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Many people see investing in real estate as a way to generate cash flow, build-up a nest egg and have tenants pay your mortgage for you. That is true but, like with anything, there are pros and cons and some mistakes to avoid if you want to succeed as an investor in real estate.
1. Be Pre-Qualified
Always visit a with a mortgage broker or with your bank to get pre-qualified before you start looking for properties. And determine how much of a loan you can get. This will help you determine just how much you have to spend and where to buy. Nothing is worse than losing a great deal and possibly losing your earnest money deposit because you did not secure the proper financing in advance of signing a contract.
2. Run Your Numbers
Also, look for properties or areas that are sure to generate a positive cash flow; this means the rent from tenants should be enough to not only pay for your mortgage, property tax, insurance, utility bills, repairs and maintenance, property management fees and other regular expenses, but also include an allowance for vacancies and future capital expenses (roofs, new A/C, etc.). After all of those, you also want to make sure you have built in your positive cash flow income. Afterall, you are an investor and investors seek good returns and profits!
3. Know Your Market
Never go into the real estate market by yourself, always have an experienced local team and solid “boots on the ground” who thoroughly understand your market, and, especially, the neighborhoods in which you are investing. This point cannot be emphasized enough. A strong local team can advise you on where and where not to invest. If you have members on your local team who are also investors this gives you an additional advantage as they have had first-hand experience investing in the area and you definitely want the advantage of their experience.
4. Have a Professional Inspection
Have any property you are going to settle on be inspected by a professional home inspector, as it is often said, not everything that glitters is gold. Never just look at a property from the exterior and the face value and jump on it. The pipes may be damaged, wiring might not be properly done, the foundation may have issues and many more problems, so the inspector should be a crucial step before settling on any property. Also, find a contractor whom you can trust to give you the right advice on repairs and renovations to be carried out on the property.
5. Carefully Track Your Income and Expenses
Always keep proper records of your income and expenses, even before you purchase, for every investment on the property. Do not get these records mixed up with your personal bank accounts as it would become even more tedious to separate when you file a tax return at the end of every year. It does not matter if the investment is owned in your name or a company name, always try to separate these records.
6. Properly Document Partnerships
If you are buying any property with a partner, always make sure you have a proper joint venture or partnership agreement to protect the interest of both parties should things not work out as predicted. Most importantly, provisions should be made in case a partner wants to sell and the other partner does not, one partner is not paying their share of expenses or what should happen if a partner was to die. Do not be naive and believe because you and your partner are best friends nothing bad can happen. Always drawing up a proper partnership agreement, you could never know what exactly would happen and to assume is a dangerous step.
Here a just a few common mistakes to avoid as a real estate investor to insure your business runs smoothly and profitably.
Bill Manassero is the founder/top dog at “The Old Dawg’s REI Network,” a blog, newsletter and podcast for seniors and retirees, that teaches the art of real estate investing. His personal real estate investing goal, which will be chronicled at olddawgsreinetwork.com, is to own/control 1,000 units/doors in the next 6 years. Prior to that, Bill and his family lived in Haiti for 11 years as missionaries serving orphaned, abandoned and at risk children.
