This past week we’ve been to a seminar of Kevin Green on real estate, and I (Mrs. Divnomics) went to a Meet-Up for real estate investors. There were some people we knew who also went to both, and we’ve already getting to know quite some people because of it.
I was hoping that both topics had information that would be a bit similar, and I was right. Two key topics that were covered on both were these:
1. How can I find a good property deal?
2. How can I find the money to fund buying a property?
Both of these questions are very important to get some answers to when you want to invest in real estate. For now, we only focus on the first question.
Investing in real estate and stocks are both assets you want to buy when they are undervalued. You want to pay a price below the current or future value, which will provide a certain risk margin. If an asset is 20% under market value, the risk would be lower than when the gap is only 5% or even less. The other way around is a no go, you don’t want to pay more than it’s actual worth. Price and value are 2 very different things. Which makes it interesting to find an asset that is at a so-called discount.
But how do you find a property below market value? And what strategies can you use to make sure you don’t overpay? Is it really possible for the average investor to find such a deal?
These and other questions were answered both in the Kevin Green seminar and the real estate Meet-Up. So I will share all of them with you today in the hopes you get inspired, questions being answered or to look at it from a different perspective. I’ve arranged this blog post per topic, and it’s somewhat longer than the average article here. If you have any questions, thoughts or comments after reading. You can obviously leave a comment below, or contact me via twitter or email if that’s what you prefer.
Using different ways of finding real estate
In the Netherlands, there are many ways to find houses that are listed for sale. When we started with checking out real estate opportunities we thought that many were not of interest for us, and went the obvious route. But if you really want to put in some time or effort, there are many ways to find a property. I’ve listed 6 of them below, which are all advised by real estate investors with many years of (successful) experience.
1. Multiple listing services
These services are providing lots of properties on 1 platform. Well-known parties in the Netherlands are Funda.nl and Jaap.nl. Many of these sites or used by consumers looking for a house to buy and live in. This is the easiest way to start looking for real estate, which you could do yourself or with the help of a real estate agent. One of the platforms we also use is Beleggingspanden.nl, which is specialized in properties that are rented out already and show some numbers on what you can expect as rental income and possible returns.
2. Cruising around in the neighborhood.
If you are focusing on a specific area and it’s rather close to where you live. You can start by driving around in the area and look for vacant properties. Some of those might not be listed on listing services, and it would give you a good idea of the overall listings in that specific area.
3. Direct mail marketing
I’ve never tried this one before, and the reason is that you have to got a network to use it. The idea is about collecting mail addresses from people that might be interesting in selling their home. You can collect those via the Kadaster (Dutch registration agency on real estate) or via people who work at a bank. When you collected certain emails, for example from people that are living in their home for over 15 years, you might consider send them a notification and check if they would be interested in selling. Personally, this one goes a bit far for my taste, in the way that you connect with people that might have problems (can’t pay their mortgage) and it sounds a bit spammy.
This type of people/agencies are looking for deals on the market but have no interest whatsoever in buying and owning the properties. They pass on certain deals in return for fees or help you along by providing some funding as well. Again, this also proofs that having a network could be worthwhile. Without knowing the right people this isn’t easy to set up.
5. Auctions – online & private
A lot of properties are sold on auctions, mostly because the homeowners couldn’t afford to pay their mortgage anymore and the bank is selling the underlying asset. The good thing here is that a bank is most often only seeking the funds to cover the amount of the mortgage that is still open. When a part of the mortgage has already been paid off, these properties are being sold for a lower price than the market value. This way of finding real estate property has 2 downsides though. You can not see the inside of a property, making it harder to determine how much work there is that needs to be done. And secondly, the payment often needs to be made within a very short amount of time, making it difficult to fund this with the help of a mortgage.
6. Placing ads – online and/or offline
Another way to find people that are willing to sell, but haven’t listed their home for sale (yet). Is to place advertisements online and/or offline. For example on Facebook or Marktplaats (the Dutch equivalent of Craigslist), or in a local newspaper. For me, this is somewhat similar to emailing people but less spammy. There are 2 ways to do this. Placing an add stating that you are looking to buy a property, or respond to rental units saying that you are willing to buy. You need to reach a whole lot of people though before you will receive a serious lead. And it’s important that if you’re willing to give this a go, you also need to follow up when someone shows interest.
Smarter ways – what to look for
Apart from different channels you can use, there are also some insider tips on what might give you an advantage when buying a property. Most people just check what’s available, looks quite nice already and is around the range of your budget. It sounds kinda the same as when you go house shopping for a home where you have to live in yourself. With real estate investing you must look differently at properties that you are willing to invest in. The most important reason to buy: it gives a decent return. Of course, it should be rented out rather easily, low maintenance is preferable but not a must have and the location is as always a big thing. It’s advised to have a more business-like mindset when viewing properties.
Seek out an investor friendly agent
Real estate agents, or property managers, that understands what investors are looking for and try to help you with it is giving you many advantages as to whether you would do it all yourself. It could be an agent that is selling the property, but an agent that is working for you and you build up a relationship with is very important. You have to surround yourself with experts that you can trusts. Agents could provide you with lots of info on the property or area and could pass you on deals that would otherwise be overlooked.
