One piece of advice I give anyone wanting to get into investing in real estate is to understand that this is a business. I have seen people jump in and buy a property without doing due diligence. Some get lucky and do just fine, while others fail and fail miserably. There are many factors to consider when you decide to be a real estate investor. I’ll cover some in this post and will follow up in future posts.
Educate Yourself
DO NOT jump in without first getting an education. Learn as much as you can. There are many resources out there about investing in real estate. There are books, websites, podcasts and just about anything you can find in this day of mass communication. Learn the terms. Learn what to look for. Learn the law! I speak from experience. I bought my first property with little education and no experience. I thought it was easy, buy a property, put a tenant in it and cash the check every month. I got an education alright, but learning from your mistakes can be pretty expensive.
Determine Your Goals
Why are you investing in real estate? Is it strictly for positive cash flow? Do you want to increase your net worth? Is this part of your retirement planning? Are you looking for a specific return on your investment? Are you already quite wealthy and just want to rejuvenate a blighted area? It’s important to determine exactly what your goal is as this will help you make sure you are buying the right property. For example, if your goal is positive cash flow to support your desire to travel the world, then you wouldn’t buy the same property as someone who is looking to increase net worth. You would want something that already has tenants as opposed to finding something that’s being sold below market value and is going to need work to make it move in ready and built in equity.
Financial Analysis
I spoke to someone who told me that he got a great deal on a house that he bought as a rental. I asked him how he knew he got a great deal. He said “I bought it for $10,000 less than the asking price.” This is probably not the best way to analyze an investment. There are several factors to look at when doing an analysis. Many just look at income and the obvious expenses like taxes and insurance. What about the not so obvious? Are you including management fees? A lot of people who self manage don’t. They should! Three reasons. 1) Everybody’s time is worth something. It doesn’t matter if you self manage, your time has a dollar value associated with it. Pay yourself something even if it’s just on paper. 2) Most banks include management fees when they do their analysis for your loan. What if, God forbid, something happens and they have to foreclose? Managing that property until they can sell it is going to have a cost. 3) When you’re ready to sell, what if your potential buyer isn’t going to self manage? They will add management fees, so you might as well add it in now. Every property is different and the expenses with it will vary. Every possible variable needs to be included in your analysis.
When you complete your analysis, is this the right property for you? Will it bring you the positive cash flow you’re looking for? Are you getting the best return for you value? Could you find a better return on another property? If this doesn’t work out, there will be other opportunities. This is a business, and if it’s bad business, you don’t need it.
This will get you started. We’ll cover more in future posts.
Here’s to keeping cash flow positive,
Dave
