Many people enjoy the idea of becoming a real estate investor. An abundance of infomercials and HGTV programming make it seem so easy and glamorous. The reality is that it is not always easy. Real estate can be a great investment, but educate yourself and understand what you are getting into before you make the plunge.
When purchasing a property, the first step is to get pre-approved for a home loan. Be sure to specify whether you want to purchase a single family or multi-unit residence, and whether you plan to occupy it. Based on this information, there are different types of loans available, and different requirements for each loan type such as down payment amount, interest rate, and other costs. Typically when purchasing investment property, larger down payments are required. When house hunting, you will want to consider a number of factors that make a rental desirable. Location is first and foremost. Size, condition, and neighborhood amenities are other important factors.
A property acquisition worksheet (see below) helps you organize expenses and visualize a budget and potential profit. What will the property purchase and closing costs entail? What are the yearly operating expenses and income? Using the property cash flow analysis spreadsheet (see below), you can determine the yearly cash flow. Buying a rental property is a great investment over the long term. Not only do you collect yearly income, but you also build up equity over time. Equity is the market value of the property minus whatever liens (ex. mortgage) need to be paid.
Obvious monthly costs would be property taxes, insurance, and any landlord paid utilities. There may also be a mortgage payment or lawn care/snow removal expenses. So what are some of the costs that are not so apparent? Remember to consider yearly property maintenance and repairs. It is also smart to include a rental vacancy expense. This is money lost from rental income between tenants when the property is not occupied. The actual vacancy rate will vary with the real estate rental market, but 5% is usually a good estimate.
Become familiar with landlord tenant law. Things like security deposit amounts, notice to terminate a lease, and the process to evict a tenant are all regulated. Fair housing is another important piece of legislation. Did you know that housing discrimination is a federal offense? Knowing and following the laws will help minimize your risk of lawsuits and makes for healthier communities. Contracts are also vitally important. Use good contracts and know them inside out. Always screen tenants for credit and background checks.
The handy and business savvy people stand to do well in world of rentals. But what if you don't have time to manage all of these details? Hiring a property manager is an option. Property managers advertise rentals, screen tenants, deal with paperwork, and coordinate maintenance and repairs. Their fees usually include a larger amount upon an executed lease, and then a smaller monthly fee.
MY THOUGHTS ON FLIPPING
Flipping refers to buying a house, fixing it up, and then selling it for a profit. As I mentioned earlier, real estate is the best investment over the long term because of equity. There are costs associated with both buying and selling, so it makes it harder to profit in the short term. The longer you hold, the more cash flow you receive and more equity is gained. Another thing people do is over estimate their handyman skills and underestimate the amount of time a project will take. Be realistic. Time is an important factor because holding costs add up quickly with no rental income to offset it. The best way to tackle a flip house is to have a small crew for faster turn over.
HOW TO SAVE MONEY
Property managers, repair people, attorneys, etc, all cost money. The more work you can do yourself, the more money you will save. Things like painting or changing a light fixture are simple enough projects. However, don't attempt things if you lack skills for the job. Making mistakes can cause damage or injury and end up costing a lot more than if it were hired out in the first place. Know when to hire a professional. Another way to save money is cut expenses. Shop for competitive rates on homeowner's insurance, trash service, or any other expenses.
There are many valuable resources available to landlords in the greater Grand Rapids area. The Rental Property Owners Association (RPOA) is at the top of the list. Membership in the RPOA gives you access to loads of information. The staff can answer questions and provide services such as background and credit checks. They also hold classes and networking events. The Kent County District Court is another great resource that provides court forms and information on laws. Nolo is a website dedicated to laws and legal information. The Real Estate Investors (REI) Club is a national group of real estate investors sharing resources. Their website is filled with articles and videos covering all aspects of real estate investing.
Understanding these basic concepts arms you well with knowledge to be a successful real estate investor. Start slowly with one property and see how you like it. If it is a good fit, expand cautiously and do not over extend yourself financially. Who knows? If you really love it, eventually you might be able to quit your day job and solely manage your rental properties and cash flow.