{"id":89693,"date":"2019-11-16T09:00:04","date_gmt":"2019-11-16T16:00:04","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=89693"},"modified":"2023-08-09T10:06:40","modified_gmt":"2023-08-09T16:06:40","slug":"things-i-wish-i-knew","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/things-i-wish-i-knew","title":{"rendered":"7 Lessons I Wish I&#8217;d Known When I Started Investing in Real Estate"},"content":{"rendered":"\n\n      <iframe loading=\"lazy\" frameborder=\"0\" height=\"200\" scrolling=\"no\" src=\"https:\/\/playlist.megaphone.fm?e=BIGPOC5370560134&#038;light=false\" width=\"100%\"><\/iframe>  \n\n\n\n<p>In the beginning, I was afraid. Later, I was greedy and reckless.<\/p>\n<p>Neither worked out for me very well.<\/p>\n<p>I spent my first few years in the real estate industry helping other investors get financing to renovate old homes. I was in my early 20s and wanted to get involved, but wasn\u2019t quite \u201cready\u201d emotionally.<\/p>\n<p>Then I bought my first buy-and-hold deal, and it worked out pretty well. After that, I became a vacuum cleaner, sucking up every deal I could find.<\/p>\n<p>I lost a boatload of money. Some of these bad deals still cost me to this day.<\/p>\n<p>I wish I had a time machine, so I could go back and slap some sense into my younger self. Here are the seven lessons I\u2019d use my time machine to teach myself. Learn from my mistakes, so you don\u2019t have to suffer the results like I did!<\/p>\n<h2>7 Lessons I Wish I&#8217;d Known When I Started Investing in Real Estate<\/h2>\n<h3>1. Learn how to forecast cash flow accurately.<\/h3>\n<p>The first lesson of cash flow is that it\u2019s a long-term average, <em>not<\/em> what happens in a \u201ctypical\u201d month.<\/p>\n<p>Cash flow works like this: For nine months, you\u2019ll be sitting pretty, banking the (hopefully wide) margin between your rent and your mortgage. Then you\u2019ll be slapped with a $3,000 furnace repair.<\/p>\n<p>Or your tenants will decide to stop paying. Or they\u2019ll sue you because the neighbor\u2019s dog looked at them funny. Or whatever.<\/p>\n<p>Novice landlords say to themselves, \u201cWhat bad luck! Oh well, this was a freak one-time expense, next year will be better!\u201d Which is, of course, bull$%#t.<\/p>\n<p>By contrast, experienced landlords say to themselves, \u201cGood thing I budgeted for these expenses in my cash flow calculations.\u201d<\/p>\n<p>You need to include repairs, maintenance, CapEx, vacancy rate, property management fees, accounting costs, administrative costs, property taxes, insurance, HOA fees (if applicable), and maybe even your shrink&#8217;s bill.<\/p>\n<p>Sound like it\u2019s difficult to find deals that will still cash flow properly after all those expenses? It is! Finding good deals is work\u2014they\u2019re not just strewn all over the MLS.<\/p>\n<p>But if you learn to forecast these expenses accurately and you only invest in properties that still cash flow well, you are virtually guaranteed to make money. If you get cash flow forecasting wrong, prepare to lose money. The good news is that it&#8217;s not hard to get right, once you know what questions to ask.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-118369\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/10\/architect-at-office.jpg\" alt=\"professional young asian female architect wearing casual shirt sitting in cozy office and making architectural sketches. Profession concept. beautiful young girl interior designer drawing blueprint.\" width=\"702\" height=\"336\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/10\/architect-at-office.jpg 702w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/10\/architect-at-office-300x144.jpg 300w\" sizes=\"auto, (max-width: 702px) 100vw, 702px\" \/><br \/><em><br \/><strong>Related:<\/strong> <a href=\"\/renewsblog\/property-management-growth-lessons\" target=\"_blank\" rel=\"noopener noreferrer\">4 Lessons We Learned as Our Property Management Company Grew<\/a><\/em><\/p>\n<h3>2. House hacking is an ideal way to get started.<\/h3>\n<p>What\u2019s better than living for free? Not much.<\/p>\n<p>If you aren\u2019t deeply familiar with house hacking, read this <a href=\"\/renewsblog\/newbie-house-hack-duplex\/\" target=\"_blank\" rel=\"noopener noreferrer\">case study about an ordinary guy with no real estate experience who house hacked<\/a> and now lives for free. It\u2019s rich in detail and will show you exactly how you can do the same thing.<\/p>\n<p>When your neighboring renters pay your mortgage and other housing expenses for you, you can throw your savings into hyperdrive. For most people, their highest expense is housing. Remove that, and suddenly they can devote all the money they would have spent on rent or a mortgage toward savings and investment.<\/p>\n<p>Lower expenses, higher savings rate: This is the formula for reaching financial independence very, very quickly. The really ambitious set a goal of <a href=\"\/renewsblog\/6-tips-live-income-invest-rest\/\" target=\"_blank\" rel=\"noopener noreferrer\">living on half their income<\/a> and investing the rest!