Getting into real estate investing and buying that first income property can get people pretty excited. They imagine how their lives will change once all of that easy money comes rolling in. And lives can change, but it is not always easy. It takes certain knowledge and characteristics to be a successful landlord, knowledge and characteristics that can be overlooked during the excitement of a first deal. So to keep focused, here are five questions to ask before you dive in.
5 Crucial Questions to Ask BEFORE You Buy That First Rental Property
Do I Understand What I’m Getting Into?
Being a landlord is definitely a hands on experience. It also takes tenacity and perseverance. Many people are sold the dream of sitting back and collecting easy, passive income. Well, I am here to tell you that the income you gain is not really passive. There will be tenants to screen, leases to write, rent to collect, repairs to be done, things to maintain, messes to clean up, and on and on and on. Are you ready to do all of that? You will have to enforce rules and policies and calm disputes. Are you ready to act tough? You will have to because if you let your tenants slide, they will take you to the cleaners. Most of the time things work out ok, and most tenants are decent people who do the right thing. But be assured that there will be times when you will wonder why you ever thought real estate was a good idea. While the rewards can be great, landlording can at times be quite the task.
Do the Numbers Really Work?
Please, please, please make sure that the numbers on the property you intend to buy really do work and that your cash flow is positive. Make sure you really know what your property’s income will be. And make sure that you have budgeted adequately for all expenses, including utilities, repairs, vacancy, and reserves. Do not fudge these numbers to make the deal work. Ask someone else with experience to look over your numbers. A surefire way to grow to hate being a landlord is writing checks rather than collecting them every month.
Is This Really a Good Deal For Me?
If the numbers really are working from question two above, it is time to take a step back and think about you and how you plan to operate. Will you be ok traveling back and forth to this property for showings, maintenance, lockouts, etc. Is the property located in a neighborhood that you would feel comfortable in at night? Will you feel comfortable collecting rent? Are you glossing over any potential issues just to get your first deal? I have seen more than one newbie landlord ignore the neighborhood characteristics, the potential tenant characteristics, and even deferred maintenance because they are so keyed up on getting that first deal. So, before you buy, just stop and think a bit about how this deal will affect you, your investing goals, and your lifestyle.
What If I Don’t Like Being a Landlord?
Many people never even think to ask this question. But what if you buy this property, work at it for a little while, and then decide that landlording is not for you? What will you do then? Will you be able to sell it? Perhaps you can turn the property over to a management company, but that comes with its own set of problems and additional costs that may tip the cash flow negative. What will you do if this landlording thing does not work out? Perhaps now is a good time to ask…
What Is My Exit Strategy?
Do you plan to hold on to this property until you die? While that is one viable exit strategy, most of us would prefer at some time to cash out and move on down the road. So how long do you intend to hold this property? Five years? Ten years? Twenty? When you are ready to sell, who will you sell it to? The thing about investment properties is that most often there is little if any retail market. That being the case, as a new investor you have to understand that the only person you are likely going to sell to at some point in the future is another investor. What will that investor be looking for? Most likely it will be the same things you were looking for, which is a deal. And if they are smart, they will be asking themselves these same questions. Please don’t think real estate always goes up (2008 proved it does not), and do not bet on appreciation. Landlording is often a long term investment strategy. Do not think that you are going to jump in and then be able or want to jump right back out.
Real estate investing is a great thing. But it is not a great thing for everyone. Make sure it is the right thing for you by asking these five questions before you pull the trigger on that first purchase. Don’t get caught up in the hype and excitement. That can be really hard to do, and those infomercials on late night TV make it look so easy. Know yourself and think about what you are getting into before you jump.
Investors: What questions would you add to this list?
Don’t forget to leave a comment below!