A Beginner’s Guide to Real Estate Investing in Philadelphia & the Delaware Valley
Philadelphia is one of the most iconic cities in the US. It is home to a vast array of historical and cultural elements and is the fifth most populous city in the country. The Declaration of Independence and Constitution were signed in Pennsylvania’s largest city, and it’s still home to the Liberty Bell. But it’s not just the history and culture that makes the Philadelphia appealing; it also has a thriving real estate sector.
In 2016, house prices were 38% higher than they were in 2010. Since the recession, it’s also thrived in terms of home sales. This is in part due to the fact that, despite the rise in prices, Philly homes are some of the most affordable in the country. There are plenty of investment opportunities in Philadelphia, and indeed in the whole Delaware Valley Region. This guide will help you navigate the basics and demonstrate why you should consider investing in Philadelphia real estate.
The Basics of Real Estate Investing
Despite the fact it may seem like a daunting market to get to grips with, investing in real estate follows some basic principles. You want to put money toward something that’s going to increase over time. Your profit needs to cover your risks and other costs, for example, taxes, maintenance, and insurance. There’s nearly always money to be made in property, but you need to have a clear strategy in mind. Below, we’ve briefly outlined some of the popular methods investors use:
Perhaps the most hands-off approach (and also quite a risky one) is to rely on the long-term gain in value of a property. If you purchase some real estate, external factors can make the location and the building more or less desirable. New amenities may be built, or the area might receive improvements. All of these can increase the property’s value. However, negative aspects can soon see the price decrease so it can be tricky to determine.
A popular way to make money through real estate is to buy it and operate it. For example, if you buy an apartment or house, you can then rent it out and collect a continuous stream of cash. Again, you’ll need to ensure that the cash flow you receive is enough to cover your expenses and pay back into the value of the property.
The term ‘fixer-upper’ applies here. If you can find some property on the cheap and inexpensively renovate it, you can then sell it for a profit. Again, this can be a risky option as renovation costs can soon spiral. However, if you’re confident in your own abilities to repair and refit a property, you could stand to make quite a lot.
If you’re hoping for a less hands-on type of investing, a real estate investment trust (REIT) can be a good form of investment. They’re similar to mutual funds, so you’re investing your money in a company that owns and trades commercial real estate.
Below, we’ve listed some of the basic terms that you should know when you’re getting started with real estate investing:
- Adjustable Rate Mortgage. A mortgage on which the interest rate can change over the course of the loan.
- Appraisal. When buying a property, the bank needs to have it appraised to ensure its value matches that which you’re asking to borrow against it.
- Cash reserve. The amount of money you have left after your down payment and closing costs are made.
- Closing. When the final documents and contracts are exchanged and signed, and costs are paid.
- Comparative market analysis. A report that details similar homes in the area. Used to help assess a property’s value.
- Equity. The amount of the property you own. Essentially, it’s the house’s value minus how much you still owe on your mortgage.
- Fixed-rate mortgage. A mortgage on which the interest rate remains constant over the course of the loan.
- Listing. The details of a property that’s for sale. Usually, you will ‘list’ the real estate on a website or with a real estate agent.
- Mortgage Broker. An individual or firm that helps you find a mortgage. They make the deal between you and the lenders.
- Principal. The amount of money you borrowed to purchase the real estate.
- Refinancing. A restructuring of your mortgage, where you swap out your existing loan for a new one. Often this can reduce the monthly payments you make and even lower your debt.
Philadelphia Real Estate – What You Need to Know
As with any investment, it’s crucial that you know what you’re getting into. You should thoroughly research any real estate you’re potentially going to buy. This includes the value of similar houses in the area, the local amenities and schools, the crime rate, and the market trends. Armed with the relevant information, you can make an informed decision on whether an investment is right for you.
In this article, we’ll cover as much of the general information as we can. However, it’s up to you to look for further detailed information about properties and areas.
Current Real Estate Climate in Philadelphia
Philadelphia has had a strong few years in the real estate market. Prices have seemingly been going up and up, meaning investors are scrambling to get on board. It’s very much a seller’s market at the moment, as demand is outstripping supply. Philly, and the Delaware Valley region, is seeing a steady increase in its economy. In addition, housing construction is also booming. This makes it a great time to buy, but also means that competition can be fierce. Some reports are even showing that new homes to the market are selling within days of being listed. However, others are suggesting that the market is starting to slow slightly.
Due to the low inventory (number of houses on the market), you may find it difficult to pick up a bargain. However, if you have the money to invest then now could be a good time. If you have the luxury of time, you can shop around to find a property that’s right for you. Don’t be discouraged if you find yourself in a bidding war with others. If a piece of real estate starts to get too expensive, look elsewhere in the area for alternatives. Flexibility is important amidst such competition.
Why Now is a Good Time to Buy
Aside from the points mentioned above, there are some other good reasons why Philly and the surrounding area make for such a good investment:
- The job market. Despite a fairly high unemployment rate (higher than the national average), Philly’s numbers are falling rapidly. This shows that the job market is improving, which bodes well for investors.
