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Real Estate Investing

How Do Interest Rates Impact REITs?

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The last few months have been choppy for stock markets. The S&P 500 [SPY] index which is an indicator of the overall market has experienced at least three sharp declines since October this year.

With the tariff war looming large and interest rates set to rise again, are the stock markets still a viable investment option? Should you diversify and invest in REITs instead? Here we look at the relationship between rising interest rates and their impact on REITs or real estate investment trusts.

REITs are high-yield financial instruments that are obligated to pay at least 90% of taxable profits to shareholders. The maximum amount of returns are driven majorly by dividend payouts instead of price appreciation.

Rising interest rates

Generally, a rise in interest rates is driven by economic growth. There are several reports that suggest REITs outperform the S&P 500 in periods of rising interest rates. The response to an interest rate hike is the depreciation in asset value.

This is because investors think that higher interest rates reduce the present value of future cash flow from investments. However, contrary to public opinion, a period of higher interest rate has resulted in an increase in REIT share prices.

The leverage ratio is a key metric

Currently, the leverage ratio for REITs is at the lowest point in the last 20 years. The ratio of debt-to-book assets fell 95 basis points last year. This fall in leverage will lead to lower interest expense for REITs.

The interest expense for REITs was far lower at 22% last year compared to the high of 38% witnessed during the financial crisis of 2008. Another reason why rising interest rates will not impact REITs is that almost all debt is allocated at a fixed rate. The average maturity for REIT debt is around 75 months.

According to Brian Cordes, a senior vice president at Cohen & Steers, an investment company focused on real estate, “If interest rates are going up because the economy is improving, that can be positive for REITs because landlords can raise rents to cover the rate increases.”

You can sell off your REIT holdings in times of economic uncertainties or an economic downturn when the interest rates rise. But hold on to them if the economy is strong and investors will be rewarded.

Real Estate Investing

What’s The Best Way To Invest $100K?

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Let’s have some fun today and talk about the best way to invest $100,000.

It is a lot of money, but it’s also not a lot. You might have $100k after selling a house, rolling over a 401(k) or IRA, receive it as an inheritance, etc.

So, let’s dive into the best way to invest $100k.

Should I Diversify my $100k Investment?

The first thing to think about is diversification. Should I diversify?

This will depend on my current financial situation. If I have a bunch of other investments elsewhere, then I would consider dropping my $100k into just one investment.

If this was all of my disposable money that I want to invest, then I’d diversify it.

I will assume that this 100k is all the money available, so I’ll diversify it. But, if I ever wanted to dump it all in one place, I could just pick one of these categories and put it all in there.

Allocating My Money

Since I’m going to invest my $100,000 in a diversified fashion, I’m going to plan how to allocate the money first. In order to do that, I need to lay out some options to invest in first. Here are a few.

  • Stocks
  • Bonds
  • Real Estate
  • Business Ownership
  • Commodities
  • Venture Capital
  • Crowdfunding (venture capital, real estate, etc)

There are definitely more options but these are probably the most mainstream. I don’t want to dive deep into something that requires a lot of very specific knowledge or experience to get into.

Looking at this list, I’m going to cross a few items off right away.

Crossing Off My List

First, toss bonds. They earn too little and values are inversely related to interest rates. Since interest rates are going up, bond values are going down. Plus, who wants a few percentage points of return when everything else returns so much more?

The next thing I’d toss off is venture capital. The minimum investments are going to be too high and the cashflow is not there. Generally, VC companies have big pay days if they sell or go public, but won’t return any capital in between. I like good cash flowing assets.

The third item I’m going to toss is commodities. It’s an area where you can make a lot of money, but it requires a lot of specialized knowledge that most of us don’t have. Or, it requires a lot of speculation and that isn’t a solid investment strategy.

That leaves stocks, real estate, business ownership, and crowdfunding.

I personally would allocate my money into those 4 categories as follows:

  • 40% – Direct Real Estate Ownership
  • 20% – Crowdfunded Real Estate
  • 20% – Stocks
  • 20% – Side Business Venture

1. Crowdfunding:

I’m starting with crowdfunding because it’s easy to get started. I’ll be putting $20,000 of my $100k investment into this.

I’d jump right onto my favorite platform, Fundrise, and drop a portion of my investments right in there. The great part is you can invest with your retirement fund.

Investing With Fundrise

It’s a super simple process so this won’t take long.

I like Fundrise because it’s done well with the money I invested in it back in 2016. My return has average around 10% per year, and there has been some appreciation as well.

So, here’s how to invest with them:

First, go to the Fundrise website and pop your email address in there.

Next, select your plan.

Third, connect your account and fund the investment.

Simple, right?

2. Direct Real Estate Ownership

I’d put 40% of my $100,000 investment money into my own real estate. At the $40k mark that allows me to buy a property that is roughly $200k in value. I can get a good triplex or fourplex at that price.

I think real estate is one of the best ways to invest money, regardless if you have $10,000, $50,000, $100,000 or even more to invest.

I’d expect at least a 15% cash on cash return and another 2-3% per year in appreciation. So, this $40k should earn around $7,000 per year for me.

Getting started in real estate is a little bit more challenging than just dropping money into crowdfunding. You can get started making offers in the next 30 days by checking this course out.

There are 4 things you need to learn in order to succeed at investing in real estate:

  • Find a Deal
  • Run the Numbers
  • Finance the Property
  • Fill it With Good Tenants

Finding Good Real Estate Deals

There are really 3 ways to find good deals – MLS, Direct Mail, or Online Lead Generation.

