In our last couple of posts, we have provided some great information on the home buying and selling processes (Spoiler Alert: They are complex, and Our Executives would love to assist you). Today, we continue our "101" series with some info on real estate investing. Welcome to Real Estate Investing 101.
You see it everywhere. On HGTV, on the Internet, on billboards. The claim? "Real estate is a great investment, and it can do wonders for your financial future!" While that may be true, there is certainly more to it than that. Not all investments are created equal, and not all real estate is a great investment.
This post will identify some of the fundamental steps you need to follow when considering your first real estate investment property.
Real estate investing is not for everyone. Investing (in anything) generally requires knowledge and a strong grasp on personal finance and budget management. The most important thing to realize is that investing in real estate is not a “get rich quick” scheme. No matter what your initial cash position is, real estate investing will be a slow and steady process that can span decades – you put your money to work today, so you have more money in the future. But if you make enough money from rents and take good care of your property, you may end up with monthly income, increased equity, or both.
One thing is for certain: You have to educate yourself - about real estate generally, and about real estate locally. This is where Realty Executives of Cape County can help.
There are dozens of ways you can invest in real estate. The trick is finding a type of real estate investment that suits your financial position, risk tolerance, and capabilities as a landlord. Niches include single family properties, small multi-family properties such as duplexes or triplexs, large multi-family properties such as apartment complexes, commercial properties, industrial properties, and many others. Strategies vary as well. You could flip, buy and hold, or lease-option, among others.
Perhaps the biggest reason investors are not successful is because they don’t have a plan. This applies to all investments, but for real estate, having a plan is absolutely essential. You will need a roadmap to guide you along the way.
The best way to build your plan is to determine your goal, and work backwards. If you want to generate $2,000 per month in income, how many houses does that take? How much money do you have? How much should you spend on each house? What are your costs each month? What will your properties rent for?
Beyond these big picture items, you also need to have a plan for the small stuff. How will you find and screen tenants? How will you manage each property? How will you handle repairs? How will you track your expenses and income?
A thorough plan will be a life saver in the long run.
Obviously, your plan should include actually purchasing a property. You’ve already identified a niche and price range, so go find a deal!
A "deal," in our opinion, is a property with a positive cash flow. This means that your monthly rents, less expenses (including your mortgage payment, taxes and insurance), provide positive cash flow each month. For example, if you collect $1,000 in monthly rent, then subtract expenses of $150 and a mortgage payment of $600, you will have a positive cash flow of $250 per month.
Unfortunately, many investors buy properties that have a negative cash flow. This occurs when rents do not cover the expenses and mortgage payment, leaving the investor to make up the difference each month. This is not a “deal,” in our opinion.
Also relevant to your analysis of a deal are the characteristics of the property. Smart investors work very hard on the front end to find a high renting property that will have minimal expenses, resulting in a greater positive cash flow. Investors should look at a variety of factors here, including property condition and features, crime rates, nearby amenities such as parks and retail, and schools.
For more information on how Our Executives can help you find a deal, check out our helpful “Home Buying 101” post. We have many great homebuying tools, including the most advanced Property Search in the area, as well as My Home Tracker, which helps you find new properties matching your criteria as soon as they hit the market.
Now that you have acquired a property, the next step is to get it on the market for rent. There are a variety of methods you can use to market your property, such as rental websites, social media, newspapers, and the like. You could also hire an Executive or a property manager such as Executive Property Management to market your property, both of which have proven connections to potential tenants.
When advertising your property, it is wise to first study up on the various laws and regulations that may apply to your rental. From city ordinances to federal fair housing laws, there are many potential legal hurdles that must be cleared in order to properly advertise your property for rent. Our Executives are knowledgeable about these regulations and would be happy to lead you through this process.
Once you have a solid tenant lined up, your ongoing job will generally be to manage the property in accordance with the terms of your lease agreement, in exchange for the tenant’s rental payment. The goal, again, is to end up in a positive cash flow situation.
There are several management options, as well. You can self-manage the property, or hire a licensed property manager. A self-managed property is one in which the owner (or owner’s employee) fields all calls from tenants and coordinates all repairs and maintenance issues, as well as collects rent payments and holds security deposits. A property manager will perform the same duties for a fee.
The property manager’s fee should be calculated into the “expenses” part of the cash flow analysis discussed above. If you find a property with a solid enough cash flow, hiring a property manager can make your life much less stressful.
Realty Executives Can Help
As you can see, buying an investment property is not something that should be taken lightly. From evaluating the financial aspects of the purchase, to drawing up a contract, to closing on the property, the process can be a bit overwhelming. Our dedicated Executives can help you every step of the way.
Give us a call at our Cape Girardeau Office (573) 335-8111 or our Jackson Office (573) 243-2555!