- Population. With the growth of the job market comes more people who are interested in taking advantage of it. New jobs mean a higher population, which in turn results in a higher demand for rentals and real estate.
- House prices. Compared to the national average, house prices in Philadelphia are quite low. This makes it an appealing prospect, as those values are likely to rise over the coming years.
- Homeownership rate. Unfortunately for many, even though prices are lower, so are average wages. This means that the number of homeowners in the city is decreasing. However, as a result, the rental market is growing. This makes real estate for cash flow purposes particularly appealing.
- Increased construction. Areas such as East Market, University City, and Navy yard are seeing record levels of real estate construction. This trend is seemingly set to continue, meaning there should still be some good availability over the coming years.
Picking a Location & Property Type in Philadelphia
Perhaps your two biggest considerations aside from price are location and type of property. Together, these three factors will determine the type of real estate you decide to invest in. Philadelphia has many sought-after neighborhoods, including Chestnut Hill, Fairmount, and Roxborough. Obviously, places such as this will have higher prices than those further out of the city.
In terms of property types, you have a few options. We’ve covered them in more detail, below:
- Residential. Perhaps the most popular type of investment is in residential real estate. Houses and apartments are plentiful, and it’s certainly possible to get a good, quick return on your investment. If you can fix up a cheaper residential property and flip it, you could soon turn a profit. However, as mentioned above, there’s a lot more to it than you may think. This type of investment is good for property appreciation and re-sell tactics.
- Commercial. Businesses are always looking for commercial space in expanding cities. Although these types of properties can be lucrative, it’s a lot more complicated than residential investment. However, incomes and cash flow generally tend to be very good. Usually, more experienced investors turn to this kind of real estate. REITs will often look to this kind of real estate.
- Land. This type of investing requires a lot of research and time. Vacant land, lots with no construction, can be a very lucrative investment. There are often many possibilities with this type of real estate, but the legalities and intricacies mean it’s usually something experts take on.
For beginners, we’d always recommend trying residential real estate investment to start with. It’s the easiest form, and often the risks are lower. Additionally, it’s possible to make money faster.
Getting Started With Real Estate Investment
Now that you know a little about the real estate landscape in the Philadelphia area, it’s time to think about how to get started. Although this guide is a great starting point, there are other resources, such as DIG University, that can also be useful.
We’ve highlighted some of the key areas that you’ll need to consider when getting started. It gives you a framework for how to approach your first real estate investment.
Choosing a Strategy
We’ve already mentioned some of the main strategies you can choose from. This decision ultimately depends on your situation and goals. For example, a property appreciation strategy can be risky in some environments but can give a return over the course of a few years. Similarly, a cash flow strategy gives you the chance to have an ongoing income as well as paying equity into a property.
Consider what it is that you hope to get from your first investment, and then choose a strategy that closely matches those ambitions.
Raising Money/Securing Financing
Your financial situation and access to money will play a huge role in your investment. In Philadelphia, there are a few options available to you:
- FHA Loans – This type of loan is insured by the Federal government. As such, they’re often easier to access for most people. You will need to pay a small down payment, and will likely have a fixed interest rate over the length of the loan.
- Hard Money Loans – When you opt for this type of borrowing, you will have to put up an asset as collateral. Costs generally tend to be a lot higher than other options, but for a short-term project, they can be beneficial.
- VA Loans – These are Veterans Administration loans, and as such are only applicable to veterans. However, they do have a 0% down payment. The interest rate is usually fixed.
- Private Loans – Private lenders come in all different kinds. They can often provide greater flexibility and can be taken over a long term.
- Seller Financing – When the seller has equity in the property, you can pay for the real estate over time. These are hard to come by but can be beneficial.
- Conforming Loans – These are loans that follow specific guidelines from industry specialists. This usually means they require a down payment of around 5%-20% and a fixed interest rate.
- Portfolio Loan – For short-term loans with competitive rates, banks usually keep their own loans. These types aren’t sold off on the mortgage market.
The type of financing you choose will depend greatly on the type of property you’re investing in, as well as your current personal financial situation. As with other elements, you need to assess the situation and make an informed decision.
No Money Down
In some instances, it may be possible to purchase a property without putting money down. However, this can be difficult. You will usually need to find a party that’s willing to undertake such an agreement. Maybe you will find a partner with the necessary fund, providing you have the expertise to manage the investment. Alternatively, you could come to an arrangement with the seller where you swap properties or assume an existing mortgage.
Although investing in real estate without making a down payment is possible, the risks associated with such a tactic can often be high.
Purchasing Your First Property
Before you begin your first investment venture, you need to have your finances in order. This means that you need to have your strategy lined up, your budget in place, a timeline for the investment, and a plan for your renovations/rental. This may sound like a lot of work, and it is. However, it will save you a lot more time and work in the long run.
Once you know where you stand financially, you can start assessing viable properties. Try to narrow it down to a few and weigh up the pros and cons of each. From here, you should be able to find a front-runner as well as some alternatives if you’re not successful. Be prepared to negotiate on the price, and for the possibility of a bidding war.
With patience and planning, you’ll soon be able to purchase your first real estate investment. From here, your careful preparation for your next steps will make the whole process a lot easier.
