What niche to focus on?

Question

My partner & I (new to real estate investing) have been advised to pick a niche: homes for first-time buyers, “value-add” properties (those in need of work), foreclosure buys, tax lien purchases, etc.  That said, since we are looking to invest out of state, and will be partnering with a private investor, I'm intimidated by foreclosure buys & tax lien purchases. In hot markets that have seen huge appreciation (10%) in recent years, are we being naive to buy & hold, versus buy low & flip?

Peter Abualzolof · Answer

Hi Kelly,

I personally think buy-and-holds are great for for beginners and think fix-and-flips would actually be difficult as a first investment.

A buy-and-hold will give you additional income, and then hopefully appreciate in a few years. It'll be a good learning experience as well because it's a long-term investment. There are also tax deductible expenses when having a rental property.

The longer flips take, the more expensive they get and as someone new, you may not be able to quickly flip.

You can always tap into different niches once you evaluate the success of your investments.

Anmmar Alsaggaf · Answer

Whatever the case pick Easy Wins at first to build your confidence. It's okay to make less at first and more later.

Kelley Lefmann · Answer

@Joe Fairless - great advice. I am detail-oriented and great at research and marketing. He is great with people (I'm no slouch, but he seems to have a way with making people feel at ease, when I am a bit more intense). I've been serving up properties in my research, and after we analyze them together, he will be the point-person to present the deal to our potential investors.

Kelley Lefmann · Answer

Thanks, @Peter Abualzolof - I tend to agree.  At this point, we are focusing on single family rentals.

Incidentally, I grew up in San Jose / Campbell. :)

Cheers!

Kelley Lefmann · Answer

Thanks, @Joe Mclain!  Great resource. I need to get more familiar with tax liens. With little to put down at present, this may be a good route.  Will keep you posted! Cheers!

Joe Mclain · Answer

@Kelley Lefmann You may want to read this if you are interested in Tax Lien investing.   Good material to start off with and understand your markets.

http://www.taxlienlady.com/StateGuide.pdf

Understand there are tax liens which you receive a nice interest rate on your investment.  That investment is yours when the owner redeems.  Tax deeds are where you are interested in trying to end up with the property.

Joe

Joe Fairless · Answer

@Kelley Lefmann what are each of you best at doing that would apply to real estate? That's what I would focus on to build our nest egg.

Kelley Lefmann · Answer

Thanks, Jim.

Sincerely appreciate your input. We are considering several markets in TX (we are in CA), and we do have a couple of folks there (who live there part time) who can help us build a team and narrow down our neighborhoods. That said, we don't have "boots on the ground" full-time. Therefore I agree that it is risky doing our first deal so far from home.

That said, we have not found anything within a 3-hour drive from where we live (Monterey Bay) that meets our criteria of <$200k with high job growth and strong appreciation. Personally, I would like to buy and hold single family as well as well as small multifamily (2-4 unit) properties. With this strategy however, our cash flow needs to generate a profit, after the out of state CPA, the property management fee and general operating costs. I've been told to expect to pay $5k/year for a CPA to handle our LLC and the transfer of income from one state to another. And to expect 5-10% to go to the property management firm. Then, assuming our private investor expects a return, that may be anywhere from 5-7%. We are not sure if this would come out of the monthly rental income/profit, or if he would realize his investment interest upon the sale or 1031 exchange.

So much to consider at the outset. If we go for a conventional loan and bypass the private investor, we are limited to putting $10-$15k down MAX. And in most of CA, that's hard to do when it's not owner-occupied. We've even looked at the USDA loans for rural areas like Fresno and San Benito Counties, but don't think we qualify under these circumstances.

We are a blended family with 2 school-aged kids in a fantastic school district (but expensive area we will not be leaving anytime soon). We are around 40, both starting over, and have an interest in real estate and moreso in building our nest egg late in the game. We are not risk-averse, and want to shift from renters to landlords within a couple of years.

Any additional advice is sincerely appreciated!  We "don't know what we don't know" - but are insatiable about learning, and about making headway within this calendar year.

Best wishes, all!

Kelley

Jim Ehlinger · Answer

Hello @Kelley Lefmann

Welcome to BP, you have come to the right place to figure things out.  There are so many different choices you can make on what niche to try. The important thing to consider is that each niche requires different funding requirements, different time commitments, levels of understanding and in some cases additional complexities to overcome.

Foreclosures would typically require more funding as you will be competing against other who are doing cash purchases, so you would need to be able to have private financing/ hard money lender, or just simply cash available to not only purchase the foreclosure, but need the additional funds to make necessary repairs. With a foreclosure, what would be your exit strategy? Are you looking to flip it, or hold it as a rental with buy and Hold?  I don't think it is naive to just do a buy and hold if that is where you end up.  Buy and hold can be very rewarding in the long run, while there can be a lot of money to be made flipping, there is also money to lose if you miscalculate your expenses with the flip. So there are lots of other things to consider with those and many more people on BP with more experienced than I am who can lend their experience to help you.

For the tax liens, that is more of a long term commitment as the state you choose to invest in will very possibly have different laws and time frames as to when you buy the lien and when the lien is either satisfied or you are able to take possession, which is not an easy process.

I personally chose to do buy and old for multi-families and invest about 1 hour away from where I live.  I also am self managing so I can learn the process better and as I increase properties, then I can look at the possibility of a property manager.  However, if you do buy and hold out of state, a property manager is almost a requirement.

Good luck with your research and choice.  Hopefully others will add their .02 to your question as there is a lot of good experienced people online.

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