Ironically, while most brokers spend pretty much every day of their work lives helping their clients invest in real estate, very few take the time to set up their own portfolios. Doesn’t square, right?
There are likely a multitude of reasons for this, but @properties agent Holly Connors sees one cause that can be eliminated with a simple change of mindset. “In many ways, agents don’t necessarily see their self-worth,” she said. “They’re not using their own knowledge base to make investments.”
The pursuit made sense for Connors and her husband, who own a few two- and three-flats in the city as well as some single-family homes in Arlington Heights, where she lives and does a majority of her real estate work.
But believing in yourself and recognizing the knowledge and skills you bring to the table aren’t enough; there’s also the problem of a lack of serious capital, which is what it’s all about when it comes to starting out. “You have to have enough regular income to make the down payment [and] to maintain the property,” said Connors. Here’s how other Chicagoland real estate professionals made the leap from agent to investor.
Focus on the future
Maria Rivera, broker associate at RE/MAX Premier Properties, suggests zeroing in on those neighborhoods she earmarks as “up and coming.” One good indicator of this is where large companies establish a presence. “You have to recognize who’s dominant in a neighborhood, such as a Walgreen’s or Jewel. That’s when I start looking for properties,” said Rivera.
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Another way to build in future growth opportunities is to specialize in short sales, which Rivera also does. While such transactions take longer to close, they generate greater profitability, she noted. “When I buy short-sale properties, negotiations are longer than regular sales. I always keep my offers low and wait until lenders approve” them, she said.
Rivera also prioritizes investing in tenant-occupied properties, especially given that “the moment a property’s closed, rent can be collected.” Not only does this give you some immediate financial stability, you can also use the proceeds collected to begin to make updates or repairs to increase the value of those residences right away, she noted.
Ryan Garcilazo, CEO of The Rehab Depot Inc., has flipped thousands of properties over the last 15 years and received numerous industry awards and recognitions for his work in this niche. He’s created a regular schedule that keeps income flowing and deals going. “My outlook on investing is to buy four flips and two rentals a year. It’s controllable; one provides quicker cash to live on, the other helps build long-term wealth,” he said.
Start serving more investor clients
One way to break into the investment market is to represent more people looking to build a real estate portfolio. It may seem intimidating at first to court this type of client if you’ve only worked with homebuyers before, but Garcilazo noted that most agents already have the skills required. “Real estate agents have enough knowledge and experience to provide that extra service, full well understanding the options that their client, the buyer, will inevitably need,” he said.
Indeed, it may even turn out to be a profitable niche for some. “Real estate agents have the ability to build a very nice base of services and can really work with dozens, if not hundreds, of real estate investors,” Garcilazo said. “They can connect with special lenders, team up with contractors and leverage their own network to acquire properties.”
Garcilazo said that many agents around today could have capitalized on their abilities 10 years ago, when the market was down. At the time, he was flying all around the country, taking in the role that real estate agents could’ve played had they known how to engage, manage or tap into that niche of the opportunity.
“Millionaires are made during down times, and this situation is no different. Investors are preparing for inventory. As was the case years ago, there will be foreclosures and people will lose their homes. As long as unemployment remains high, these variables collide, which generates an inventory of properties,” he said.
The COVID-19 effect
These days, no one’s really flying around the country, but we are in a downturn, thanks to the impact of COVID-19. Melina Michelin, a residential broker and leasing specialist at Berkshire Hathaway HomeServices Chicago, noted that sellers need the specialized skills and ability to pivot that real estate brokers bring to the table now more than ever. “The pandemic’s changed the way showings are conducted,” she offered as one example. Prior to an in-person showing, buyers and renters are prescreening the property, so a listing’s online presence has to be perfect to attract interest.
Although Rivera said the pandemic hasn’t changed the way she thinks about property management or real estate investment, she does agree with Garcilazo’s basic premise that now is one of the best times to invest in multi-unit properties. “There’s a huge shift in the market that is coming. This is a great time to take advantage of the changing market,” she said.
Indeed, back in April, Globe Street reported that single-family rentals were one of the few asset classes to experience mounting demand in the aftermath of the pandemic’s onset. The publication quoted Jeff Cline of SVN | SFRhub Advisors, who said demand for single-family portfolios, defined as being composed of at least five homes, had skyrocketed 650% in the last month. “Compared to other commercial real estate segments, S&P 500, Treasury notes and the stock market, SFR investment is typically more stable and profitable,” Cline told Globe Street.
While the pandemic has underlined the need to pivot quickly for many investors, Rivera said that quality has been an important one for holders of real estate properties for some time. “No investment should be kept forever; there’s always a time to update or sell. I’ve advised investors that, if they’re unwilling to renovate after 10 years to the current trend, then sell — quickly — and buy in another trending area. The rental market never stays the same; keeping up with trends is a must,” she said.
Figuring out where to invest
And how do you pinpoint areas where you should sink your money? Rivera, who favors residential buildings that have two or three units as being easiest to manage, said that prior to coming up with an offer, she conducts a comparative market analysis to ensure the numbers make sense.
“I look to see that about 75% of the rental income covers expenses,” she said. “You have to think about how long it’s going to take to rehab, the cost of the rehab, and the carrying cost. Then, for the long term, you have to know your [principal, interest, taxes and insurance costs] and any monthly ongoing expenses for which the owner’s responsible.”
It’s important to be reasonable about your potential returns as well. “I don’t go into areas where values are very high or very low,” Rivera said. “You just have to be conservative and watch your numbers.”
In terms of the geographic question of choosing an investment, Michelin said it’s vital that “only an agent with a deep understanding” of an area help make this determination for an investor. One important piece of the puzzle that brokers can offer is a solid understanding of the neighborhoods and types of properties that renters are interested in occupying. For example, if an investor client of hers were interested in buying a studio near Northwestern Memorial Hospital, “most likely, that investor will have many younger professionals doing their residency at the hospital in need of a rental for a year or two,” Michelin noted.
Putting together the management puzzle
Rivera manages her investment properties herself, which can certainly help keep costs down. But sometimes, clients will become accidental landlords. Michelin’s worked with a number of such investors, including those who lease their second home and, often due to pressures such as job relocation, need to move out of their home but may not be ready to sell.
Some of her clients prefer to invest in condos because they can rely on on-site managers and engineers that they can call in the event of an emergency. Others who don’t want to deal with associations and rental quotas might rather invest in their own multi-unit apartments or single-family houses.
Michelin’s specialty puts in her in a position to foster short- and long-term relationships between landlords and tenants. “When an investor becomes a landlord, they must understand their role then becomes providing a tenant with a fully functional place in which to live,” she said. At the same time, tenants are providing care for the landlord’s investment. When the landlord addresses issues that are beyond the tenant’s control in a timely manner, just as they expect to get their rent, it’s to the benefit of all parties involved.
By contrast, the leasing process can be too intense for some landlords, Michelin said, requiring cooperation from everyone involved to make the process run as smoothly as possible, especially if there are condo board rules and regulations to abide by.
“Leasing for private owners, caring for their investment, and providing a qualified tenant’s important to my niche,” she said. But overall, the most important element in deciding what kind of property will serve an investor’s interests and capabilities best is understanding how these relationships interconnect. “But it’s also important for the landlords to keep their tenants happy. That means they have to keep up with their property. It’s a win-win when all parties are able to understand their roles.”