Best Ways to Invest in Real Estate

By Frank Uhler

Given the importance of the real estate industry to our country’s economic growth, it would be wise for the diversified investor to consider gaining exposure to this market through personal investments. The real estate market is a significant segment of the economy, and according to the National Association of Home Builders, generally averages a 15-18% contribution to the U.S. GDP.  As an investor, there are several different ways to gain exposure to the real estate market. Each of these investment vehicles varies in the amount of risk and return. They also differ in the minimum amount of capital necessary to make an investment.

It’s important for individual investors to consider their risk tolerance, investment horizon, and savings goals when considering which type of real estate investment might be right for them. Below I provided some brief insights into the different ways individuals can invest in the real estate market to help identify which type of investment best fits within your wealth management goals.

Direct Investing
Direct investing involves the purchase of property by an investor. It requires the most up front capital, and is also a higher risk investment. This form of investing is often done by experienced real estate professionals due to the time requirements of identifying strong opportunities, obtaining financing, active property management, and construction.

As a property owner, you are responsible for managing all aspects of the property and are also entitled to all the income generated through rents. Non-real estate professionals who invest directly in real estate often use third party property managers to help with the active property management requirements. One alternative to hiring a property manager is using a property management software such as Rentalutions.  This software provides an effective and lower cost alternative to hiring a property manager for the individual investor. 

When done effectively, investing directly by purchasing your own property can be a great tool for generating passive income and building wealth.

Real Estate Syndication
You can also invest directly into real estate as a passive investor through a process called real estate syndication. This process involves the aggregation of investor capital by a real estate company (syndicator) for the purpose of investing directly into real estate opportunities. The real estate companies manage all aspects of the direct investment process (identify the investment opportunities, raise the necessary capital, obtain financing, construction management, and property management). Honore Properties is a real estate syndicator. 

This type of investing can provide investors with solid returns and does not require any active participation in the process. However, the risk is higher because it is still concentrated on the performance of individual properties.

Exchange Traded Funds (ETFs) and Real Estate Mutual Funds
Real Estate ETFs or mutual funds provide investors with the opportunity to diversify their investment into a variety real estate related companies. These funds can have a variety of strategies including a focus on specific types of real estate (retail, residential, office, muti-family) or geographic regions. These funds primarily invest in real estate related stocks, but some include direct purchases of real estate assets.

The main advantage of these types of investments is diversification. The purchase of one ETF or mutual fund is an investment into all of the underlying real estate company stocks or real estate assets held by that fund. This can be beneficial to those with less investment capital, who lack the ability to diversify into several different investments. Furthermore, many of these funds have low minimum investment thresholds.

Personally, I prefer ETFs to mutual funds because they generally have lower expenses and are easier to trade through online brokerages.

Public Company Stock
REITS
One type of real estate stock investment is known as a real estate investment trust (REIT). REITS are public companies that own and manage real estate and mortgages. They are a popular form of real estate investment because of the dividends paid to investors. In order to retain status as a REIT (and the tax benefits that come along with it), these companies must distribute 90% of their taxable income to shareholders in the form of a dividend. This generally results in higher dividends for investors in REITS when compared to your average S&P 500 company.  According to NAREIT, as of April 2017 the average dividend for REITS was 4.14% versus 2.01% for companies in the S&P 500. 

REITS also allow investors to participate in the income produced by real estate investments through the purchase of a stock, without having to identify and purchase an actual property. These REIT stocks are more liquid than traditional real estate and can easily be bought and sold through stock exchanges.

REITS provide the benefit of diversification because they often own large portfolios of properties. The purchase of one particular REIT stock includes an interest in all the underlying properties held by that REIT.

Real Estate Company Stocks or Peripheral Business Stocks
There is also a variety of real estate company stocks available on the public exchanges which are not classified as REITs. The companies generally pay a lower dividend, but have more freedom to re-invest their profits. These types of companies may be in the business of owning, developing, and operating real estate assets, or they could be peripheral businesses.

Peripheral businesses may provide services to the real estate industry (brokerages, property managers, etc.) or businesses that benefit from an active real estate market (Home Depot, Sherwin Williams, etc.). These companies are not in the business of owning real estate assets, but benefit from home building and home improvement.  

Individual investors have a variety of options when it comes to investing in real estate.  Hopefully, the insights above can help you get started with an assortment of options that suites your investment strategy best. 

A First Impression is a Lasting Impression- Home Selling Tips

By Melissa Williams

They say you get one chance to make a first impression, this couldn’t be truer when selling your home. There are quite a few items that can be done to help you get the most money for home, along with producing a quick sale.

