1. Get the Numbers Right
Repairs & Carrying Costs
When you flip houses or buy rental properties to renovate, you need to know exactly how much repairs will cost. It sounds easy on the surface; after all, contractors give you a written price quote, right?
The problem is that contractors are notoriously difficult to work with, and renovations rarely go as smoothly as planned. Often, contractors over-promise and under-deliver, in terms of both costs and timeline.
For your first investment property, stick with relatively minor cosmetic repairs. Then, budget an enormous cost overrun reserve to handle the inevitable hiccups. Just don’t tell the contractor about it, or they’ll find an excuse to spend it.
After-Repair Value (ARV)
Just as new investors usually underestimate costs, they also often overestimate the after-repair value (ARV) of their property.
Do your own research on Trulia or Zillow to get a sense of comparable renovated property values. Then, visit a few comparable homes that are currently for sale. Walk through them and get a gut-level sense of how completed properties are priced in the neighborhood.
2. Consider a Turnkey Property
Not everyone wants to mess around with contractors, permits, and refinancing for a long-term mortgage. There’s nothing wrong with that.
If the idea of overseeing a renovation fills you with stress, buy a turnkey property. You can buy properties that are already rented to stable, reliable tenants or buy properties in rent-ready condition.
In today’s increasingly connected world, you can even buy turnkey properties anywhere in the country using platforms such as Roofstock. Imagine a nationwide, public access version of the MLS just for turnkey rental properties, and you have a good sense of the power and convenience of this platform.
3. Stay Detached & Be Patient
As mentioned above, buying real estate takes work. That work multiplies tenfold if you want to find a good deal – which you better as an investor, or else what’s the point?
Many novice investors get emotionally attached to the first property that attracts their interest. They love the location and think, “I would love to retire here,” or they love the kitchen or the mosaic tile in the second upstairs bathroom.
4. Negotiate (and Don’t Be Afraid to Walk Away)
Sellers expect you to negotiate. If you don’t, they start second-guessing the purchase price and wondering if they should have asked for more.
Negotiating real estate starts with seller research. Find out everything you can about the sellers, such as how urgently they want to sell, why they’re selling, and when they’re moving if the property is owner-occupied. If you’re using a real estate agent, have them feel out the listing agent. You’d be surprised how often listing agents get talkative.
5. Arrange Financing Before Making Offers
When you make an offer, sellers expect you to provide details about how you plan to actually pay for their property. Which means you need to line up financing before you start throwing around offers. Your options vary based on whether you’re looking for a short-term purchase-rehab loan or a long-term rental property mortgage.
For short-term purchase-rehab loans, go with a hard money lender. They’re fast and flexible, if expensive on both interest rates and lender fees. Alternatively, you may find luck with a local community bank, but these operate individually, and each has a different lending policy.
For long-term rental mortgages, you can try conventional mortgage lenders when you first start investing. But banks and conforming lenders are not scalable beyond your first couple of properties as they place limits on how many mortgages you can have reporting on your credit.
6. Don’t Bank on Appreciation
Real estate does not always go up in value. Homes usually go up in value, but if you count on “usually,” then you’re speculating, not investing.
If your investment strategy involves flipping fixer-uppers, flip based on today’s housing market prices. If you’re a long-term rental investor, buy based on today’s cash flow. While home values can collapse, rents remain surprisingly resilient. Even in the Great Recession, when home values dropped by 27.42%, rents continued to rise, according to the U.S. Census Bureau.
7. Be Prepared to Enforce & Evict
Just as not everyone has the temperament to be a real estate investor, the same goes for being an effective landlord. It requires attention to detail, self-discipline, and the willingness to enforce the rules of your rental agreement.
Human beings push against their boundaries. As a landlord, that means that some of your tenants will try to push your boundaries. It’s your job to defend those boundaries. Not everyone has the discipline to enforce the rules of their lease in the face of a sobbing tenant. But enforcing rules is one of the challenges of being a landlord that you must be comfortable with if you want to succeed.
