What You Need to Know About Investing in Real Estate in Santa Cruz
Attention Santa Cruz real estate investors or those of you who have been dreaming of becoming Santa Cruz real estate investors. Hi, I’m Shemeika Fox, your Santa Cruz real estate expert. Do you have what it takes to becomes the next Chip and Joanna Gaines? I always thought I did. Or maybe you are a newer Santa Cruz real estate investor and you have no idea where to even begin. The tips I’m about to share with you can be utilized even if you do not have your real estate license.
Step 1. You must become laser focused on what area you want to work in. Remember, the riches are in the niches is what they say. You want to dial down to zip code rather than area code.
Step 2. If you don’t have access to the MLS data, then you’re going to want to use a site like Zillow or realtor.com and look at the last three to six months of transactions in the zip codes that you have chosen for properties that look distressed and then sold for cash and then the flip side or when the property reentered the market all fixed up. You are looking for the profit margin for analysis so you can educate yourself on possible gains or loss, depending on the area in which you are looking.
Step 3. You are going to have to get out and connect with the locals. Not all Santa Cruz real estate happens online. By connecting with different people and groups in the areas that you are wanting to be working in, you may find that perfect off-market opportunity that otherwise would have been available to you. You can also drive the Santa Cruz neighborhoods in the Santa Cruz zip codes that you have identified and look for Santa Cruz homes that look dilapidated and distressed, and also vacant. Once you have identified the addresses of the Santa Cruz homes that look like they might need a little extra love, work backwards to find out who the owner is and/or if there is a local Santa Cruz realtor already involved in the sale who can help you.
Step 4. The next thing you should ask yourself when considering whether or not to invest in Santa Cruz real estate are what is your Santa Cruz investment criteria? Can you buy a Santa Cruz rental house the same way you can buy a Santa Cruz apartment building? Defining your personal criteria for Santa Cruz real estate purchases is a vital step in successful Santa Cruz real estate investing. What is your Santa Cruz real estate investment strategy? Do you want to buy and hold? Do you enjoy the prospect of house flipping or does wholesaling excite you? Is your goal cash-on-cash returns? This would be the level of return or cash flow you want to achieve with your investment. Your budget and the type of property that you may be interested in could be surprisingly difficult to define.
When deciding to invest the property size is one of the main aspects to consider. Are you interested in single-family homes, townhomes or condos, or would you prefer a four-plex or a multi-family Santa Cruz property? Desired property characteristics are the property-specific characteristics that you can give to your Santa Cruz realtor at the beginning of your search. Though your desired property characteristics could and usually do change throughout the searching process, it is a great jumping off point.
The process of buying your first Santa Cruz rental could be enjoyable or it could be a nightmare. So make sure you do your research and feel confident and excited about the Santa Cruz investment in which you are about to make.
One thing I hear people talk about often is this false illusion of what they see on reality TV investment shows. These shows are designed for entertainment and are not always actually reality. Let’s talk about HGTV versus an actual investment flip. HGTV makes flipping houses look easy. However, the reality is nothing like what they portray. The episodes are scripted and planned so now you’re probably thinking well, what’s the difference?
First of all, you need a good amount of time to invest and you need available capital if you want to be successful in the world of Santa Cruz real estate flipping. You have to be able to plan for any and all issues. The big question you have to ask yourself is do I truly have the time and money to overcome those issues and the added costs?
First item on your list should be finding a good list of Santa Cruz professionals that you can turn to for advice and instruction. You need to make sure that if you choose to hire a Santa Cruz realtor that they truly understand the process from beginning to end, and can give you a reasonable evaluation of the property, and what your actual profit potential will be. Whether you buy to repair, restore and flip or keep the Santa Cruz property for a long-term Santa Cruz investment, you wanna understand the soft and the hard costs, and the rate on return with the finished product. HGTV does not show you all that.
Many people think it’s required to have a real estate license to get involved in Santa Cruz real estate investing. Let’s look at the pros and the cons of investing with a real estate license.
Real estate license pros: You might be considering getting into flipping Santa Cruz real estate and whether or not it’s worthwhile to get a real estate license or partner with a local Santa Cruz realtor. If you decide to get your license in California, you will have to hold your license with a broker for a minimum of two years before you can actually go out and open your own brokerage and work on your own. With that comes protection, help, but there’s also added fees, which we’ll talk more about in the con section next. Brokers are responsible for the realtors that work for them and have a vested interest in making sure that they are successful. So that’s a pro. Secondly, when you have a license and represent yourself, you’re able to reduce or waive your commission when you’re making offers, which could potentially be more appealing to the seller and help you get your offer accepted. Thirdly, it can also make negotiations easier because you know exactly what your top and your bottom dollar amount is and you can build rapport with the listing agent. Besides that, you can list your own finished product and only have to pay a buyer’s agent instead of both the buying side and the selling agent. Most importantly, you will have the knowledge to navigate the real estate transaction and property management and you won’t be dependent on someone else’s availability or schedule or a lack of knowledge. You will also have the ability to sell for others for residual income on the side.
I mean, that all sounds so appealing, right? So what possibly could the cons be for not having a real estate license or for having a real estate license as an investor in California?