  • Declutter- Your goal is to have potential buyers view your home and see as much livable space as possible. Consider removing big pieces of furniture if it means it will make the room appear larger or open up rooms by rearranging furniture to increase the feeling of roominess.  Organize your closets, pantry, and drawers, as potential buyers will be looking in these spots.
  • Paint- Paint your home a neutral color. Consider a light and bright neutral color; your goal is to make your home as appealing to as many people as possible.
  • Add color! Although, you want to keep your walls neutral, a little bit of color is helpful. Add color in conspicuous ways, such as adding colored throw pillows, towels, art, and/or décor.
  • Price your home competitively. Your Realtor will do a market analysis to see what similar homes in your neighborhood are selling for. It is important to price your home competitively to achieve a quick sale.
  • Repair- It is better to repair any known issues prior to going on the market in order to avoid any future potential issues. Preliminary repairs will also help boost the buyer’s confidence that the home has been well maintained.
  • Curb appeal-  This is the very first impression of your home, make it count.Boost your homes curb appeal, consider adding planters, planting flowers, weeding if needed, and mulching.


Along with the above items, you’ll also want to prepare your homes for showings to make it as appealing and welcoming as possible. 

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  • Clean. Prior to any showings make sure your home is very tidy and clean. Leave your home in show ready condition at all times to accommodate for last minute showings. Who doesn’t love that fresh clean look and smell?
  • Light. Turn on all lights for showings and open all blinds and curtains. 
  • Smell. Light a homey smelling candle or bake some chocolate chip cookies.  A good smelling home, can leave a long-lasting impression.
  • Sound. Play soft music in the background, think Michael Bublé  or classical music. 
  • Feel. Consider leaving a letter for potential buyers about the things you love most about the home and the area.


If you are have any questions about selling your home, please contact Melissa Williams at 224.235.2448 or mwilliams@honoreproperties.com. 
 

3 Ways to Prepare for your Rental Search

By Tim Stroh

For most people, where you live is one of the most important choices you make. With that said, it's important to be properly prepared for your search, before you start to view options, so that you're best positioned to get the apartment that you want.  It is best to go into the apartment-finding process with the mentality that anything can come up at any moment. Here are a few important steps to make sure you are as best prepared as possible:

  1. Documentation ready to go. Once you find the place of your dreams, you don't want to be scrambling to get your paperwork in order as part of your application. Common documents that you will need to submit include a driver’s license or photo ID, your three most recent paycheck stubs, and possibly a statement that shows your bank and savings balance. If you are starting a new job, a copy of your offer letter should be readily accessible to submit in lieu of paycheck stubs. If you are a student, be sure to have your acceptance letter, as well as any financial aid/stipend documentation ready. Having all of your documents ready to go at any moment will help expedite your application process, which may make the difference in getting your top choice apartment.
     
  2. Funds available for up-front costs. Most landlords will require an upfront payment, typically after the lease is signed, to secure the apartment. This payment is usually applied to the first month's rent, but there can also be other up-front fees, including move-in deposits or fees, pet fees and application fees. Being ready and willing to make these payments will send a good sign to your potential new landlord. 
     
  3. Willingness to pull the trigger quickly. Many people lose out on a unit that they really like because they decide that they'd like to see what else is out there and compare. The stage of comparing and contrasting should come before you view apartments, by doing online research via sites like Zillow and Hotpads. The best units usually go quickly, so understanding the need to act swiftly is important if you've found something that you really like. 


If you need help with your rental search, please be sure to contact us!


 

How to Structure Real Estate Deals

By Michael Shenouda

After posting my first blog about "How I got started in real estate", I wanted to continue by giving some advice on a few different ways to structure deals when you are getting started.  There are many ways to structure a real estate deal and it is all about setting expectations with your partners and/or investors.  

First, you can start the way I did with a FHA 203k loan.  This type of loan is a great way to get in with very little money down.  However, it is HIGHLY leveraged so be careful because with only 3.5% down if things don’t go well, it can turn ugly quickly.   Regardless, there are multiple mortgage brokers out there that can provide these loans and you will only need to put 3.5% of the total purchase price and construction.  This is a great way to start as you will it own it all yourself and if you do well the upside can be a lot higher.

