Wealth through real estate investing is more common than you think. It isn’t just the Warren Buffetts that secure a more comfortable lifestyle by investing in real estate. I’ve come across just ‘average’ people who have invested money over the years in homes, condos, multi-family properties, etc. and by managing their investments wisely have the ability to live in comfort without having to work again.
There is quite a bit of important information an investor needs to know to be successful. Information concerning the handling of risk, the proper formulas for determining which properties are good investments, how to determine whether it is better to hold onto a property or sell it – these are just some of the areas an investor needs to be knowledgeable about. But to start, any investor should have an understanding of some of the unique terminology that can be used when discussing multi-family property of various sizes or even single family homes or condos.
Split or Mix: When you are discussing multi-family properties you may be asked what kind of split or mix you require. This refers to the number of bedrooms and bathrooms. If, for example, you are looking at triplexes you could say you are looking for a 2/2 and 3/2 mix or split, meaning you only want triplexes that consist of 3 bedroom 2 bathroom units and/or 2 bedroom 2 bathroom units.
Horizontal or Vertical: If you are ever asked if you want to invest horizontally or vertically you probably don’t want to stand there with your mouth open!
Investing horizontally would be having several properties spread out over a medium or large area. If you bought a house in Tarpon Springs you are going to rent out, plus a condo in Clearwater Beach to rent out and a couple of duplexes in Lutz – that would be horizontal investing.
Investing vertically would be having your properties clustered more tightly together or buying a larger multi-family property such as an apartment building.
Horizontal investing involves a larger area of travel and more expense (4 houses – 4 roofs) but you have less risk of having all wiped out at once.
Vertical investing doesn’t involve much travel at all and there is less expense (1 fourplex – 1 roof) but you then also have a higher risk of having all wiped out at once (for instance if there was a fire).
You have probably heard this term used before and may have some understanding of what it means but may not know all the ways that properties can have upside potential.
Upside potential means that there is a decent likelihood a property will turn a decent profit either in a short period of time (a flip) or over a longer period of time based on existing factors which would improve or would allow for improvement of the property’s condition.
There are many things that could be upside potential and if you are aware of these and can evaluate them properly, you have a much better chance of making wise and profitable investments.
Some of the factors that can create upside potential are: Rents currently lower than what the market will bear; Improvements to the surrounding neighborhood; Deferred maintenance that can improve not only the condition but the appearance of the property; A 5 unit building that can be converted to 4 units; Combining 1 bedroom units into 2 bedroom units; etc.
Of the ones I listed there you might be wondering about the 5 unit building being converted to a 4 unit building. The reason that could be upside potential is that a 5 unit building/complex is considered a commercial property and a 4 unit property is considered a residential property and it is easier to get financing for a residential multi-family than it is for a commercial multi-family purchase. So by making that change you would have a larger field of prospective buyers when you wanted to sell.
So there is some of the terminology you should be familiar with at any point you choose to be or become an investor. If you want any help in finding properties to start your personal real estate portfolio, please let me know.