Of course, some deals are found by worth of mouth, knocking on doors, etc. But the 3 methods I mentioned are the only 3 that are truly scalable.

Finding Deals on the MLS

I’m not going to go into this too much, but, here are the basics.

First, find a good real estate agent. I like to use Agents Invest for a few reasons. First, the owner of the company is a real estate investor and she finds and trains agents around the country how to work with investors.

Second, it’s totally free to the investor.

Third, her agents often find deals that are not on the MLS, so it saves a lot of work for me.

Direct Mail Marketing

If you want to cut out the agent and go direct to the seller, a good way is with direct mail marketing.

 

In a nutshell, you buy a list of addresses, put together letters, and mail to them. Then, you wait for calls to come in.

Every time I’ve done this, I get about a 3% call back rate. So, if I mail 1,000 addresses, about 30 call me. Of that 30, maybe 3 are good deals and of those 3 I might get one.

In some markets, it’s more competitive so the numbers may be lower.

I go into a lot more detail on this method in my course on creating deal flow.

Online Lead Generation

Most questions start with a google search. Everything from “how do I avoid foreclosure” to “how do I sell my house fast” are all questions that people go to the internet to solve.

So, by creating that resource online, you might be the one they contact!

I use Investor Carrot for my online lead generation sites. Getting started with them is super simple too!

Simply go to the Investor Carrot site and pop in your email address.

Go through the prompts and set up your free trial.

Then start building content!

It does take about 3-6 months to generate any movement on Google, so be patient when first getting started.

Running the Numbers

This is the hardest part and there is no way we can get into it all here. But, we’ll cover the 4 basics you need to know, which are:

  • Determine After Repaired Value
  • Estimate the Rehab Costs
  • Know The Rents
  • Budget for Ongoing Operational Costs

Determining After Repaired Value

After repair value, or ARV is what the property will be worth after any necessary repairs are completed. Hopefully, the ARV is higher than whatever you are purchasing it for.

The goal is to buy it for a certain price, do some work, then have the ARV be significantly more than what you put into it.

The best way to estimate the ARV is to do a comparative market analysis (watch this video and subscribe)

Estimate Rehab Costs

There are a lot of rules of thumb and none of them apply everywhere. It also depends a lot on the size of the property in question.

The best way to estimate costs is to bring a contractor with you to give a rough idea.

You could use the $25/foot method which assumes a full interior upgrade costs about $25/foot, but that is fairly substantial.

There is also the $3,500 – $7,000 rule for interior upgrades on smaller apartments.

or…

You get the point. It’s hard to estimate!

Know Your Rents

Similar to doing a comparative market analysis, you’ll want to look at comparable rents in the area.

Here are the keys to estimating rents:

First, find 3 or 4 apartments for rent in the area that have similar characteristics such as age, amenities, size, number of bedrooms, etc.

List their rent prices from cheapest to most expensive. If one is way out of alignment with the others, you want to know why. If it’s an outlier, I’d discard it.

Look at the remaining comparable apartments to see if they have rents that are similar then simply average them if it’s true. If they have a wide variety, then look to see which one is most like yours. Then, go find more apartments for rent that are more closely aligned with yours.

Operational Costs

This is one of the biggest mistakes that most new investors make – they forget to budget properly for operational costs.

The easiest thing to do is to simply use the 50% rule. Basically, this says that 50% of your income will go your your expenses (everything except the principal and interest payments).

3. Create a Side BusinessI’d take $20,000 and invest it in a side project.

While this is not an entirely passive investment, it can become passive if it grows. Additionally, if it’s set up in a smart way, I can dedicate just a little bit of time to hopefully get outsized returns for the time commitment.

Honestly, not investment starts as completely passive, not even rental property. The key is to set it up well and have good systems in place.

There are two ways to go about this. I could start something completely unrelated to my other investments such as an eBay or Amazon FBA site. The other option is to start something that has synergy with one of my other investments.

Me personally, I’d rather have a business that ties in with other things I’m doing. So, I’d start a business related to real estate, but that isn’t actually investing in real estate.

4. Investing in Stocks

This is the most boring of all the options and the most well understood, so I’ve put it last.

I would invest the remaining money into a low cost index fund that tracks one or more of the major indices such as the DOW, Nasdaq, or S&P 500.

I’d probably divide my total investment between 2 or all 3 of them.

There are other low cost ETFs or funds that mirror other indices in the US or around the world, so you can get creative here and just go with the ones you think will perform the best.

For me personally, I like the S&P 500.

I’ve covered a lot of different ways to invest $100k. Like I said before, it really depends on your personal situation and risk tolerance.

It also depends on any other investments you might currently have as well.

This article originally appeared on idealrei.com. Read the full article here.

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Real Estate Investing

VIDEO: How To Do Your First Deal In 5 Steps

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Ah, so you wanna invest in real estate. But don’t know where to start. Or maybe you do know where to start? Either way, if you want to get into the game, the key is to follow a plan. In this video, WealthLAB’s Philip Michael lays out a 5-step blueprint to get started.

(Also! If you want a great handbook for real estate, pick up Philip’s bestseller Real Estate Wealth Hacking: How To 10x Your Net Worth In 18 Months.)

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Real Estate Investing

VIDEO: Why Millennials Aren’t Buying Houses

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Low income, student loans and high cost of living are factors affecting millennials from being able to afford purchasing homes in their desired areas. Unless they’re willing to compromise on location and amenities. See full video courtesy Business Insider.

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