 

Second, you may determine that coming up with any cash is hard but you still want to put in the work, find the deal and manage it.  This is where you can find a family member, friend or ANYONE who wants to invest in real estate.  I promise if you do your homework and find a good deal, there is money out there to do it.  If you can’t find the money, call me and I’ll find it for you.  Once you have found your investor or partner, you can structure the deal several different ways.  The beauty about this is that there is no right or wrong way to do it.  Several ways I have seen:

The beauty about this is that there is no right or wrong way to do it.
  1. Investor puts up the cash, you sign the loan and do all the work and split the profits 50/50 or 75/25 after they have their initial investment returned.
  2. Investor puts up the cash and you pay them interest on their money 10-15% a year and once they have all their initial investment back plus return you keep all the upside.
  3. Investor puts up the money and you pay them interest (ie 8%) plus a percentage of the profits (75-80%) and you keep 20-25%.  This is more standard as you grow larger.

Real estate is a lot of fun because you can be as creative as you want with your deal structure; there is no one size fits all.  
 

Top 5 Reasons You Should Invest in Rental Properties

By Frank Uhler

You worked hard and effectively stashed away a solid portion of your income into savings.  Now comes the question most people struggle with, “how should I invest my hard earned savings?”  In today’s financial markets there are a significant number of investment vehicles for an individual investor to choose from.  Furthermore, interest on savings or money market accounts is historically low.  

Those who diversify their investments into stocks, bonds, ETFs, etc., tend to enjoy the simplicity and speed of online brokerage accounts (I know because I used to be one of these people).  Investing directly in income producing real estate is not as easy as clicking a button, but can produce superior returns as a result.  

For those considering adding real estate to their portfolio of investments, I have included the top 5 advantages of this type of investment.

1. Passive Income – At its core, real estate investing is a purchase of a future income stream. When done correctly, this income stream is often much greater than you could achieve from other types of investments and should increase over time.  Once all of the property operating expenses and debt service is paid for the month, the remaining “profit” is kept by the owner.  This leftover profit is similar to a dividend received from stock investments, which both result in the receipt of passive income.  

OVER THE LONG TERM, PASSIVE INCOME IS A GREAT TOOL FOR BUILDING WEALTH

The cash dividend provided by real estate investments will vary based on several different variables such as: location, property type, competition, risk tolerance, and various other factors; however, many real estate investors attempt to achieve a 6-10% cash dividend on their investment.  This is significantly higher than the average trailing twelve-month dividend yield of the S&P 500 as of March 2017, of 1.97%.  The S&P 500 dividend yield approximates the average dividend paid by companies in the S&P 500.  

For example, if you invest $50,000 of cash into an investment property, and the property produces a cash flow dividend of 8% throughout the following year, you will earn $4,000 of passive income off this investment. If you are able to slowly build the number of investment properties in your portfolio to 10 similar properties, this could eventually result in $40,000 of passive income each year.  Over the long term, passive income is a great tool for building wealth.  


2. Value Appreciation and Stability – Although the market value for real estate is cyclical, real estate tends to be a more stable asset.  Unlike the stock market, there is not a daily quote for individual real estate asset values.  Furthermore, there is lower transaction volume because of the higher costs and longer timeline involved in real estate transactions.  Lastly, the impact of inflation can typically be passed on to tenants in the form of higher rents, resulting in appreciation of the property value.

YOU HAVE A GREATER POTENTIAL TO DIRECTLY IMPACT THE PERFORMANCE OF YOUR INVESTMENT


3. Potential for Value Creation – Unlike stocks and bonds, you have a greater potential to directly impact the performance of your investment.  Full time investors often create additional value, through property rehabs, improved utilization of the space, or superior management, including economies of scale on maintenance and property management staff.  The resulting increase in rent from rehabbing a property typically results in an overall increase to the cash flow and total return of a real estate investment.  Even small improvements to a unit, such as adding washer/dryer or updating a bathroom, can often result in rental increases of a few hundred dollars per month.
 

4. Leverage – The appropriate use of debt in real estate can help you increase returns.  The main advantage of leverage is that the initial capital required to buy a property would typically only be around 20-25% of the price (even less in some instances).  This would allow an investor to purchase a $1M real estate investment property with only $200K of cash. Additionally, your outstanding loan balance is being paid down over time through the rent payments of tenants.

Properties can also be re-financed after the value has increased (whether due to rehab work or strengthening market).  The return of capital through a re-financing will provide an investor with access to equity earned through the amortization of debt, or the increase in the property’s value.  

For example, after 7 years your $1M property has increased in value to $1.23M (approximately 3% appreciation per year) and your outstanding loan balance has gone from $800K to $675K.  If you decide to re-finance your property using a loan that is 75% of the value, then you will receive a new loan of $923K.  Once you pay the old loan off you are left with approximately $248K of proceeds (return of your initial investment of $200K + $48K of additional cash).
 

