8 Basics Every New Real Estate Investor Should Master
One of the keys to success for a new real estate investor is to quickly get pointed in the right direction. With hundreds of different directions to move, that can be a challenge!
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There are plenty of false starts and wrong ways for investors to move as they are getting started that can cost both time and money. That is why it is key for an investor to overcome early obstacles.
New investors, no matter where they’re starting out, have a massive learning curve if they want to be successful. It’s true — there’s a ton to know before you can really dive in. If you want to find success in real estate investment from the get-go without making a lot of costly mistakes, there’s a foundation that must be laid from the very beginning.
8 Basic Areas for New Investors to Master
1. Your Goals as a Real Estate Investor
While you can’t research, you have to do some introspection for this one. As much of a cliche as the saying is, it seems to fit perfectly here. You must be able to articulate why you want to invest in real estate. Getting rich is not an answer. Making money is not an answer. Your “why” has to do with the choices you make and how you spend your time. You choose to create a better life. You choose to study, to learn, to give up free time to educate yourself. You choose to put off pleasure today so that tomorrow whatever you choose to do can be more pleasurable!
Your “why” is the reason you make sacrifices. It is a concrete reason or reasons and never something as abstract as “I want to be rich.” It is goal-oriented and something worth working toward. It is something worth setting a goal for and making the appropriate sacrifices.
For real estate investors just starting out, you need your goals in mind! While there are a lot of things to figure out (and a lot of things that must be learned through experience), you do need to have a plan before you go in. Have in mind what kind of investor you want to be going in and what type of investments you want to try. What are your long-term, ultimate goals? These will help keep you on track and focused as you learn.
Having your goals in place will help you take the right actions, make the right sacrifices, and keep you focused on your “why.”
2. Relevant Laws & Regulations
Obviously, the number one thing you’ll want to be up on are the legalities of getting into real estate investment. There are plenty of things you’ll need to know — and variations depending on where you live and invest. There are laws and liabilities to consider, like Fair Housing and discrimination laws, plus tax laws (you wouldn’t want to run into trouble with Uncle Sam), and plenty of national and local legal considerations.
For any investor, it’s important to know these laws and keep up with how they change over the years. It may be wise to seek a legal and tax advisor just to be sure you’re absolutely sure on everything. At first, it would be smart to join or attend a local real estate club and try and grab a conversation with local real estate investors. This will be the front-lines for your start in real estate and the place where you can shorten your learning curve by surrounding yourself with experience and advice.
Just make sure you do not use this area as one to slow you down. You DO NOT need to know every law, and not every law will pertain to you or the particular niche of real estate you are investing in. Passive investing, for instance — where you are not making offers, overseeing renovations, or managing your investment property — will require very little knowledge of laws and regulation. You’ll need to know just enough to ensure that whomever you choose to work with is following the laws properly. So be smart and attentive, but don’t let this area slow you down.
3. Due Diligence
Due diligence is absolutely key for every real estate investor! No investor should be investing willy-nilly without taking the time to investigate and properly vet properties and to take care of the details. Things like hiring a property inspector before purchasing a property and not relying on the seller’s report are integral to avoiding big mistakes and unexpected surprises. Due diligence also involves examining the numbers. Do they make sense? Does this property fit into the grand scheme of your portfolio and your investment goals?
BiggerPockets has become a fantastic resource for investors who use it appropriately. There is loads and loads of advice and many years’ worth of forums to search and read. As with any forum, your biggest challenge will be determining which comments are actually worth reading and noting and which ones to weigh a little less in your final decision making. That is a something you will learn over time.
That being said, you should absolutely ask questions and remember that there are no dumb questions when you truly do not understand something. Ask what you need and pay attention to the answers. This is a crucial part of early due diligence and necessary before moving on to other critical steps of due diligence.
4. Reading the Numbers
Speaking of numbers, it can be a little difficult to learn what numbers matter and what numbers don’t. What should you be paying attention to? How are you making these calculations? Obviously, your prime concern with your rental properties should be long-term viability. In today’s market environment, first and foremost, investors should be looking for:
A return of capital before looking for a return on capital.
There are simply too many opportunities to lose money with no real outlet for getting your money back in today’s market.
Investing in a safe and reliable manner is the most important aspect of putting your money into today’s crazy market. Safety, reliability, and high probability of “getting my money back” are paramount. That’s what you’re looking for. Beware of fudging the numbers to making them work for you — if you love a property or are too eager to make your first deal, that can be a temptation!
Let the numbers speak for themselves. If they don’t make sense, they won’t make sense. Move on.
5. The Value of Good Property Management
Some investors choose to bear the burden of property management themselves. Others decide that they can just pick the cheapest services available so that their monthly cash flow doesn’t suffer as much. Investors would do well to learn early on that good property management is worth the premium. A trusted, excellent property management team is one of your best assets and can have an amazing return on investment.
I could go on and on with this topic and have written about it extensively here for the BiggerPockets blog. Property management may be the single most important factor in the success of a buy and hold investment property. Whether you are buying single family houses or multifamily buildings, the management of that property will make or break you. From proper maintenance and resident selection to the actual customer service given to the residents, bad property management can kill what should be a great investment.
Make sure you do your due diligence on this topic and read the benefits of choosing great property management. What some investors see as an expense can end up being the best “investment” you make in your property.
Taxes! We love to hate them. For the investor, it’s not just about not making tax mistakes, it’s about reaping the tax benefits. Your new-found method of passive income is rife with benefits. It can be downright tax-free if you do it right, and that’s amazing! You can even look into things like investing through a SDIRA for retirement. Do some research and talk to a professional who really know real estate investment finance and taxes.
Taxes and insurance are often overlooked or at a minimum pushed to the side when investors look at properties. There are many, many benefits hidden in these two line items, and those benefits can add to an investors’ bottom line in many ways.
7. What Makes a Good Tenant Good
They other key to a successful rental property is a good tenant. Being able to snag and retain a good tenant is going to keep your cash flow stable and incidents that cost you money low. Good tenants mean you don’t end up with property damage, you don’t deal with lawsuits, and you don’t have to wrestle with general bad tenant headaches.
Knowing what makes a good tenant (i.e. how to properly vet a tenant and perform a background check, something a good property management team can help you with), can create stability for your investments for the future.
8. The Qualities of a Good Property
What should you look for in an investment property? That’s the big question. Before you get going, you have to know what you’re looking for. The same thing that makes any real estate good makes an investment property good: location! Is the neighborhood up-and-coming? Going downhill? What are the property values like? Is the rental market saturated? In demand?
More importantly, has the property been or will it be halfway renovated, leaving you with a ton of deferred maintenance? Are you buying a neighborhood-normal property or are you getting a great deal because your property is a major outlier? There are a ton of factors in the equation. On top of the that, there’s the property itself: What’s the value in comparison to the houses around it in similar condition? Is the layout weird? Does it make sense for the renters in your area, or who you will be marketing to?
A good property in Toledo, OH will be different than what may qualify as a good property in Denver, CO. Or Dallas, TX. Or Orlando, FL.
At the same time, a good property in one zip code may be completely different from a good property in a different zip code in the same city. When you are at the point of looking at property, make sure you have a basic understanding of what you are looking for. At a minimum, do not buy outlier properties that do not make sense for the neighborhood.
For new real estate investors, there are so many pitfalls to beware of as you get started. Many are created in our own minds, and they slow us down from getting started. Still, there are several that are real, and investors would be smart to educate themselves and be aware of the most important aspects to master before jumping in and buying their first properties.
Anything you’d add to this list?
Let me know with a comment!