Real estate investing can be a rewarding endeavor, but it’s fraught with danger. Investors who make mistakes can go bankrupt, and investors who do it right can become wealthy.
I’ve been investing in real estate for more than 16 years. I own more than 70 rental houses and am an avid house flipper. I can teach you how to invest in real estate, and I’ll start with this article.
Must-Follow Tips to Be a Successful Real Estate Investor
Do you want to invest in real estate, but are unsure if you can do it successfully? Following these tips will help you generate a passive income stream while building wealth for the long term.
1. Do It!
Stop the analysis paralysis and start investing in real estate. Many would-be investors spend years studying and never invest a cent.
It’s good to learn a few investing terms, and you must understand the local market, but the research shouldn’t go much further. Leave advanced strategies and creative techniques for later in your investing career.
The first step to becoming a successful real estate investor is to begin investing in real estate.
2. Don’t Pay Too Much
As the old saying goes, “You make your profit when you buy.” That’s true, so be sure to pay the right price for investment property.
Uncovering these great deals is the hardest part of investing in real estate, but it’s the most important. Finding a great deal will provide a margin on safety if things go wrong.
On top of this, buying a property significantly under market value will amplify wealth generation.
3. Cash Flow is King
With rental houses, cash flow is one of the most critical factors in successful real estate investing. Positive cash flow allows investors to cover expenses, make mortgage payments, and build a financial cushion for unexpected problems.
Without cash flow, the investor must continuously put money into the investment, which amplifies the adverse effects of unforeseen issues.
In the right market, real estate appreciation can provide a hefty boost to net worth regardless of the cash flow. However, without positive cash flow, it’s nearly impossible to stick with the investment long enough to realize the gains.
4. Know the Real Expenses
When managing a rental house portfolio, the expenses are significant. Many investors hold back ten percent of the rent only to discover that it’s not nearly enough to cover the costs of a rental property.
The investor must pay property taxes, insurance, and mortgage payments. In addition, they will eventually have to replace the roof, the HVAC system, and even the pipes that run from the house to the city water system.
On top of all that, there will often be a vacant period with no rent coming in. Owning rental properties can get expensive.
A 2016 working paper, Rental Yields, and HPA: The Returns to Single Family Rentals, from UCLA Anderson School of Management, analyzed the returns of rental houses over 28 years. This study found that expenses averaged about 42 percent of the market rent.
A savvy investor should hold back 45 – 50 percent of the rent to cover the actual expenses a landlord is likely to face.
5. Don’t Overspend on the Rehab
It’s vital to improve the condition of investment property. However, going beyond the level of neighboring houses rarely adds significant value or justifies the additional costs.
A house-flipping venture often requires more expensive rehab than a rental house. The investor will generally need nicer components for the home to stand out amongst other listed properties.
Nevertheless, going above and beyond on the renovation rarely raises the property value more than the project’s cost.
As an investor, resist the urge to be creative with home renovation. Instead, evaluate the ROI on every aspect of the project. An investor looking for a creative outlet should focus on their own home.
6. Delegate, Delegate, Delegate
Focus on growing your business, not working for the business. Don’t let non-essential tasks consume your time and energy.
Hire professional contractors to handle maintenance and renovations, even if you are very handy. Using contractors allows you to complete the renovations faster and with less stress.
If you have rentals, the scope of work for a simple maintenance task can easily grow when the landlord is at the house.
Hire an attorney whenever there is a legal question. Don’t guess with tax questions; hire an accountant.
Use your time to grow the business. Improve systems to run more efficiently or find more investment opportunities. Don’t get bogged down in mundane tasks that are easily delegated.
7. Don’t Use a Property Management Company
When starting out with rentals, don’t use a property management company. At this early stage, it’s crucial that you manage the properties yourself. This is the only way you will have the experience to evaluate a property management company.
Property management companies do a great job of finding tenants and collecting rent; that’s how they get paid. They do a poor job of handling maintenance issues.
Property management companies will tackle the maintenance issues and send the investor a bill. There is no incentive for them to address the problem cost-effectively.
If you have a non-paying tenant, a management company can easily handle the problem, but you must learn how to address it yourself.
Even worse, when tenants pay regularly and aren’t making maintenance requests, you get no value for the monthly fee the management company collects.
Once an investor has the experience and several houses, the management duties can be delegated. However, hiring an employee (even part-time) is much better than using a property management company.
An employee will cost less, perform more duties, and run the properties using the investor’s process.
8. Use Leverage
Leverage is a fancy word that means using debt. Contrary to what you may have heard, accumulating debt is not bad when purchasing cash-flowing assets that appreciate over time. By using leverage, you can buy much more investment real estate than you could with cash.
Note: If you wisely finance a million dollars in real estate, you have added a million dollars to your net worth when the loan is paid off.
Using the bank’s money to build a real estate portfolio and the tenant’s money to make mortgage payments is a fantastic way to increase your net worth.
An investor using this technique will amplify their wealth creation and expedite their journey to becoming a millionaire real estate investor.
9. Understand Financing Options
A real estate investor must understand the available financing options. A traditional mortgage, with a low fixed rate and a 30-year amortization period, is an excellent tool.
However, they can’t be used for investment properties once the borrower has ten mortgages.
Commercial loans from local community banks are an outstanding source of financing. These local bankers understand the market and are used to analyzing the financials of small businesses.
On top of that, they allow you to cross-collateralize your properties into a line of credit for future purchases.
Hard money loans are expensive, but sometimes they are a perfect fit. These loans can be funded quickly, allowing an investor to buy a house fast.
Hard money loans depend on the equity in the deal and not the borrower’s creditworthiness. An investor will pay a high rate for these loans, but sometimes they are the perfect fit for a given situation.
10. Beware of the Gurus
Real estate investing gurus are “so-called” experts that will teach beginners how to invest in real estate – for a hefty fee. In most cases, what little experience they have is outdated.
Their actual business is selling courses and seminars, not investing in real estate. Furthermore, these courses are usually disguised sales pitches to buy the next lesson.
A vast industry around real estate investment training has popped up, but most of it is useless. This industry primarily exists to take advantage of beginning real estate investors.
Do not attend a seminar or take a course. There is no need to pay for advice.
Some advanced concepts could help an experienced investor but don’t start with these creative strategies. Learn the basics, and after you have some experience, you can evaluate a course.
Investing in real estate is not a get-rich-quick scheme. When done correctly, the wealth will come, but it takes time.
Over time, rents increase while mortgages are paid off, increasing an investor’s passive income. In addition, many real estate properties appreciate, adding to the investor’s net worth.
Follow the basics, stick to your plan, and let time make you rich.
Andrew Carnegie said, “Ninety percent of all millionaires become so through owning real estate.”
When done correctly, real estate investing can provide returns far greater than the stock market and many investing alternatives. The residential real estate industry is uniquely suited to make use of leverage, and the industry has some of the most favorable tax rules.
The tips provided in this article will provide a stable foundation for becoming a successful real estate investor.
What’s holding you back from investing in real estate?
About the author: Don Chambers – Real Estate Adventurer. Don has been a real estate investor for over 16 years. He has accumulated over 70 rental properties and is an avid house flipper. Don owns a property management company and acts as a hard money lender. He writes on real estate investment, often divulging financial details, with a direct, no-nonsense style. In addition, Don is a software consultant and an accomplished software developer with a Master’s degree in Computer Science.