Real estate can be one of the most profitable and secure investments one can make, especially for those who do their research and put the time into efficiently managing their properties. Buying real estate has essentially become a part of today’s pop culture, with national television shows depicting everything from vacation home shopping experiences to flipping distressed properties. Coupled with a relatively strong market across the country, more and more people are looking into investing in real estate, and especially rental properties.
Real estate investing can be addictive, and investors are often constantly looking for the next deal. I’m no exception to the rule, purchasing my first property when I was 21 years old and officially entering the investment game when I purchased my second property just a few years later. As my investment portfolio grew, I spent countless hours talking to other investors, property managers, and experienced landlords, attending REI meetings, and gaining as much knowledge as I possibly could. I wanted to learn about every good or bad situation that could potentially happen to me in my experience as a real estate investor.
Now that more than a decade has passed since I first called myself an investor, there are a few things I’ve learned along the way that I wish I had known in those first few years. It’s always a good idea to do a thorough analysis before you take the plunge and invest in real estate. If you’re considering a new investment, here are some of the most surprising and important things to consider.
Do the Math
Before you put your money into any investment opportunity, make sure it’s something you can afford and that the numbers will work for your specific financial situation. Since this is an investment property, be certain that your profits will be worth the amount of work and money it will take to get your rental property up and running.
Treat every new property investment as if it is your only source of revenue. Be sure that each property will be a worthwhile investment without factoring in other properties you may have in your portfolio. Look at your potential profit margins, know your mortgage rates, research rental rates and management costs, and make sure you can afford associated fees such as closing fees, landlord insurance and maintenance costs.
Pay Down Debt First
When you see the money start to roll in from your first rental property, it’s easy to get excited and tempted to keep adding to your portfolio. In most circumstances, it’s advisable to work toward paying down debt on your first property before buying any additional investment properties.
If you are absolutely certain that your first investment will bring in more profit than the interest rates on your current loans, you may be in a position to continue on to additional investments. If you are unsure or uncertain, the best decision is to pay down debts before taking out any additional loans. By taking a safe approach, you’ll protect yourself if the market takes a downward turn.
Understand Rent Regulations
Take the time to familiarize yourself with the rental regulations in your city or municipality. Different states and cities have different rental laws, regulating things like rental rates, HOA restrictions, and fees or penalties. These are rules and regulations you should understand before purchasing your first rental property, or any property you invest in thereafter.
Buy Something Rent Ready
Fixer-uppers are appealing for many reasons, usually when you can save money on the purchase price and complete some of the renovations yourself. However, it’s easy to forget how much time and work it will take to get a fixer-upper property to a place where it is ready for renters. Anyone who has renovated a property before knows this — repairs always take longer and cost more money than you expected. And anyone who owns a rental property knows that the only way for your investment to be profitable is to have tenants.
Every day your property goes without a tenant, such as when you are completing construction projects, is a day that your investment is losing money. It’s usually best to look for an investment that will rent quickly, or that only needs minor updates and won’t cause you to experience a long downtime during the renovation process.
Know Your Tenants
Tenant vacancies will make or break your investment and can quickly destroy your otherwise healthy profit margins. Your main goal as a property manager and investor should be to find good tenants and hold on to them for as long as you can. Always invest in proper tenant screening including credit reports, landlord references, rental history, and criminal reports.
If you’re purchasing a property that is already used as a rental and already has tenants, do your research and don’t just assume that they will be good tenants. Ask the current property owner for as much documentation as possible on the existing tenants to make sure they were screened properly. The property owner should also give you details on rent payment history. Make sure any current tenants have a written lease in place and understand any existing agreements.
Real estate investing can definitely pay off, but it is a large investment that requires careful consideration. Maybe one successful rental property is all you need, but if the numbers look good and you’re confident in your investment, you may be on your way to acquiring that second or third property. With the right knowledge (and a little luck) you too can become a seasoned real estate investor.