Last updated on April 8, 2020
Investing in real estate is often compared to a box of chocolates. There are so many choices, it’s hard to know what to take a bite of first. But unlike eating candy, choosing the wrong rental property can be a lot harder to swallow. In this article we’ll profile six real estate investors, each with a different success story to tell. You will learn how two beginners got their start, why one Bay Area investor stopped renting and began buying in Indianapolis and why buy-and-hold is the crème de la crème real estate investment strategy. Plus, we’ll explain how two high-tech entrepreneurs doubled their returns by transitioning from commercial office to a 169-unit portfolio of single-family rental homes using a 1031 exchange. Here’s how two newbie investors used the Roofstock Investment Property Marketplace to pick their first investment properties and launch their real estate investing careers: Sarah is based out of the San Francisco Bay Area. Like many beginning real estate investors in California she decided to invest out-of-state because of the lofty home prices in many major markets here. She studied and researched different areas for about six months before settling on a single-family rental house in Memphis. Sarah’s investment strategy is to focus on cash flow, solid market fundamentals, and current rent vs. property value by using the 1% rule. The house she purchased in Tennessee ticked all of these boxes and more. Her first rental property provided a first-year net cash flow of almost $3,000, a cap rate of 8.4%, and a gross yield of nearly 14%. Sarah’s biggest surprise about owning rental property?
Tips on Picking Your First Rental Property
Sarah Park, Senior Product Designer
All of the expenses and deductions she was able to claim thanks to the real estate-friendly tax rules in the U.S. Learn more about Sarah’s real estate investing success here.
Jason Pabon, Buyer Account Executive
Jason also pursued the buy-and-hold strategy. He began his real estate investing business by spending countless hours networking with other investors, reading books from real estate pros like Robert Kiyosaki and David Lindahl, and listening to podcasts from BiggerPockets.
When the time was right, Jason was ready to start looking for the perfect rental property. He had four top criteria for choosing where to invest:
- Market with strong job and population growth and new development
- 1% rule of current rent vs. property value
- Minimum 7% cap rate
- 3-star neighborhood or higher as ranked in the Roofstock Marketplace
He budgeted $20,000 to get started and found exactly what he was looking for in suburban Cleveland. His 2-bedroom/1-bath single-family rental offered a cap rate of over 8.5% and a total 5-year return of nearly $9,200.
Jason’s tips for first-time real estate investors include locking in the loan interest rate, setting reachable goals to keep yourself accountable, and using a Roofstock preferred property manager instead of the seller’s.
Why One Investor Loves Indianapolis
Like many people living in the Bay Area – where a tiny house on a postage stamp-size lot can easily run $1 million or more – Tyler Jahnke was one of the over 111 million people renting in the U.S.
One day, he calculated that by the time his lease was up, he and his roommates would have literally paid enough in rent for his landlord’s son to go to college. That’s when the lightbulb turned on and Tyler realized he had to jump into real estate investing.
On a salary of just $44,000 a year, Tyler knew that buying rental property in his own backyard simply wasn’t financially possible. But, becoming a long-distance landlord was not only feasible but offered huge opportunities for affordable cash-flowing properties.
After studying various rental markets across the country Tyler decided to begin building his rental property portfolio in Indianapolis. There are 10 reasons why this beginning real estate investor likes Indianapolis so much:
- Population growth
- Job growth in high-wage sectors
- Business friendly
- Diverse economy
- Strong occupancy rates
- Acquisition price-to-rent ratio
- Landlord friendly laws
- Infrastructure development
- Lifestyle amenities attract both tenants and business
- Education
Tyler also realizes that investing in single-family rental real estate is the way for him to accomplish the goals he envisions:
“There was no way I’d have a completely fulfilled life if I kept throwing money at my savings account and watching it build slower than the inflation rate.”
Buying Buy-and-Hold Real Estate for 9+ Years
There are three typical investing strategies to choose from when deciding how to invest in real estate: Fix-and flip, Short-term buy-and-hold, and Long-term buy-and-hold.
Of these three strategic real estate investing options, long-term buy-and-hold is generally considered the crème de la crème for a variety of reasons, including consistent cash flow and the compound effect of appreciation.
