Investing in Real Estate
Thinking of investing in real estate, or just starting out? Or maybe you're a seasoned investor wondering where you can find the right property right now? Loretta Gray joins us for an overview on how to evaluate real estate investment opportunities.
I think that one of the most important things that you can do up front is just determine what you want your cap rate to be.
Welcome to episode seven of Keepin' it Real. I'm your host, Adam Tabaka. Today we'll be discussing real estate investment with Loretta Gray. Loretta is an associate broker with Long and Foster in old town Alexandria. A New York native since 1998, Loretta has split time between Florida and the DMV. She has six and a half years experience in the industry, currently serves Northern Virginia as well as DC, and soon she'll be licensed in sunny, Florida. Loretta specializes in teaching real estate classes, investing in real estate, and working with investors. Loretta recently graduated from USF and SNHU. Just yesterday began her studies in ancient Greek at Oxford and year to date, she has closed 8.9 million dollars in sales. A wife, a dog owner, Loretta has twice battled and beat cancer, has a crazy love for history, is a phenomenally talented multilingual reader, writer, and editor. And when she's not busy working or studying, she enjoys collecting books and coins. It's my honor to introduce the one, the only Loretta Gray. Loretta, thank you for joining us today.
Thanks, Adam. It's great to be here.
Awesome. It's great to have you. Before we delve into investing in real estate here, tell us real quickly, how did you get started in the real estate business?
The real estate business I separate into two different categories. I first started in real estate because I was a real estate purchaser. And when you purchase real estate, even if you're not an agent, you are still in the industry. I consider myself an active participant in the real estate business for quite some time. I only became a licensed agent in 2015. I make the distinction between the two. And I just want to make sure that's clear in case someone is listening, who doesn't say, Hey, wait, those timelines don't mesh up. Well that's because this is how I evaluate it, in two separate events, but it has a long timeline.
Nice, nice. Tell us, since you've been working as a licensed agent, what's one of the biggest misconceptions that you've seen maybe among the general public about what you do?
I think that in terms of what I do as a licensed person, I think a lot of people think that the job is pretty easy because I don't think a lot of people see the prep work that goes into a transaction, that it's mostly done in the backside. And it's not necessarily the time between contract acceptance and settlement date, because most of our jobs are already finished by then. And we're just waiting for the client to play out their role with getting a loan. A lot of our stuff is done on the backside of it before we even get to a completed contract. I think that's the biggest misconception is that people go online, they do their do their own searching because you can search and look for homes online.
And it's fun going online and shopping. A lot of people find the place that they're going to get. They find it. They know what they're looking for. They can know inside their head better than how they can communicate it out and have me get out there and do the legwork and the footwork and get out there and look, because you really need to be right there with a client when you show property. But they do a lot of the looking and the searching on their own. It's our job as agents to really know the other stuff, to really know the details of the contract, the market itself, how we can make our clients more competitive in a market, make our contracts better, how we can just know the contract and really give them the best advice for exactly what they're looking for, so they don't have to keep doing it multiple times.
Yeah. Yeah. Less is better in that situation for sure.
Now, in terms of your job as a real estate agent, what do you think is the most underappreciated aspect of what you do on a daily basis?
I think it's probably negotiating contracts. It's doesn't seem to be something that most people in the United States are very comfortable with is negotiating. Usually we go to a store, we look at the price tag, we pay what's on the price tag.
And it's traditional in most other parts of the world that you negotiate everything. Things are overpriced. We negotiate it out. We look at it, but things are only overpriced when they're overpriced. Sometimes they're not. And sometimes negotiation is how you deal with other people. Sometimes negotiation isn't mean making your offer lower. Sometimes it's making your offer more. And that's also part of what is, I think, underappreciated by the general public is just distinguishing between the two. Because oftentimes we understand that anybody can overpay for a property. It's our job to make the client not overpay for the property and just make sure they still win the property. And that's a really fine line. And sometimes it is on the difference of a dollar.
No, it really is. It's a tough market out there sometimes. Now, turning our attention to investing. Now you work with a number of investors and you're also an active real estate investor yourself. Tell us a little bit about how you started investing in real estate and what was it like the first time that you bought an investment property?
