The magic words were spoken somewhere in February of this year… What if we would invest in real estate?
And so we did. In the midst of July, we bought our very first rental property. Of course, there happened quite a few things in between as well. I hoped to give you a detailed post on the financial side of this deal. But instead, we found some new (to us) financial possibilities, which has led us to research a new option on funding for the property. We still have 3 months before the transfer take place, so we take our time.
Today’s housing market is not an easy one. It’s a seller’s market, and every month the prices are going up, so it seems. When real estate profits in general, and especially when their return surpasses those of others assets, more people are looking for ways to invest in it. Buying a normal house (where you want to live in) can be difficult. Let alone buying a rental property.
Instead of peeking into our own numbers and figures, I thought it would be interesting to show our view on the different types of real estate investors we have come across so far.
A few days ago, we’ve talked to a local realtor agent, who happened to sold our current home to us, about the market and how his business is going. He said that a lot of people are expecting that their home should be worth far more than what they are told by an assessor. Additionally, the people looking to sell, or buy a house are increasing by the month. A real estate agent’s job is never done.
It’s a seller’s market, houses are being sold above asking price. And now everybody thinks they can sell their home for the highest price possible. On the other side, there are so many people looking to buy, that the strong competition is causing them to increase bids in order to get their dream home. We’ve heard stories of people paying up far more than the asking price. A home is not to be seen as an investment.
The financial crisis has caused home owners to wait and sit out the bear market, and buyers to face difficulties finding the right property. Right now, the market is being overrun with new listings. And anyone looking for a property, either to live in or as an investment, is surrounded by a great pool of people looking for the same thing.
If there is one thing that we learned, it’s that real estate investing is a substantial part of the market in general. Everything that involves buying and selling a property, either residential or commercial, investors have been playing a big part in it. Due to the low-interest rates on lending capital and a substantial cash availability, the market is thriving. A lot of investors, or people who have been saving their money, have been stepping into real estate in search of higher and growing returns. In my personal opinion, RE investors are probably a big element that pushes the market to higher grounds, and might even play a role in inflating ‘the bubble’.
The residential housing market is to divide into two different groups. The people looking for a place to live and the people looking for a property to invest in. Within the latter, the investors, there are different kinds to distinguish as well. Like the hobby investor, the old money investor and the next generation investor.
The hobby investor
This type of investor is aiming to have a decent additional income every month through investing in real estate. Many will own 1 or a few properties. In most cases, they will stay a bit on the surface of the whole investment market. The focus is to receive an income as passive as possible and like to figure out how it works on their own. For now, we fall into this category.
Old money (or ‘oud geld’ in Dutch) is a saying we use to describe a certain type of person. This person has gotten his wealth due to family heritage in the form of money or business. I’ve used this description because within the Dutch real estate market there is a group of people who have a lot already but didn’t build up their wealth on their own. They remain deep down in the depths of this business and aren’t always that active.
The next generation
This is the group who have to build their own little (or big) business in real estate from the grounds up. They are doing this primarily to let the money work for them and secondly because they really like the business. Instead of focusing on passive income, they are really active in this market and do the management themselves by using a personal network of agents, contractors, etc, that works for them. The biggest difference is that they are also willing to share their knowledge with others. Joined ventures are very common, and as long as they can create a win-win situation they will work together with other investors.
Of course, this is my version and view on how investors could be categorized. This is a big market with room for many types of investors. So far, these seem to be the most characteristic.
Our goals are to eventually mix up the first and third category. We would love to do this as a full-time business, but can only do so when we have built up enough wealth and experience. Additional to our dividend investing, real estate will take up a big chunk of our investment strategy. Not only do we like doing it, but more importantly it will give us better returns in the short term due to the use of leverage. For this and probably next year, most of our savings will end up in bricks. We continue to buy dividend stocks as well, but in smaller chunks, than we did before.