One of the most lucrative investments today is real estate. Risky for those not well versed with its nuances or trends, it’s important to avoid costly mistakes to ensure a good return on your investment. In this episode, Bill presents some common dos and don’ts from successful real estate investors.
Keep in mind, this is really geared to 50 plusers, and the specific issues they may encounter, who are not looking for a full-time job but want to reap the benefits of steady cash flow from a passive or semi-passive investment. Here is a quick mixture of the best tips and most common mistakes real estate investors have encountered.
DO treat your real estate investing like a business.
Adequate insurance, bookkeeping, and liability protection are a must.
DO have a plan.
Before investing your hard earned dollars in real estate you should have a plan. You should have a clear idea of your budget, how long you want your money tied up for and what type of risk you are most comfortable with. Seasoned real estate investors not only have a plan, they make offers on multiple properties while concentrating on the numbers they planned for in their investment strategy.
DO stick with deals that have a pre-determined minimum rate of return on investments determined in your real estate investing strategic plan.
DO use as much O.P.M. (Other People’s Money) as possible.
As a real estate investor, you want to maintain as much working capital and liquidity as possible. By utilizing other people’s money (banks, lenders, investors and partners), you can help preserve your precious reserve funds.
DO your own due diligence on any deal that you intend on purchasing.
Never rely 100% on someone else to do it, not even a partner.
DO get your personal finances in order before jumping into real estate
It´s very important to get your own house in order before buying more of them. Have a clear idea of your existing income, expenses and outstanding loans before complicating your life further. If you do not do so already, spend a month or two tracking everything you spend money on – there might be substantial savings you can make that would free up more cash for investment. If you know there are some big ticket items in the near future (i.e. a new car), make sure you factor that into your calculations.
DO use common sense and set aside time to study.
If you apply common sense and are willing to set aside significant amounts of personal time to research a deal (i.e. evenings and weekends), then it is unlikely that you will make an expensive mistake. Most of the time, when people lose money on real estate investment, it is because they haven’t done their homework properly. They bought in a hurry and didn’t spend enough time doing basic due diligence.
DO study the local neighborhood
This is crucial. Use zipdatamaps.com to research local demographics and household incomes. Use city-data.com to research crime data plus a lot of housing and business information. Use Trulia & Zillow to check local rental and sales comparisons and info on local schools.
DO remember that the bottom line is critical
Just because a property can be bought for $40,000 and rented for $800 per month doesn´t necessarily mean it´s a great deal. You need to know and keep track of every overhead associated with it. This would include community fees, maintenance fees, insurance, property tax, property management, repairs, vacancies and income tax.
DO keep on top of things
Sometimes people switch off after they’ve bought and rented a properly only to find huge problems building up without their knowledge. Do not let that happen to you. Keep a close eye on your property manager (whom I strongly recommend you get) to track money coming in and out of your property investment at all times and make sure you file your tax returns every year (or better still, get a good CPA, familiar with real estate investors and perhaps one himself or herself to do it)
DO plan for the worst.
Many new real estate investors make incorrect estimates like the amount of time it will take to convert the space for their new tenant. Miscalculations can cost real estate investors money.
DON’T buy your second property until your first is making you money.
DON’T buy a property that you cannot support from your cash reserves for at least six months.
DON’T buy a property without inspections.
DON’T ever buy a property without title insurance.
DON’T buy more properties than you really want.
DON’T buy properties that you wouldn’t want to manage.
DON’T do Section 8 properties unless you absolutely can’t avoid it.
Case in point, my properties in Memphis that were nearly impossible to rent without section 8. Section 8 has pluses and minuses but, overall, the minuses stand out most!
DON’T quit your job unless your rental income equals twice what you really need to survive.
This allows for those unexpected expenses, disasters, unplanned for high-ticket items and rental losses
DON’T buy a property just because it’s cheap!
All the numbers AND the market must make sense
DON’T self-manage unless you absolutely can’t avoid it.
Remember, we’re trying to make this as passive as possible. (If you ever do self-manage, I would suggest you create your own separate entity or business and where you have someone who works for you run your own property management company/entity)
DON’T believe the infomercials and the hype that you can make money quickly.
Many new real estate investors think it’s easy to get rich quick in real estate. Infomercials have perpetuated this myth. In reality, investing in real estate should be for the long-term.
DON’T overlook your cash reserves.
This is extremely important! Set enough aside to cover your rentals expenses for six months. Also, Cap-X is critical and you need to be setting aside a fixed percentage of your income every month
DON’T rush into a deal that might be too good to be true.
If you find a property that looks like an amazing investment, take a very deep breath and figure out what you are not seeing. Probably, one time in twenty, it will be a great deal and you just happened to get there first. More often than not, others will have seen an issue you may have missed and have passed on it for a reason. The best deals are usually the boring reliable ones, not the perfect shiny ones.
DON’T miscalculate cash flow.
Many successful real estate investors buy, hold and rent out properties for the long term ensuring they have enough cash flow for maintenance and other expenses. Savvy real estate investors allocate their budgets so there is sufficient coverage for expenses like the mortgage, taxes, insurance and advertising costs. When you don’t have enough cash flow your property becomes a liability when it should be an asset.
DON’T buy without visiting the property personally.
Real due diligence involves a mix of research you can do at home , but it is also vital to walk and drive the neighborhoods yourself. There are lots of reputable agents and realtors who will give you accurate feedback on certain locations, but you need to start developing your own “gut instinct” for the property types and locations you are comfortable with. That only comes by pounding the pavement.
DON’T underestimate the value of a stable tenant
Renting to professionals in full-time jobs with a good credit history and decent salary is the best way to ensure a continuous and hassle-free income stream. People outside of these categories tend to move around more and take less care of their property. If a paying tenant makes a request (e.g. fix the lock on the bathroom), make sure they get a polite reply and that action is quickly taken to solve their problem.
DON’T think you can invest in real estate single-handedly. Successful real estate investors rely on a team of professionals to assist them in real estate deals. Commercial real estate brokers, appraisers, home inspectors, lenders and closing attorneys are all an essential part of achieving success in real estate investing
And our last one…
DON’T be afraid to take the plunge once a deal stacks up
It is not uncommon to suffer from “analysis paralysis” – having so much information that you don’t know what to do. It is just a phase and you can get through it by double-checking that you’ve covered all the most important angles. Once you have spent time figuring out what you want and have researched the opportunities that match these criteria, my advice is to take the plunge and don’t look back!
Well, that’s our list! I know I could include more and you probably even have some of your own but I tried to include some of the more common and critical.
Abiding by these simple dos and don’ts will help you to avoid some of the more common mistakes new and experienced real estate investors make. There are huge wealth building opportunities out there for the investors who are wise and prudent in their investment practices. Real estate investing can actually be fun if you approach it right. Remember these tips and happy investing!
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