Well, I would say that investing in property is a general term, but it could be a buy hold. It could be, not really a flip. This is not really investing. It's speculating, but what my experience in my own circumstances for what I've done, [inaudible 00:06:38] for other investors that I've worked with, but in my own circumstances, what we've done is we have purchased property and then we rent it out. We purchase property, we live in the property, and then we rent it out is what I should say. And I bought the two properties because they were in line with what I was looking for at the time. And then we just go through the motions and then we rent out the property. Being an investor in my case is falling in love with something and loving the price and loving the potential rent and then eventually renting it out. And that's a little bit different from somebody who just goes out to purchase a property as an investor, never intending to live there. My experience is just a little bit different. I like the buy, live in, and then rent.
And there's a little bit of an advantage to that from even just an interest rate perspective. Is there not?
Yeah, it's a little bit lower interest rate if you're going to be an owner occupant. There are other criteria that you have to adhere to, if you're going to do that. You have to live in there for a specific amount of time before you're able to just turn it over.
Now for anyone who's thought about investing in real estate in hasn't yet, or anyone who's just getting started, what are the most important steps that they need to take to ensure their success on this initial transaction that they're in the process of making or about to undertake?
They really should look at potential agents who are out there and decide on what they want to do in long term. Do they want to get a condo and spend less money out of pocket on the front side or do they want to invest in the condo fee, depending on how much the condo fee is, how much they want their tax break to be because the value of the land is going to be different if it's a condo versus a single family home, where they want that property to be, if they want it to be across the country where they can get a higher cap rate or do they want it to be close by where they can just drive past it and see their little investment every day. I think you should do the thing that makes the most sense to your pocket and what makes the most sense to your long term goals.
Understood. What are one or two of the easiest mistakes to potentially fall into if you're not careful when you first start out investing in real estate, buying property?
Yeah, I think the biggest thing that people don't do that they should look more closely into is how important is the list price. For example, if a list price around here for property, you can get one for less than $200,000, a one bedroom, a two bedroom. And the really important thing is to evaluate how much your total out-of-pocket expense is for that property. And how much do you have to put down? And how much is your return going to be? Because it's easy to say, you don't have to put tons of money down. Well, if you don't put tons of money down, you don't have tons of equity and you probably won't get a cash on cash return on a month to month basis. And I think it just depends on your goals. And if you make the wrong moves upfront, you could be paying out of pocket at that your renter is not covering.
And I think that's one of the mistakes that people made. They get talked into a loan that is maybe only 10%, 15% versus one that's 20 or 25% down. And I think it just depends on what you're looking for, what you're looking to get out of it, how long you intend to hold the property and what you're going to do if things go wrong in the property. Who are you going to be your contractors? Are you going to have a property management company? I think it's people's inability to explore all the facets instead of they just focus on how much their return might be per month.
Oh, that's all great points. There's a lot to think about when you're delving in and I know that you're very methodical and you do your due diligence when you're looking at properties that you're considering. And so tell us a little bit about the criteria that you think are most important and how you evaluate and break down a property when you're looking at it going, okay, do I want to invest in those or not?
Yeah. I think one of the most important things that you can do upfront is just determine what you want your cap rate to be. How much do you want your potential property to bring in? And once you establish that, establish how much money you are going to need from property A, then stay within that criteria. Do not get sidetracked by the shiny new penny that's coming on the market. Stay within your lane and focus on your goals.
Excellent. Excellent. In terms of, say cap rates, talk us through real quickly, how does the cap rate, how is it going to differ from closer into the city, farther out and even from market to market? What are some of the differences that we might expect to see?
Well, it's funny because I think that the beltway around DC, I think it looks like a big zero if you look at it on a map. And I think that the closer you get to DC, the closer you get to the big zero, and that's where I see your cap rate going. I think it's going to zero. However, and that's just because of the cost of land, but on the flip side, your cap rate really, it measures how much risk you have. It doesn't necessarily measure how much money or blah, blah, blah. It matters your risk. If your risk is closer to zero, the less risky something is. If your cap rate is higher, then you're generally going to be in a more risky spot. You're going to get probably more money per month, percentage wise, from your initial investment. But your risk is higher. I think it just depends on what your goals are. Again, I said this a couple times, but how much risk you're willing to take.