<\/p>\n<h3>3. The perfect deal is a myth; look for a good deal.<\/h3>\n<p>New investors sometimes wind themselves up looking for the \u201cperfect\u201d deal. It doesn\u2019t exist.<\/p>\n<p>In personal development circles, there\u2019s an adage that \u201cperfect is the enemy of progress.\u201d It\u2019s true: If you refuse to act until conditions are \u201cperfect,\u201d you\u2019ll never act. No, today\u2019s housing markets are not as advantageous to buyers as housing markets six years ago. Get over it. That market is gone, and this is the market available to you now.<\/p>\n<p>This&nbsp;is not to say you should buy indiscriminately. Quite the opposite\u2014set targets for ROI and for cash flow, and commit to yourself that you will not buy any properties that don\u2019t meet those standards.<\/p>\n<p>Choose a few neighborhoods to target with care, and then focus on finding good deals within those neighborhoods. Don\u2019t be afraid to negotiate hard to drop a property\u2019s price to meet your standards.<\/p>\n<p>Most importantly, keep at it. There are good deals out there, finding them is just a matter of tenacity.<\/p>\n<h3>4. After purchasing, properties\u2019 ROI comes from strong management.<\/h3>\n<p>You can score a great deal on a property and then still lose a boatload of money on it. How? Bad property management.<\/p>\n<p>When you buy a property, you\u2019ve forecasted its cash flow, but those forecasts are purely theoretical. They exist only on paper.<\/p>\n<p>In the real world, you\u2019ll earn either higher or lower returns than these forecasts, based on how well the properties are managed.<\/p>\n<p>How well do you <a href=\"\/renewsblog\/advanced-tenant-screening-dont-be-fleeced-by-wolves-in-sheep-clothing\/\" target=\"_blank\" rel=\"noopener noreferrer\">screen out bad tenants<\/a>? How well do you <a href=\"\/renewsblog\/11-ways-boost-tenant-retention-higher-roi\/\" target=\"_blank\" rel=\"noopener noreferrer\">retain good tenants<\/a>? Does your preventative maintenance extend the lifespans of your mechanical systems? How well do you add value to remain competitive with other nearby properties?<\/p>\n<p>Your returns on rental properties will be based on two things: whether you bought a good deal initially and whether you manage the property effectively. Success depends on doing both right.<\/p>\n<p>The best acquisition in the world will lose money if you lease to a deadbeat who doesn\u2019t pay the rent and then fights you in rent court. Invest time and effort in tenant screening and tenant retention when you\u2019re first starting out\u2014these are the backbone of good property management.<\/p>\n<h3>5. Focus on the fundamentals (and forget the rest!).<\/h3>\n<p>I can\u2019t tell you how often I see questions from new investors asking about S-corps versus LLCs, or about 1031 exchanges, or some other distraction far over their head.<\/p>\n<p>When you\u2019re a multimillionaire, you can worry about protecting your assets with legal entities or trusts or Harry Potter\u2019s invisibility cloak. When you\u2019re starting out, focus on accruing assets that are actually worth protecting.<\/p>\n<p>And don\u2019t get me started on all the armchair economists who go on about trying to time the market. If housing experts and real economists with actual PhDs behind their names can\u2019t accurately predict market timing, you can\u2019t.<\/p>\n<p>Forget all that nonsense.<\/p>\n<p>In the beginning, there are only two things new investors should focus on: finding good deals and managing them effectively. If that sounds oversimplified, it\u2019s because both of those tasks involve plenty of sub-skills to master.<br \/><em><br \/><strong>Related:<\/strong> <a href=\"\/renewsblog\/2016\/05\/19\/10-lessons-learned-tenant-eviction\/\" target=\"_blank\" rel=\"noopener noreferrer\">10 Invaluable Lessons I Learned From My Very First Tenant Eviction<\/a><\/em><\/p>\n<p>Learn how to accurately forecast cash flow. Identify good target neighborhoods for rental investments. Find a good real estate agent&nbsp;who specializes in working with investors in those neighborhoods or even a team of agents. Pursue off-market deals. Network with wholesalers, turnkey providers, local banks\u2019 REO managers.<\/p>\n<p>Screen the living heck out of your rental applicants. Manage your properties proactively. Develop trust and respect with your renters.<\/p>\n<p>In other words, focus on the fundamentals: finding good deals and managing them well.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-114848 size-main-slider\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2019\/08\/smiling-male-main-702x336.jpg\" alt=\"Portrait of a young confident smiling indian man with his arms crossed looking into the distance\" width=\"702\" height=\"336\" title=\"\"><\/p>\n<h3>6. Leave the slums to the slumlords.<\/h3>\n<p>I\u2019ve known people to make money in super low-end real estate. But it\u2019s a complex and challenging niche, and it\u2019s not for new investors\u2014or most experienced investors, for that matter.