Choosing a Location and Tenant
Location is another key factor in the decision-making process. Philadelphia and the Delaware Valley have an incredibly varied range of locations. Some of these will be more sought-after than others, and prices will fluctuate accordingly. When you’re making an investment, you want to consider not only what the area is like now, but also how it will develop over the coming years.
Consider the type of location you’re thinking of. What are the amenities it has near? Are there good schools? Is it suitable for businesses? All of these will determine the type of investment you make, and the type of tenants you will be marketing to after you make a purchase. If you’re planning on a property appreciation strategy, you’ll ideally want to pick an up-and-coming area. These have the greatest potential for long-term gains. Conversely, if you’re attempting a re-sell, you should look for a cheap fixer-upper in an already established location.
The type of tenant you choose should also reflect your investment strategy. If you’re planning on buying a residential property, consider the kinds of people who already live there. Look at demographic figures, socio-economic factors, and other similar metrics. If you’re buying in a business hub, think about the types of businesses that are thriving in the surrounding areas.
Cash Flow & Costs
As with every investment, your cash flow and costing will play a big part in your overall success. Regardless of the type of investment you make, whether residential, commercial, or land, you will need to spend money on it. You should have a clear plan in mind of how you want this to progress, and what your budgets and ROI are.
Value the Property
One important aspect of cash flow and cost is to value the property ahead of time. There are plenty of estimator tools online, which can give you an initial guide for the price. Alternatively, you can ask a broker to give their opinion or access a competitive market analysis. These generally provide an accurate and more detailed overview. Another option is to hire a professional appraiser to do the task for you.
Basics for OPEX and Cash Flow
If you’re planning on renting out your real estate investment, you need to get familiar with cash flow and operating expenses (OPEX). You will have to assess the likelihood of renting out the property, and how much you’ll be getting per month. Next to this, you’ll have to look at how much it will cost you to maintain the property, pay taxes, and secure the tenancy. Don’t forget, you’ll also likely have to pay your mortgage back.
Calculating your net operating income will give you a clearer understanding of how much you can potentially make from your investment each month. To work out this net, you’ll need to take your gross operating income and minus your OPEX.
Leverage is a term that refers to the use of your finances or borrowed capital to increase the value of your real estate investment and its potential returns. Essentially, you use borrowed money to improve your buying power and therefore increase your yield. As the popular explanation goes, leverage allows you to make money from other people’s money.
To demonstrate the power of leverage, let’s look at the example steps below:
- You have $50,000 to invest in a property. You can either buy a property for cash or put the $50,000 towards the purchase of a $100,000 property.
- Property prices increase 5%.
- If you invested $50,000 in one property, your portfolio is now worth $52.500, an increase of $2,500.
- If you put your $50,000 towards a $100,000 property, your portfolio is now worth $105,000, an increase of $5000.
As you can see, using leverage means you can increase your gains in an investment. However, the opposite is also true. With the same example in mind:
- Property prices decrease 5%.
- Your $50,000 property is now worth $47,500, a loss of $2500.
- If you used leverage to invest in a $100,000 property, it’s now worth $95,000, a $5000 loss.
However, leverage can work well. In fact, most mortgages that require a down payment are effectively forms of leverage. It’s about making prudent investments and not over-stretching your initial capital. If your entire portfolio is built on leverage and depends on all of your tenants paying their rent on time, one default payment can send the whole portfolio crashing down.
Building a Team
Quite often, serious real estate investors will rely on the combined expertise of a team. This doesn’t necessarily have to be a group of employees, but rather a network of trusted contractors and advisors whose skills you can rely on. Running a team requires a lot of effort, dedication, and management skills, but it can prove to be mutually beneficial for everyone involved.
Pros and Cons
There are, as with most things, some positives and negatives of using a real estate team:
- The outcomes are often far greater than you could achieve alone.
- It’s quicker and more efficient.
- Responsibility is shared.
- Ideas come from different areas.
- Profits have to be split between people.
- Team members can clash or cause trouble.
- You can end up with conflicting perspectives.
The structure of your team depends a little on how you want to work. However, a useful idea is to first plan out how you want your investment project to progress. With this in mind, you’ll be able to outline a team structure that is capable of dealing with those steps. Consider roles such as listing partners, buying agents, admin staff, accountants, and other similar positions. Also, don’t forget service roles that you can call upon when needed.
Separate these team roles into specific areas and consider at which point in your investment you’ll need to utilize their talents. From here, you can make a structure that works for your needs and is effective at each stage of the process.
Tips on Building a Team
Below, we’ve highlighted some top tips for creating your real estate team:
- Look for like-minded people. Try and find people who compliment the way you work. This can be people you know, but equally could be someone recommended to you. It will make the whole process a lot easier.
- Delegate. Even if you’re heading up the team, that doesn’t mean you have to oversee everything. Make sure that you delegate responsibilities where necessary.
- Have a system. Although organically assembling a team can sometimes work well, having a clear system in place before you begin will make the task easier.
Ready to succeed in real estate investing?
Become a DIG member today.