So you have decided to invest in real estate. I say the word invest, as I have always been of the mindset that rehabbing and reselling property (better known as “flipping”) is only trading real estate, not investing. Investing involves buying a property for cash flow purposes. There are really 2 ways this happens
- You buy an investment property from a seller and turn around and rent it out.
- You decide you want a different home, but instead of selling your current home, you turn it into a rental property.
There are at least 3 critical items you should think about when investing in real estate.
Financing – Unless you have come into some cash someway you will probably be financing your purchase. Discussing with the lender should really be your first stop. As opposed to buying a home, today’s lending environment requires much more money down on an investment property. Another large factor to consider is that you will have to qualify for the property without using the income from the property. Let me explain. On your second investment property (after you have been a landlord for a year and show it on your tax returns) then you may be able to use the income from the new property to help offset the cost. For example; let’s say you are purchasing a 100,000 property that is currently rented at $1000 a month. The bank may give you credit for 75% of that income or $750 a month added to your income from work to help you qualify for the loan. This only happens on your second property though. This first one you will have to qualify to cover both mortgages…..and don’t forget to add the annual taxes and insurance to that qualification number.
- Cash is King – Remember at the beginning of this post I stated we are looking at the investment as a cash flow investment. When you start looking at properties, never lose sight of that. Appreciation is not why you are buying this property. If that happens consider it a bonus, but do not sacrifice cash flow for it. Back in 2006 I saw too many people buying investment properties that were going to cost them $100-$300 a month to have (even rented out), but they just “KNEW” the property would be worth double in 18 months and they could cash in then. That is betting on appreciation, and even though it is a long term “trade” it is still a trade and probably should be avoided at the beginning of your real estate investing career.
Due Diligence – Once we have the financing numbers together, and we find a property that looks good on paper, cash flow wise, now it’s time to do our due diligence. I would recommend working with an agent that has rental properties (something about been there done that that proves very valuable here). Part of your due diligence is looking at any repairs that need to be made to make the property not only “inhabitable” but appealing to tenants. Don’t skimp on the inspections because it all looks good to you. I have learned this from experience. I bought some Pensacola real estate based on me looking at it closely (remember I have done this plenty of times). When we finished the purchase and I was renovating I noticed and astronomical water bill show up. Come to find out the pipe under the slab was broken and had to be replaced. Did I mention it was UNDER THE SLAB? So $3500 later the problem had been corrected. This would have easily been found in an inspection. This is also where you should re-evaluate the numbers to ensure you have vacancy factor in as well as annual repairs.
Real estate is a great place to build and hold wealth. Learning how to invest wisely can pay dividends for generations, but there are many pitfalls. When evaluating always go conservative on the income and high on the potential expenses. If the property still cash flows and the due diligence works out then it may be the one. Oh yeah unless you’re in the industry, I would probably recommend a property manager. Build that cost in as well. I truly believe Real Estate can help anyone if they just put the time in to educate themselves about the aspect of it they are interested in. Happy Hunting.