5. Tax – There are many tax benefits to owning real estate, which differ based on your classification as a passive investor or a real estate professional.  A tax lawyer or accountant should typically be consulted about the specifics of your situation, but I will highlight the general benefits to a passive real estate investor.  The following real estate investment related expenses can be deducted from your taxable income:

  • Mortgage interest expense (for loans to acquire or improve rental property)
  • Repairs & maintenance
  • Depreciation
  • Insurance premiums
  • Casualty and theft losses
  • Legal & professional services
  • Travel expenses (for property related trips)

Deducting these expenses can significantly reduce your taxable income for the year, therefore decreasing your overall tax liability.  


If you read these benefits and are now considering making your first real estate investment, stay tuned for my next blog on the “best ways to invest in real estate.”
 

10 Simple Steps to Buying a Home

By Melissa Williams

Navigating through the maze of home buying can be overwhelming, especially as a first-time buyer. What in the what is earnest money? What is the importance of getting pre-approved? With the assistance of a great team, we can make the home buying process a breeze. There are typically a couple of key players to ease the home buying process; a mortgage broker, a Realtor, and an attorney. Throughout the process, you will also work with a home inspector and an appraiser. Here are the major steps to home buying:

  1. Contact a mortgage broker and get pre-approved. Your mortgage broker will help identify if there are any areas of improvement that would help lower your interest rate or increase your spending power, such as paying down a credit card or improving your credit score. Your mortgage broker will be a KEY player throughout the process by getting you approved for a loan.
     
  2. Contact a Realtor. Your Realtor will help coordinate, educate, provide expertise and help  negotiate the best possible price. Your Realtor will serve as your confidant throughout the home buying process.
     
  3. Create a home buying wish list. Break your list down to your non-negotiables and items that would be nice to have, but could live without. Your Realtor will help you fine-tune your wish list as well.
     
  4. Select your desired area and begin looking at homes.  After viewing a few homes and getting a feel for your tastes, your Realtor should be able to keep an eye out for the perfect property for you.
     
  5. Make an offer. Once you find your dream home, put in an offer with the assistance of your Realtor.
     
  6. Contact a real estate attorney. Your attorney will play a key role in the home buying process following offer acceptance. 
     
  7. Contact a home inspector. The home inspector will do a thorough inspection of your home and will provide you with a detailed report.
     
  8. Get home appraised. If agreement is reached following your home inspection and attorney review, your mortgage broker will schedule an appraisal. The appraiser will determine the value of your future home.
     
  9. Complete a final walk through. The day before or the day of closing, you will walk through the property to verify there have been no changes in the home and any requested repairs have been made. 
     
  10. Closing day! On average, from offer acceptance to close, it takes about 45 days to close. Once all of the above steps are completed, you will close on your home. This typically takes about 2-3 hours and is the final step towards home ownership. Typically closing will be held at a title company or an attorney’s office. 
 
 

Please contact Melissa Williams at 224.235.2448 or Mwilliams@honoreproperties.com for a complimentary home buying consultation.    
 

5 Benefits to Using a Realtor for Rentals

By Tim Stroh

Despite the fact that nearly all buyers of real estate use a Realtor to help them find the perfect property to purchase, many consumers do not utilize the help of a Realtor when they are looking to rent. Below is a list of five important reasons why you should consider using a Realtor to supplement your rental search. 

  1. Market expertise. Realtors have the market knowledge that can come in handy during your search. Realtors are able to look up comparable units and buildings in the area that you’re considering to make sure that you are getting a fair rate. Realtors can provide you with average rental rates for different neighborhoods, which can also help you narrow your search to areas that fit your budget. 
     
  2. A Realtor can save you money. Realtors can use their market expertise to negotiate a lower rental rate on your behalf. Many renters are not aware that rent prices are almost always negotiable, particularly when renting a home or condo. Realtors can also help negotiate the waiving or lowering of fees associated with rentals, and/or the inclusion of parking, storage, etc. 
     
  3. You do not have to pay a broker fee. In the Chicago area, Realtors receive their fees from the landlord or management company, so they are providing a free service to the renter. On top of that, a Realtor only gets paid if they find you a place, further motivating them to do the best job possible. 
     
  4. Notification of new rentals as soon as they hit the market. If you decide to use a Realtor, they can set you up to receive listings that fit your criteria as soon as they hit the market. This means that you can beat the competition by scheduling a showing before others even see that it is available. It also means that you don’t have to necessarily skim various rental websites every day to see what’s new. While you can often set up a new listing notification email for sites like Zillow and Hotpads, there is often a lag time between when the unit is listed on the Multiple Listing Service (MLS) and when the listing hits the feeder sites. Having a leg up on timing can be crucial when looking for your next home.
     