The main benefits of buy-and-hold real estate investing are:
- Goal planning is easier to achieve
- Compound effect of appreciation
- Tax benefits such as 1031 exchanges
- Easier to manage and scale up a rental property portfolio over time
- Stable net worth due to steady cash flow and long-term appreciation
On the other hand, successful fixing-and-flipping depends on perfectly timing the market on every flip, while holding real estate over the short-term often means expensive repairs and financing options that can lead to erratic cash flow.
Michael Albaum, Buy-and-Hold Real Estate Investor
After experimenting with a variety of investing strategies, Michael and his wife settled on long-distance real estate investing with single-family homes.
Thanks to their buy-and-hold strategy, the couple was able to quit their full-time 9-5 jobs and travel the world while working remotely and managing their rental property business from a laptop.
Another big advantage of investing long-term is that literally any type of property can make a great buy and hold investment, according to Michael:
“The first single-family rental (SFR) that I purchased is a long-term investment. The first duplex that I purchased is a long-term buy and hold. The first triplex that I purchased is a long-term buy and hold. The first 8-plex that I purchased is a long-term buy and hold. You get the idea…”
Before buying buy-and-hold rental property, Michael suggest investors consider these four important factors:
- Age of building
- Local market conditions
- Real estate team dynamics
- Availability of good deals in the market
One of the best things that Michael loves about Roofstock is the fact that they’ve vetted the investment property available on the Roofstock Marketplace and they’ve already done the legwork in assembling a real estate team.
That’s critical, because it allows the rental property investment process to become ‘rinse, wash, and repeat’ when it comes to deal acquisition and property management.
How These Business Partners Converted 1 Commercial Property Into 169 Single-Family Homes
Many real estate investors have heard of a 1031 tax deferred like-kind exchange. It’s based on Section 1031 of the Internal Revenue Code and allows investors to sell one income-producing property and buy another, while deferring 100% of any capital gains tax due.
But what many people aren’t aware of is that ‘like-kind’ doesn’t have to be the exact same type of real estate. As long as a property is held for business or investment purposes, it can be exchanged tax-free for another property in a different asset class.
For example, land can be exchanged for a warehouse, a shopping center can be relinquished for an apartment building, or a large office building can be sold and replaced with dozens of small single-family rental homes.
Doubling ROI with single-family rental property
In fact, that’s exactly what Tom Fallows (founder of Google Express) and his business partner Jonathan Kibera did. The investors sold a commercial office building that they’d owned for 13 years in San Francisco’s North Beach neighborhood and exchanged it for a Roofstock Portfolio of 169 single-family rental properties.
The portfolio Tom and Jonathan acquired through their strategic 1031 exchange consisted of 57 homes in Milwaukee and 122 homes in Columbia, South Carolina.
According to Tom, everyone told the real estate investment duo they were “crazy” to try and do a 1031 into hundreds of properties. Since they already owned commercial real estate, the expert advisors kept pitching “traditional” tried and true properties like Walgreens, Home Depot, and shopping malls.
But Tom and Jonathan are used to thinking outside of the box and defying the status quo. There are several reasons why they made the unconventional jump from commercial real estate to single-family rental properties:
- Nearly doubled their ROI by transitioning from commercial to residential
- Took their portfolio cap rate from 4% to 8%
- Diversified their holdings geographically with a completely different asset class
Here’s the bottom line, according to Tom:
“Transitioning from commercial real estate to residential real estate through a 1031 is not a common or popular thing because it is seen as complex. But despite what everyone says, it’s possible.”
Characteristics of a Successful Real Estate Investor
The six real estate investors profiled in this article come from different age groups, professions, and walks of life. So, it makes sense to ask, what exactly is it that makes a successful real estate investor?
Here’s what Forbes recently had to say about “The Top Seven Traits Of A Successful Real Estate Investor”:
- Knowledge and an understanding of what drives real estate market cycles
- Patience to know when to move fast, when to hold, and when to wait and see how things develop
- Vision to invest in cash flowing buy-and-hold property while adding value
- Efficiency to focus on the tasks that add to the bottom line and delegate the rest
- Focus to know what you want and not allow any obstacles to stand in the way
- Relationship building by embracing that fact that “it’s not what you know, it’s who you know”
- Leverage of money, people, and opportunity
