates from year to year is has remained less than 3% over the last 4 years. But investing in real estate certainly isn’t without its risks, which is why it is so important to do your research and work with a real estate agent who has your best interests at heart.
When you’re thinking about buying your first investment property, you’ll want to define your goal with the purchase. Are you looking for a one time, lump sum payout? Or would you rather use the investment to generate an ongoing stream of income? Both options have pros and cons, depending on your experience, available cash reserves, and long term goals.
Before you buy your first investment property, make sure you understand these four investment basics:
#1 The Pros and Cons of Flipping a Home
With the popularity of DIY and HGTV tv shows and YouTube channels, it’s no surprise there’s so much interest in buying and flipping homes. Flipping a house is a form of appreciation investing, which means that the property appreciates, or increases, in value during the time that you own it. This can be an incredible way to turn a profit, but it can also come with tremendous risks if you don’t enter into the situation well informed and well prepared. When flipping houses in Spokane, we usually see people do it one of three main ways.
The first and simplest way to flip a house is to buy a home that is in structurally and architecturally good shape, but looks outdated. In this case, the work that needs to be done in order to “flip” and resell the home is a simple modernization. For example, a home with shag carpet and green floral wallpaper can be completely remade by simply replacing the carpet (and maybe upgrading to pergo or hardwood floors), repainting the interior using a modern, neutral color, and installing new or stainless steel appliances. The reason that the resale price can be worth the effort is that while the home’s value might not increase exponentially, it’s perceived value does. That’s because many people can’t envision the final product or don’t want to put in the effort. This is a fairly low risk, low reward way to flip a house, and can be a great place to start.
Second, you can buy a house that’s listed very cheaply because it needs a lot of work and do a full-scale remodel. This is a great option when a home (or piece of property) has a lot of unrecognized potential. Common remodels are updated kitchens and bathrooms, knocking out walls to create more open/modern floor plans, or adding a garage. There is a much higher return on investment possible with this type of flip, but also greater risk involved. When you begin construction on a home, it’s possible to discover unknown problems like mold or structural insufficiencies. It’s also possible to create problems that wouldn’t have existed otherwise (moving a pipe or wire that is no longer up to code, or being unable to complete a project as budgeted because of an unforeseen architectural nuance). Although it certainly isn’t a requirement, it is helpful to have experience with remodeling or construction with this type of flip. When done properly, renovating and flipping a house can be rewarding and lucrative.
Finally, there are instances in which it might make sense to purchase a property and sit on it for a year or two before selling, possibly even renting it during this time. This would be the case in neighborhoods that are gentrifying or where there is otherwise reason to believe the land or house will be worth more money in the near future. This is a speculation based form of appreciation investing. For example, There is speculation that real estate will increase in value due to the opening of the new Amazon warehouse in The West Plains. The same speculation is common near universities like Gonzaga and Whitworth. Speculation investments can be risky, because your speculation could be wrong, causing you to break even or even lose money. But if your speculation is correct, your property could appreciate significantly in a few short years, allow you to sell it at a profit with few to no repairs or updates.
All three methods of flipping homes come with risk and reward. Working with a realtor and a lender who are experienced in investment real estate is mission critical for new investors. Let your realtor know that you plan on flipping the house before you begin your home search so they can guide and direct you appropriately.
#2 The Pros and Cons of Buying Rental Properties
If you’re looking for a long term income stream from your real estate purchase, then you might want to look at purchasing a rental property. This is known as a cash flow investment. When you buy a home to rent it out, you have the potential to earn additional income on a monthly basis for years or decades to come. Rental prices are frequently higher than mortgage prices, so the profit from a consistently rented property can be significant over time. Purchasing rental property can also come with risk because you are responsible for the mortgage even if you don’t have a renter, so be certain you can afford to carry both payments for several months, if need be. It is often in your best interest to use a property management company to liaise between yourself and the renters, so budget for them to take a small percentage of the monthly income, as well.
There are two common types of residential rental properties in Spokane: single occupancy homes and multi-family properties. Single occupancy homes are a great starting place for first time investors. Condos, townhouses, and individual homes are commonly purchased as rental properties within the single occupancy home category. The great thing about purchasing a single occupancy home as an investment, is that when compared to multi-family properties, they generally require a much less significant financial investment.
If you’re thinking about buying one of these property types as a rental investment, be mindful of the area you are looking in – some neighborhoods and areas support higher densities of renters than others. Look to your real estate agent to guide you.
The other option for purchasing rental properties is to buy what is known as a multi-family property. Common types of multifamily properties in Spokane are duplexes, quadplexes, and apartment complexes. Purchasing multi-family properties requires a bigger financial investment, but can yield bigger returns. Another benefit to multi-family properties is that they can potentially weather vacancies easier than a single occupancy home, as the rental income from the other units can help mitigate the loss of any single unit. There are a wide assortment of multi-family properties currently for sale in Spokane. First time home buyers can purchase up to a 4-plex and live in one of the units, and rent out the other units and use this income toward qualification.
If you’re thinking about investing in a larger rental property of this type, work with an experienced real estate professional who understands the ins and outs of these types of transactions in Spokane.
#3 Funding Investment Properties
Obtaining a mortgage on an investment property is a little different than it is for a primary residence (the home you live in). If you’re thinking about taking out a traditional mortgage loan, you should know that mortgage insurance won’t cover an investment property, which means you’ll need to put at least 20% of the purchase price as a down payment. You will want to maximize your return on investment by keeping your interest rate as low as possible. Two great ways to do that are to offer a higher down payment percentage, like 25%, and to shop for rates at independent mortgage brokers rather than at big banks.
If you are selling one investment property in order to purchase another, make sure you work with a financial adviser to see if you qualify for a 1031 tax-deferred exchange. This type of exchange for like-kind property sales and purchases can have significant tax benefits when executed properly, so be sure to inform your real estate agent if you are completing an exchange purchase.
#4 Choose the Right Realtor
Choosing a qualified real estate agent is always important, but it is especially important when purchasing homes to flip or rent out. Carrie Meyer, leader of the Real Estate Agent Spokane Team, specializes in investment transactions and has 30 years of experience as a Certified Legal Assistant (paralegal). This background makes her an expert at reading, writing, and negotiating contracts – a critical skill in the investment real estate world. Carrie is a licensed Realtor with the National Association of Realtors and sitting board member of both the Spokane Association of Realtors Grievance and Technology Committees.
If you’re looking at buying investment property in Spokane, we’d love to learn a little more about your investing experience and goals. Whether this is your first foray into investing or you’re a seasoned property owner, we can help you find what you’re looking for. Contact Carrie today to set up a custom search for investment properties for sale in Spokane.