And this is risk both in terms of occupancy and in terms of appreciation, or there are other factors that you're talking about that calculate into this risk?
Oh, yeah. Well, the cap rate is just that. It's an evaluation of how risky that market is for that particular property. For example, DC is a pretty stable area, and I would expect a cap rate in DC to be somewhere between, an initial cap rate. It's going to change year over year, but an initial cap rate to be four to 5%, maybe six, closer to DC you get, which is not super high. And then the further you go from DC and from any metropolitan area, it's going to really go up. Your cap rate is going to go up, but so is the risk that you're going to have from it too. For example, during the recession in 2008-09, DC itself didn't lose much value in terms of average appreciation. However, the further out you go, the more value was lost. For example, in Manassas, they lost 45, 50% of their value that they had on paper. But DC, I think, they were still plus. They were plus 0.5% that they had from 2008 to 2009 of the average value for homes. I think that it just depends on again, but they also have more condo fees for investment properties in DC too. It just depends on what you're looking to get out of the market.
Sure, sure. Excellent, excellent stuff. Now, I know a lot of seasoned investors have had a difficult time finding a good investment opportunity recently, given the way that the market's been over the last couple years. In a red hot seller's market, where can you find a good opportunity to invest?
Yeah, I think opportunity is which make of it because even though prices might be on the the high side from what we're used to, well, if you had a property from a couple years ago where the market still wasn't super great for buyers, hasn't been super great for buyers in a long time in Northern Virginia, they have now seen their values skyrocket. It depends on what you want to get out of it and where you think opportunity is. We have another great opportunity that's right in front of us to buy an investment property at a ridiculously low interest rate. Even though prices are on the high side, you got to really see what that price of, for example, if you had a place that's $500,000, what that looks like at 3%, or if you're going to wait a year and maybe it's still 500,000, maybe it's 505.
And what an added whole percentage of interest rate does do your long term repayment. It's quite a big difference. And I've told some investors who are looking in different areas that as long as you can get a good interest rate, you can make a property work long term. Long term buying a hold is really just, the longer you hold it, the better off you're going to be. Our average appreciation since 1963 has been 5.2%, something like that. It's pretty good. It's pretty good. It's pretty stable. The years that you have are going to stabilize versus this up and down, stock market mirror thing that we've got here with appreciation value. I would say long term buy and hold really evens things out.
Yeah. Excellent. Now, you're a prolific reader, an avid scholar. If somebody wants to learn more about investing in real estate, what are some books or publications, either in print or online that you'd recommend that they check out?
Yeah, I really like "Rich Dad, Poor Dad." I can't recommend it more highly. It's such a good book. Robert Kiyosaki just lays it all out on what the difference is between what he considered his rich dad and who he considered his poor dad and why they were different and how he views the market. He is a master at putting the two things side by side. And I really think it's not just a good book for investing, but a good philosophical book. It really shows us the difference in how we interpret our lives around us and how we reapply that to what our goals are. One of his fathers was a professor and he had certain goals. One was an investor and he had certain goals. Were they both happy in the end? Probably. But just because somebody has one path and you have another path doesn't mean that other path is more correct or less correct. You got to do what makes you happy.
Yeah. It's a fantastic book. I love that book, so I'm glad you said that. Now, before we head out, if somebody wants to get in touch with you and learn more, or to hire you to help them buy or sell, you've been a phenomenal, phenomenal mentor to me, and I can't recommend you more highly. What's the best way for somebody to get in touch with you?
Twitter. Twitter's a good one. At LorettaGrayVA.
I answer my Twitter account all the time. Twitter's great fun, even though nobody's on Twitter anymore. I like it. And just phone, email. I try and answer scary fast and probably later than I ought to.
Well that's good for your clients.
Yeah. I try and answer all the time.
No, yeah. You work hard. Loretta, I want to thank you so much for coming on today. It's been a pleasure. Love to have you on again sometime. Have a wonderful afternoon. Thank you again.
You're welcome, Adam. Thank you so much.
All right. Take care.