Ah, real estate investing. You buy a house, get it rented, and let the money roll in each month. It’s that simple, right? And there’s not much to it once you get the ball rolling?
While it’s true that real estate, and particularly, rental properties can be a great long-term investment, one that you can structure to operate largely independently of yourself –that doesn’t mean that finding a successful rental property happens by accident. If you’d like to ensure that you’re getting the best return on your investment (and let’s face it, that’s something we all want!), then you’ll want to make sure you take the time to do your research upfront, to ensure you’re able to spot a winning property and manage it in a way that’ll produce the best returns possible.
When it comes to taking that first step towards investing though, most people aren’t sure quite how to start. In this article, we’ll uncover some things that every first-time investor should know –before they invest.
Do Your Research
First and foremost, it’s important to do research on the type of investment that you’re thinking of getting started with. For income property, you’ll want to get a few good books, and browse websites and forums –like the Bigger Pockets Forums, learning from other investors who have been there, done that. See pitfalls you’ll want to avoid, and find strategies that you can follow that’ll help you to keep on the path to success.
Take a Long-Term Approach
Next up, you’ll want to ditch the get rich quick mindset. Can real estate help you to grow your wealth? Yes. Is it a great way to create long-term capital? Yes. But if you’re going to invest in rental property, cash flow and long-term rewards are the name of the game. This means that while you’ll be able to start generating cash flow right away, your long-term wealth creation comes in the form of appreciation and equity growth, as you pay down the mortgage. This long-term approach offers a tremendous amount of stability to an investment though, as you’ll be far better able to weather any short-term dips in the housing market.
Make Sure You’re Clear on the Law
They say ignorance is bliss, but that’s certainly not the case when it comes to the law. As a landlord, there are certain duties and obligations you’ll need to fulfill. When you’re thinking of investing in a property, take a look at laws that are in place on a state level, in addition to federal laws. Finally, don’t forget to check into local legislation. In some cases, laws that are in place on a local level can be the most restrictive, especially in larger cities, so make sure you’re aware of local ordinances that’ll impact you before you invest.
Get Yourself Financially Ready
Unless you’re planning on buying a property outright with cash, you’ll want to ensure you’re in a strong position to borrow. This means establishing a solid stream of income, so you can show the bank that you’re able to pay back the mortgage. In most cases, you’ll need proof of employment, or two years of tax returns if you’re self-employed. You’ll also want to get your credit score –available from the three credit reporting bureaus: Equifax, Experian, and TransUnion. If your score is low, you’ll want to work to get it higher in order to qualify for the best loan terms possible.
Establish Your Goals
What are you hoping to get out of rental property? Would you like to own a property or two to serve as a supplementary income and as a long-term investment? Or would you like to grow your real estate empire, and eventually retire with the money your properties are generating? No matter what it is, you’ll want to set clear goals from the start. This will help to keep you on track, and moving forward toward your big-picture goals. Some investors find it helpful to attach a specific life goal to each of their rental properties –so your first property could be to help pay for the kids’ college tuition, or maybe one could be your boat fund. Whatever it is, assigning a purpose to each property is a good idea, as it allows you to know exactly what type of returns you’ll need to generate in order to reach your goals.
Create a Plan
Next, you’ll want to create a plan for investing. This should include the type of property you’re thinking of investing in, whether or not you have a plan to add value (fixer-uppers) –and a plan for financing them.
You’ll also want to establish your investment criteria, and only invest in properties that meet your standards. Is cash flow important to you? Do you want to have both cash flow and property appreciation? If so, what type of returns are you hoping to get: 8%, 10%? This approach will save you from investing in something that “feels like a good deal,” but doesn’t end up panning out that well as an investment. It’ll also keep you from investing in a property that ends up being a mediocre investment when you could have put your money into something a lot better.
Ensure You’ve Accounted for the Expenses
Once a potential property’s on the cards, you’ll want to run the numbers to make sure it’s a worthwhile investment. Start by tallying up your projected income and expenses to determine your cash flow. You’ll want to account for:
- Mortgage Payment
- Insurance
- Taxes
- Repairs and Maintenance
- Utilities (If you’re paying for them)
- HOA Fees (If relevant)
- Vacancy Rate
See also: more about estimating the cash flow for a rental property.
You’ll also want to calculate what your cash-on-cash returns and your cap rate will look like with a potential property to gain a clearer picture of the viability of the investment.
Build Your Refinancing Strategy Carefully
While many investors and proponents of the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat0), refinancing is a key part of the plan. But don’t get caught out! Rules are in place when it comes to refinancing, and if you’ve made an all-cash purchase, you may not be able to refinance. One way to avoid this problem is by obtaining traditional financing through a bank, or by using a hard money loan. While interest is high for hard money loans, they’re an ideal option for many investors. The lending criteria is based on the after-repairs value of the property, instead of the current value, and if you’re only planning to have the loan for a few months while you renovate, the interest won’t account for too much. As with anything, though, you’ll want to ensure that you do your research to understand exactly what’s involved with a hard-money loan and choose your lender wisely as well.
Learn more about hard money loans.
Find a Good Market
Ideally, you’ll want to find a healthy market to invest in, and a property that meets your criteria. This means scouting out an area that’s up-and-coming, with excellent growth prospects. Or, if cash flow is your primary focus, you’ll want to ensure that you invest in an area where rents are relatively high compared to the house price.
As a general rule, use the 1% rule as a quick way to evaluate properties. This rule states that a property should produce at least 1% in rental income, relative to its value. So if a property is $200,000, then you’ll want to make sure it’s able to rent for $2,000 per month. Once you’ve found a property that meets this criteria, that doesn’t mean you’ll want to rush out and buy it right away, but it is a quick tool that you can use to quickly and efficiently screen properties. If they make it past this test, you can run additional numbers and assess the market conditions carefully to make sure it’s a good investment.
Tip: Once you have a potential property in your sights, head over to the Renters Warehouse Research Center to gather key data on the housing market. See population growth, housing price appreciation, employment data, and more.
Assemble Your Team
Who’s on your team? Everyone that’s involved with the investing and renting process! This means joining forces with a good investor-friendly Realtor, finding a lender, and if outsourcing the job of rental management’s on the cards, a reputable property manager as well.
See: How to build a successful real estate team.
Finally, at the end of the day, remember: it’s about making informed decisions. Don’t buy into the hype, instead, do your own research, and look to secure a good deal in an up-and-coming area. Use caution, but also use common sense. Keep looking until you find a property that will produce the returns you’re looking for. Then make your first offer! You’ll soon be on your way to growing your own real estate empire.
Are you ready to start investing in income property? Claim your FREE guide to real estate investing: Real Estate Portfolio Guide: Starting and Growing the Right Way. See how you can get started today!
Photo by Wynand van Poortvliet on Unsplash
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