Real estate license cons: The cost to get your real estate license in California and start working is around $3,000 of upfront money. Classes run about $500. You have to pay for a background check, you get fingerprinted and apply with the Real Estate Commissioner. Then you have to pay for and pass the California real estate exam and get all signed up and pay the MLS fees and join the National Association of Realtors and the California Association of Realtors and the Department of Real Estate, as well as joining your local board of realtors. All of these have fees associated with them. Next, is picking a brokerage and paying their monthly fee. As you can see, it’s quite an investment. Another con is that just because you pass the test doesn’t mean you actually have the skills to do the job. It takes a lot of time and experience to actually gain the skills and knowledge to successfully navigate real estate. The state test is largely legal information and doesn’t give you real-world working knowledge of the industry. It make take a couple of years and multiple deals before you feel confident doing this solo. You also have to budget out-of-pocket expenses for everything you need for your business. Marketing, signs, key boxes, print material and the list goes on and on. Everything you do regarding your real estate practice is an out-of-pocket expense as we all independent contractors. So though it may look glamorous from the outside, there’s a lot of time and money and dedication that gets invested to make any real estate business, both profitable and productive.
We have covered a lot so far, so now let’s dive in and look at how to start your first Santa Cruz real estate investment. Many clients have been telling me they wanna invest in Santa Cruz real estate. Yet they don’t know where to start. Here in the US, there are a lot of options for real estate investment, from land to flipping, single family homes and condo/town homes, to duplexes, fourplexes, multi-residential units, commercial/retail, industrial and triple net leases are all within reach.
If you are a first-time Santa Cruz real estate investor, my suggestion is to start small. You can learn a lot from the process and when you get familiar and build more capital, you can scale up. A good place to start is knowing your investment budget and financing options. There are loans that will allow you to put as little as 3.5% down, though this type of loan has PMI or private mortgage insurance. So that would be an added cost to be aware of. There is also the option for conventional financing, which would eliminate PMI but requires a minimum of between 10 and 20% down. Other financing options could be a construction loan or a rehab loan, a hard money loan, and/or, of course, there’s paying cash.
In addition to financing, there are four additional elements to consider when investing:
Number one is the cap rate. A cap rate is the ratio of property net operating income to its purchase price. The lower the cap rate means the lower cash return on the investment.
Number two is cash flow.
Number three is equity buy down, meaning tenant also is paying your mortgage principal.
Number four is appreciation.
These are just a few things to consider.
Starting in real estate investment can be overwhelming, whether you’re a buy and hold investor, flip or hard money lender, the value of the home is the most critical number which needs to be accurate in order for the investment to be a success. Ask your Santa Cruz agent to help with not only sold comparable properties but also remember to ask about the competition, meaning what other similar properties are on the market that could affect the sales price when I am ready to put my home on the market. Concerning rentals, an area can be oversaturated with rentals and vacancies will be very high. You may not know this on your own. There may appear to be great deals in this areas but if you have to have a vacancy for three months or lower your rent to compete, your return on your investment could be much lower than anticipated.
For flippers, knowing the hot markets and what Santa Cruz home buyers are actually looking for in the current buying environment is very important. Believe it or not, inspection items can be a deal breaker if they are not remedied ahead of time. Cosmetic updates get the buyers in the door, but we really wanna keep those buyers in contract. So big systems like roofing and plumbing is what keeps them in contract knowing that everything has been done and is done well.
Do you know the nuances of the neighborhoods that you’re investing in? Is one side of the street more desirable than the other side of the street? Are the buyers out in full force or is the Santa Cruz real estate market slowing down? Do you know the average days on market or the vacancy rates? These are all things to be considered when you are thinking about different Santa Cruz real estate investment opportunities. The last thing I wanna discuss is the financing aspect for investment properties. You may be planning on calling your traditional mortgage lender to finance the property that you want to fix and flip but please don’t call just yet. Please watch the rest of this video and see how you can save tons of money and time. I get it, I was shocked too when I found out that the financing process is totally different when it comes to flipping houses. Most traditional mortgage lenders don’t provide loans for fix and flip projects. It’s a ton of liability for their company because these homes generally have safety and/or health issues. They really love to lend to you for a move-in ready home or a safe home that just needs some aesthetic updates. A house that’s in really bad shape and ugly, not so much.
So who can you call to gain access to funding if you don’t have the cash sitting in your account? There’s a few options. There’s hard money lenders, which can help you at a cost because they’re willing to take on the risk of the home, which is generally a higher risk. They are usually a group of people or individual who will help fund your project at a higher interest rate and higher points paid with a lower loan to value ratio, meaning you’re coming in with some money. They can close the transaction much faster than a bank, which puts you in an advantageous position when you’re offering to purchase the Santa Cruz property. These loans generally have repayment time limits on them before they start getting even more expensive. If you’re working on a fix and flip project though, you should be okay with that because you wanna finish your project as quickly as possible, otherwise your holding costs are going to start eating away into your profit.
Lots of details to consider when you’re considering investing in Santa Cruz real estate or real estate in general. I hope this was helpful and gave you some insight. If you would like to discuss your real estate needs further and investing opportunities, please feel free to reach out for a confidential complimentary consultation. I’m Shemeika Fox, your Santa Cruz real estate expert and as always, I’m here to help.