February 23, 2020
Property investing for beginners
BY SUSANNAH SNIDER
When Ben and Ashley Harris decided to invest in real estate, they didn’t want to rush into it. “For the first six months, all we did was read,” said Ben, 35, a physician who has a master’s degree in business administration.
The Harrises, who live in Erie with their two young sons, researched desirable Pittsburgh neighborhoods, tips on building the right team, strategies for paying taxes and advice on how to set up a business.
After weighing the pros and cons of a couple of investment strategies, they decided to become landlords in the Pittsburgh area.
“We’ve done our research on what neighborhoods rental-wise do really well and what those neighborhoods look for,” said Ashley, 33, who also works part time as an optometrist. They scoop up properties in Lawrenceville, the South Side and near local hospitals, where renters are plentiful.
Becoming a real estate investor in the postindustrial city of Pittsburgh area may sound tempting. After all, the Pittsburgh real estate market is sizzling. In 2019, financial technology company SmartAsset ranked Pittsburgh the most undervalued city in American for the second consecutive year, noting that homes in Steel City offer top value per square foot. And while inventory is tightening, the rental market is strong. The monthly median rent in Pittsburgh in August 2019 was $1,101, according to real estate site Zillow, a 1.7 percent year-over-year increase.
“The Pittsburgh real estate market is extremely hot,” said Ben, the Pittsburgh landlord. “So yes, it’s a great place that has lots of schools, lots of hospitals. You can get good returns here.”
But there are challenges, he notes, namely, that good properties are snapped up almost instantly.
If you’re looking to get your own slice of the Pittsburgh real estate market as an investor, it’s easier said than done, experts warn. Real estate investing, especially investing in individual properties, comes with its own risks, a significant amount of work and the potential for legal or financial disaster if handled recklessly.
Still dreaming of becoming the Chip and Joanna Gaines of Pittsburgh? Here are some answers to commonly asked questions about real estate investing in the Pittsburgh area.
“Much like owning a car, real estate can be an asset, but can also create liabilities.”
What Is real estate investing?
If the term sounds broad, that’s because it is. Real estate investing spans a range of strategies and products. Put simply: “Real estate investing, whether it’s direct or indirect, involves owning physical pieces of property, and buildings,” said Michele Cagan, certified public account and author of “Real Estate Investing 101.”
Real estate investing can encompass the sort of activities you see on HGTV, such as flipping homes, investing in commercial properties or becoming a landlord. But it can also be decidedly less sexy. Property investors may also choose to invest in financial products such as real estate investment trusts (REITS), real estate mutual funds or real estate exchange traded funds (ETFs), which allow investors to get in on the real estate market without signing a deed or knowing how to fix a faucet.
Different real estate investment strategies appeal to different people. Flipping homes or becoming a landlord may attract business-minded folks who are more entrepreneurially driven, said Matt Helfrich, partner and president at Waldron Private Wealth in Bridgeville, just outside of Pittsburgh. If you want to cautiously dip your feet into the market, a real estate investment product can be a better option, Cagan said.
What should I know if I want to invest in individual properties?
Let’s say you’ve got your sights set on a row house in South Side that you know could net you a small fortune with just a little upkeep and a fresh coat of paint. Next, you have to decide what your move is. Are you going to fix it up and flip it? Do you want to become a landlord?
Either way, you’re going to want to build a solid financial team, make sure you have cash on hand for a down payment, get access to good credit and set aside the time to manage this project.
At the very least, experts recommend finding a good real estate agent, handyman, accountant, insurance broker and lawyer, who can draw up contracts and help you form a limited liability company (LLC) or an alternate legal entity to shelter your personal assets.
“Much like owning a car, real estate can be an asset, but can also create liabilities,” said Kevin McKeegan, partner at Meyer, Unkovic & Scott in downtown Pittsburgh. “You need to think of both the upside and the downside.”
For example, if you end up owning several buildings as a landlord, you’ll want to form an LLC for each individually, McKeegan said. Plus, your lawyer may need to help you during disputes with contractors or renters. Landlords, for example, have certain obligations, such as meeting Pennsylvania’s warranty of habitability law, meaning your property must be kept within a certain livable condition or tenants may refuse to pay rent.
All of these details, and others, will require your time and money, so consider carefully whether you’re willing to invest the hours and capital into this project. If not, a real estate investment product, such as a real estate ETF, can offer exposure to the housing market without requiring regular meetings with your lawyer. How should real estate investing complement my overall portfolio?
How should real estate investing complement my overall portfolio?
Whether you’re investing in financial products or individual properties, consider how your investments fit with your overall financial portfolio. Helfrich suggests keeping no more than 20 percent of your assets in individual property investments, excluding your house. So if you’re worth $5 million, he wouldn’t recommend keeping more than $1 million in direct property investments.
“You can’t pay for college tuition with a piece of property; there’s a certain degree of illiquidity there,” Helfrich said.
You’ll also want to ensure that you have enough money to cover repairs, a substantial down payment and any tax consequences of the property deal. You’ll need to think of worst-case scenarios — renters who destroy the property or a flipped house that won’t sell — and prepare an emergency fund for those options.
The Harrises in Erie, who now own eight buildings with 14 units total, spend 15 to 20 hours per week on top of their day jobs, managing details and analyzing current and future expenses. They’ve been fortunate to have Ashley’s sister and brother-in-law work as property managers, and their day jobs in medicine give them financial wiggle room.
If you want to join them as property investors, Ben recommends thinking it through carefully first. Ask yourself: “How does this fit into my personal and financial plan and does this fit in with my life?” he says.
Susannah Snider is a Pittsburgh-based personal finance journalist and certified financial planner whose work has appeared in U.S. News & World Report and Kiplinger’s Personal Finance Magazine. She is the winner of the 2018 RTDNA-NEFE Excellence in Personal Finance Award in the digital category and holds an executive certificate in financial planning from Duquesne University.