10 Tips & Tricks to Maximize Real Estate Return while Minimizing Risk
I´m one of those people who love making lists. They help me gather my thoughts and figure out what my priorities are.
Whenever we´re about to implement a new strategy or spend a lot of money on a property, I like to write out the pros and cons on a piece of paper.
Every now and again, I sit down in a quiet room and try to write out some common sense advice that I can use with all real estate purchases. I figure that there are some interesting nuggets banging around my subconscious from the various real estate books I might have read in the previous months.
So, without further ado, here is my top 10 general tips to maximise returns while minimizing risks.
1. Don´t be in a hurry
Before browsing real estate advertisements and listings, it is important to sit down with a blank piece of paper and think carefully about what outcome you wish to achieve from this purchase.
Is it a steady income from a buy and hold? A capital gain from a property that can be renovated and quickly flipped? A property that can be rented initially and used as a retirement home in the future?
Time spent considering these basic issues is very well spent. As Warren Buffett once said, an opinion poll is no substitute for thought.
2. Consider your exit strategy when you buy, not when you sell
Before signing on the dotted line, think carefully about who will buy this property from you in 1, 3 or 5 years time.
- Is it another investor? If so, you need to sell a strong rental yield.
- A tourist? They can be very fickle and vacation markets can get saturated.
- A local owner occupier? The biggest pool of buyers, but they will want to be in a safe clean neighborhood near good schools.
3. Do your homework on the selling agent
Prospective buyers often spend the vast majority of their research time examining potential properties but nowhere near enough time doing their homework on the person or company who is actually promoting it.
In addition to client references, every Realtor will have a license number you can double check and every overseas based agency who promotes property should be able to supply company, banking and accounting references.
Do not be afraid of asking for these documents. The majority of people would take your request as a buying signal and will happily supply them!
4. Research the community / neighborhood carefully
This is crucial. Use zipdatamaps.com to research local demographics and household incomes. Use city-data.com to research crime data plus a lot of housing and business information. Use trulia.com or zillow.com to check local rental and sales comparison (as a rough guide only, it is not 100% accurate).
If you are purchasing in a community ask for a copy of the rent roll and try to ascertain the numbers of vacancies and foreclosures. Ask for a copy of the HOA (home ownership association) accounts and try to verify if there is a lot of postponed maintenance or bad debts building up.
If you can´t do this stuff yourself, ask an expert to do it for you. It´s worth the fee.
5. Arrange an independent inspection report
A property might look great on the outside and the community might have terrific amenities, but that doesn´t mean the interior is in good condition. It takes an expert (or a very experienced investor) to determine if the air conditioner works, if the electrical wiring is safe, if the roof is in good condition, if there are issues with water/plumbing, if there is damp/mold, if the boiler is working properly etc. etc. Any one of these issues could cost thousands of dollars to fix after you complete your purchase.
These inspections can be easily arranged and usually cost $250-$300. You generally won´t be able to do them until after you´ve reserved the property – just make sure it has been arranged and completed before your refundable deposit period expires.
6. Appoint a competent property manager
A property manager generally has two roles to play: keeping the property owner happy and keeping the tenant happy. It ?s not an easy job and it is very labor intensive.
A professional who manages your portfolio and your tenants well over a number of years is worth their weight in gold. Practically all property managers charge additional fees for placing a new tenant or renewing the lease of an existing tenant, so you should make yourself aware of these and input them into your calculations.
The better your management company is at doing their job, the happier the tenant will be and longer they will stay. Having tenants move in and out on a regular basis is a stressful and expensive experience that should be avoided at almost all costs.
7. Treat your tenants with respect, but demand it from them too
The best property owners are those who make an effort to keep tenants happy and nip problems in the bud. If a well-behaved tenant makes a request, make sure they get a polite reply and that action is quickly taken to solve their problem.
Don´t delay or refuse to make requested repairs to your own property. All you will achieve is time consuming disputes and disruption to your income stream. Make sure you have cashflow set aside for these things and keep track of the cost.
Do not put up with tenants who are consistently late with rental payments. You need to be very strict from day one and don´t be afraid to evict if they are not honoring their rental agreement.
8. Try and pick a unit that stands out from others nearby
Choose a reasonably priced property in a nice neighborhood, but try and get the best one available.
If the two bed condos on the upper floors have extra floor space or a bigger balcony, pick that one. If one owner has spent money on expensive tiled flooring and an open plan kitchen, pay extra for that unit if the extra cost is less than the time and money it cost them.
If there is a lake in the community, pick a unit facing it. If one community has great amenities (pool, tennis, bbq areas) and is priced only a little higher than a more basic community across the street, consider spending the extra money.
9. Avoid deals that look too good to be true
If you find a property that looks like an amazing investment, take a very deep breath and figure out what you are not seeing. Probably one time in twenty, it will be a great deal and you just happened to get there first.
More often that not, others will have seen it before you and will have passed on it for a reason.
10. Keep on top of things
Sometimes people switch off after they´ve bought and rented a properly only to find huge problems building up without their knowledge. If something is going wrong, you need to be able to nip it in the bud.
Keep a close eye on money coming in and out of your property investment at all times, update your folder storing the paperwork every month and make sure you file your tax returns every year.
Anyone else got some common sense / universal tips they´d like to share?