  5. Convenience. A Realtor can take the information you give them in terms of what you’re looking for and set up showings that are back to back, where they drive you around to various options that match your search criteria. This means you don’t have to spend your time calling or emailing various landlords to set up showings on random days and times. 
 
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How I got started in real estate

By Michael Shenouda

There isn’t a month that goes by that I don’t have a coffee or beer with someone who just wants to know how to get started in real estate. My name is Michael Shenouda and I am the founder of Honore Properties, this is my story about how I bought my first building.  

In 2007, I graduated from the University of Illinois and besides getting a job I had one goal:  to buy my first piece of property.  I had taken one real estate class in college and our professor owned 3000+ units on campus; he told us the best way to start is to buy a 2-4 unit, live in one and rent out the other units.  It’s an easy way to see if you enjoy being a landlord because you are also providing a place for yourself to live at the same time. In addition, the process is not much different than buying a single-family home or condo.  The goal was to create passive income and a second income stream for myself.  

In the fall of 2007 I starting looking at 2-4 unit rental properties but prices were very expensive so I also looked at condos for rental purpose.  In 2007 prices were at an all-time peak, I wasn’t terribly focused on value though, my model was and still is to find cash flowing properties.  This was nearly impossible in 2007 especially since my only way of finding deals was through the MLS.  From 2007-2009, I looked online, underwrote, visited north of a 1,000 properties.  I was close a few times to buying but for whatever reason they did not work out.  In July of 2009, I purchased the first two flat I had seen back in 2007 but for 1/3 of the original asking price in a foreclosure sale.   

Now the nitty gritty.  I had no money, no experience, and was barely making 30k a year at the time. My first full year of working in 2008 showed an income of 22k.  I had read 50+ books on being a landlord and investing but otherwise had no idea what I was doing.  One of my friends and I decided to buy this first investment together and be roommates at the same time, making the down payment and income requirements easier.  We used a loan called a FHA 203k.  The property we bought needed rehab and this loan allowed you to put 3.5% of the total cost of acquisition and construction.  In our case, we needed a down payment of approximately $10,000.   

As I mentioned, I had zero savings and was barely able to make rent, floating out checks on the last night of the 5th hoping our landlord wouldn’t pick them up for a day or two until I was able to find some more cash.  (I am not advising this next part in anyway shape or form but just telling my story as a way to show that anything is possible.)  At that point, I took out a 1 year interest free credit card and put all my expenses on it for the few months leading up to the closing.  This allowed me to have the $5,000 needed to close on the property.  

Back then, President Obama was offering $8,000 for first time home buyers so I was able to recoup a lot of this money quickly.  Then we started to rehab the property, a lot of this was done by ourselves and our families that we dragged in to paint and help landscape.  The heavy lifting was done by a contractor we hired.  The contractor took full advantage of me, a wide eyed 24-year old that had no clue what anything cost.  Regardless, we finished the project and were able to rent the other unit to friends from college (one who later became my wife!).

After killing ourselves nights and weekends to get this done as we both still had full-time jobs, we were able to generate $500 a month in cashflow on the building.  So instead of paying $600 in monthly rent, I was able to only pay $350, saving myself that $250 every month.  On top of the $250 a month, we were paying down our loan, receiving tax breaks and hoping for future appreciation.  

I know what most people think at this point as I have heard it before.  You went through 2 years of trying to find something (nights, weekends and any free time I had) and countless hours working on this property just to save yourself $250 a month.  The answer is technically yes, but the experience was priceless.  Now that I had been through the process, built a team, met brokers, I was well poised to do more.  From there I went on to buy a couple 4 unit buildings and then started buying 6, 8, 20, 30 unit buildings.  As I learned to manage these buildings better, the value went up and I was able to leverage appreciation to refinance some equity out of our deals. That cash could then be used to buy more deals.  

After several years of doing this and having a solid track record; I am now able to raise capital and do deals as big as I want.  Honore Properties now has a portfolio of 200 units and is growing quickly.    

But remember it all started with a little 2 flat….I truly believe anyone can do this, it just takes a lot of time and effort to get started.  You don’t need to turn it into a full-time career either, you just have to get started.  No excuses!    
 

 

Honore Properties is a full service real estate company, if you are interested in buying or selling a property you can contact us at (312)-600-4501