My first real estate deal

While writing this, I am part of a program called On Deck that puts many founders-to-be in a program to meet, learn and grow. The program encourages giving back to the community and sharing knowledge. Well, I don't have too much too share but I did think of something that might be interesting to some folks. A few weeks ago, I hosted my first breakout session about my experience investing in real estate. I figured real estate as an interesting topic because:

  • Many folks want to break into real estate investing but don't know how to
  • It feels hard
  • It's illiquid

I wanted to tackle these concerns and share my experience for those who may be in my shoes in the future. Here is a breakdown of my talk

Let’s talk investing

Why real estate?

Firstly, it's a real asset that is physical and has intrinsic value. Unlike cars, boats, planes, electronics and more, it generally appreciates and appreciates very well. If we look at Toronto trends the market has been booming for a number of years. What about Atlanta, Austin or San Francisco? The trend typically shows appreciation in value over the long term.

Secondly, real estate has multiple tax advantages and benefits. You can benefit from deduction such as:

  • Property tax.
  • Property insurance,
  • Mortgage interest,
  • Property management fees,
  • Property repairs, capital improvements, or ongoing maintenance.
  • Advertising expenses (like the cost to list a rental or market a property for s
  • Closing costs

In addition, you can write off closing costs and depreciation. Lastly, real estate typically falls under capital gains tax and can be tax-deferred. Read more here.

Why is investing in RE hard?

Well, few really good reasons. Firstly, it's not as liquid as other assets such as stocks, gold, and even your car. You need some domain expertise as it is a high priced asset and you need to know what you're buying. Typically, transactions will require an agent (unless off market deal) which will coordinate searching through the MLS and handling the transaction. Finally, my opinion, if it's in the market, it might not be a deal but it could still be a good buy!

Well, what are your goals?

Real estate typically employs different investing strategies (surprise!). There are a number of ones for, say, investing in stocks (growth, dividends, etc) but for real estate, it could be broken down into a few:

Cashflow
Properties that may not appreciate much but have strong cash-flow. These properties are typically in areas where your tenant cannot afford to purchase their own home, so you can demand high rent. This is not a rule, and you may find really good deals in well established white-collar areas that are underpriced and provide good cashflow.

Appreciation
May be cashflow positive, but overall you're seeking appreciation in value. These properties are typically in highly desired areas with good schools and amenities. The desire to live in such areas drive prices of real estate up.

Flipping
You're buying an undervalued home with problems in hopes to fix it and reap the rewards! It's typically a quick win strategy.

BRRRR
Also known as buy, rehab, rent, refinance, repeat. Unlike the flips strategy, this is typically a property you hold.

Short-term rental
I do work at Airbnb and should shameless plug this. This is a very valid strategy. Unlike long-term rentals, short-term typically have higher a cap rate and cash-on-cash, but experience seasonality and/or volatility.

How to find a deal?

Ah, you're interest. You made it this far into my post. Let's talk about how you can find a deal yourself.

Tools
You can easily browse around to find properties on:

  • Zillow
  • Trulia
  • Realtor.com
  • Mashvisor
  • Roofstock
  • Through an agent
  • Private deal (find a private seller and make a deal)

Some things to help you assess an area:

Some terms to know
Gross yield

  • % of 1-yr rent / purchase price
  • For example, rent is $5k/yr, Purchase at $100k = 5%

Cap rate

  • % of year 1 net-operating income (NOI) / purchase price
  • Property Tax, Property Management, Leasing Fees, HOA Fees, Insurance, Repairs & Maintenance (Reserve)
  • NOI is $3k/yr, price at $100k = 3%

Cash-on-cash

  • % of money after all expense / initial investment amount
  • $2k / $20k = 10%

IRR (internal Rate of Return)

  • % of return on initial investment. Depends on your hold period
  • $20k (return = sale + rent) / $20k = 100% / 5 years

Ok, let's talk a deal!

Well, thanks for getting this far! I wanted to set the stage for the second blog post 😅. I want to keep this short and informative but same time I want to share the journey. Let's do a deal deep dive in the following post which I will post here.