At the moment we are working together with a real estate agent as well. We trust her expertise and communicate with her often. We hope to build on to our relationship as we are planning to buy more real estate in the future. As time continues and our investments will grow, hopefully, our relationship will do the same. Until now we are very satisfied.
Look for hidden potential
When scouting for good deals, there are several hints to check that might be of value to finding a hidden potential. Something that might not look as a favorable property at first, but could have so much future growth possibilities. From here it depends on what kind of investor you are.
For example, if you’re a real estate investor that has building experience (or knows someone that does), fixer uppers are the kind of property that is very important. You buy a house with a low profile, which others would pass by on for it’s neglected state. For you this is a perfect opportunity, you can buy the house for a very low price compared to market value, fix everything up and will be able to sell or rent out the house for a much higher price. The costs of fixing up a property are better to influence. You could do a lot of it yourself to cut on costs or let friends help you out. This way your initial investment would be less than investing in a property that was already modernized.
Other hidden potential properties could be an upcoming area that used to be a bad neighborhood but will show upwards progression in the years to come. To find such area’s it’s important to know what kind of plans there are from the local authorities in a specific city or neighborhood. You can filter it out yourself, or can make use of a real estate agent who knows what’s going on.
Most often the hidden potentials are the one that others (most people that buy to live in it) don’t even care to look at. It could be because of neglected maintenance, an atypical layout, a not so favorable location with lots of potential, bad neighbors and much more. The thing that could make it even better, is that often these properties are already listed for awhile. Which brings us to the third point.
Timing is everything
With investing in stocks we know you can not time the market. With real estate, there is no difference. You can, however, check out how the market is valued as a whole. With stocks, we do this using the P/E ratio. With real estate, you can use the house price to income ratio. Typically people spend around 30% of their income on their home. If people spend more, it gives out the mark that the housing market is overpriced.
A healthy house price to income ratio is 5:1, which means a house price is 5 times the average income. In bigger cities, this tends to be a bit higher, like 6:1 or 7,5:1. According to Kevin Green, the current state would be 9:1, which means the housing market is way overvalued.
Of course, this says nothing about if today is a good day to buy a property. Good deals are still possible to find, although a bit harder.
Another way of using time to your advantage is not to time the market, but to time the period, a house is for sale. Being the first or the last to jump in on a deal could give you financial leverage to the seller of the property.
For example, when you are the first to place a bid on a property that’s high in demand, on which you can prove to easily fund the house and can take it over rather quick. The seller will not only remember you more easily but with the right offer, he or she could be sold immediately. Leaving no room left for the competition.
On the other hand, houses that are listed for more than 6 months are harder to sell. Most people would think that something is wrong with it. As a possible buyer, these are the kind of properties where it’s easier to negotiate on a lower price.
Check on possible repossessions
This strategy has been used by Kevin Green for many years. He looks for properties (using some of the ways mentioned above) where people need to sell their home before the banks repossess the property. It sounds a bit harsh, but most people selling their house, for this reason, are actually better off selling it to you, over when the bank is selling it for them. In most cases, some of the mortgage is already been paid off. So the homeowners should at least get a price as high as the remaining mortgage amount. If you would bid a bit higher, and leaving some on the table for the other party, you can create a win-win situation where both would meet success.
For example, if the fair market value is 100.000 euro, and the repossession value lays at 60.000. You can buy the home for a 40% discount. But when you leave an additional 15% for the seller, he earns a profit and you still would have a 25% discount.
When time passes, the repossession value will become lower and lower. Due to mortgages being paid off, and leaving less debt later on. In the Netherlands, these kind of deals are hard to find though. When we bought our own home 3 years ago, we’ve viewed 2 homes where this was the case. We didn’t know upfront, and they hoped to sell via a real estate agent before the bank came on knocking. Because there is no database of homeowners who are facing repossessions, the best way to find these deals are by advertisements of direct mails. Not something that every buyer is interested in.
As you can read, there are many way to look for a good deal and what kind of advantages can be used make you a better deal. A lot depends on the kind of real estate investor you want to be. Are you an active investor that wants to do everything and reads a lot, or more of a passive one that favors real estate funds over owning properties. You may be looking to flipping houses for profit, or choose for a buy and hold strategy and just cash in the rental income. There isn’t only 1 way to invest, as there isn’t only 1 way to find a good deal.
The two key take aways I’ve learned personally, are the importance of having a network and learning from others. Don’t try to reinvent the weel, but see how others do and use elements of their style to set up your own strategy. This is one of the reasons we started to go to the Meet-Ups in the first place!
The second one is that if you really want to get things going, you need to be passionate about it. Hearing Kevin Green and others talking about it, they to it which such intensity it’s hard not to follow in their footsteps. If you are passionate about investing in real estate, want to know how you can calculate returns and cap rates and are willing to put in some real effort, then it is more likely that you will succeed.