<\/p>\n<p>The numbers are tempting. They look great on paper. A $30,000 house that rents for $1,200\u2014what could go wrong!?<\/p>\n<p>A lot.<\/p>\n<p>Many of my rentals are in bad neighborhoods. I\u2019ve regretted those investments for over a decade. I could tell you horror stories about &#8220;professional tenants,&#8221; recurring break-ins, junkies using my vacant properties as crack houses, and local lowlifes breaking apart my air conditioning condensers to steal the copper\u2014yes, even after I installed giant steel cages over them.<\/p>\n<p>Or I could try to demonstrate how landlords in these neighborhoods are always in the wrong, in the eyes of the ever-indignant public. Out of one corner of activists\u2019 mouths, they decry that there\u2019s not enough affordable housing, then out of the other they yell \u201cslumlord!\u201d and scream for ever-stricter regulations against the landlords who actually provide that affordable housing.<\/p>\n<p>Very low-end housing is a losing proposition economically and politically. Here&#8217;s a simple rule for new investors: Don\u2019t invest in neighborhoods where you wouldn\u2019t want to live if you earned $40,000\/year.<\/p>\n<h3>7. You <em>do<\/em>&nbsp;need a cash reserve, but it doesn&#8217;t need to be a fortune.<\/h3>\n<p>Landlords need to keep a cash reserve. For that matter, all responsible adults need a cash reserve.<\/p>\n<p>What happens when that $3,000 furnace bill comes along? What happens when your tenant loses their job and stops paying rent? Or for that matter, when you lose <em>your<\/em> job?<\/p>\n<p>Many personal finance experts recommend keeping an emergency fund of six months\u2019 worth of expenses in cash. But for the average American, that\u2019s somewhere around $20,000.<\/p>\n<p>That amount&nbsp;is ridiculous to keep in cash. It\u2019s wasteful; cash loses 1-4%\/year to inflation.<\/p>\n<p>You should strive for a few thousand dollars in a cash reserve for emergencies. And landlords should keep an account where all those CapEx, repairs, vacancy rate, and other expenses we talked about earlier can pile up for when they\u2019re needed.<\/p>\n<p>But keeping more than a few thousand dollars in cash is poor financial management. Instead, keep a few credit cards with no balance, and keep a few conservative, stable investments that you can liquidate quickly if needed. Money market accounts are a boring and low-yield example, but there are also mutual funds that are conservative enough to fit the bill.<\/p>\n<p>In other words, don\u2019t feel like you can\u2019t invest in rental properties just because you don\u2019t have a huge emergency fund.<\/p>\n<h2>Fear and Greed<\/h2>\n<p>Finance types love to drone on about how all investing decisions are based either on fear or greed. And in my early career, I was a good example of that theory. I waited for years before investing, and then when I did invest, it was too hastily and hungrily.<\/p>\n<p>Investing doesn\u2019t have to be driven by fear or greed. Ideally, it\u2019s driven by method, by lucid analysis and planning. But never, ever invest based on emotion.<\/p>\n<p>Before even thinking about buying a rental property, learn how to calculate and forecast cash flow properly. Search methodically for neighborhoods that fit your investing criteria. Avoid neighborhoods that are too low-end and dodgy.<\/p>\n<p>Consider house hacking.<\/p>\n<p>Focus your energy on learning how to evaluate properties accurately and learning the fundamentals of good property management. None of it is \u201chard\u201d; the former is about basic strategy and execution, and the latter is about best practices.<\/p>\n<p>It doesn\u2019t take a million-dollar inheritance, a 145 IQ, or a PhD to succeed at real estate investing. It actually takes something that\u2019s both easier to come by and rarer: discipline.<\/p>\n<p>Save yourself the losses, headaches, and occasional misery I\u2019ve been through, and learn these lessons the easy way!<\/p>\n<p><a href=\"https:\/\/www.biggerpockets.com\/webinars?utm_source=renewsblog\" target=\"_blank\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-91217\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg\" alt=\"\" width=\"700\" height=\"85\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01.jpg 700w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/08\/blog_ads-01-300x36.jpg 300w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/a><\/p>\n<p><em>What lessons have you learned the hard way? <\/em><\/p>\n<p><strong>Don&#8217;t be shy; we&#8217;ve all made mistakes!<\/strong><\/p>","protected":false},"excerpt":{"rendered":"<p>I wish I had a time machine, so I could go back and slap some sense into my younger self. Here are seven lessons I\u2019d use my time machine to teach myself about real estate investing.<\/p>\n","protected":false},"author":158586,"featured_media":118371,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524,7119],"tags":[],"class_list":["post-89693","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","category-biggerpockets-daily"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/89693","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=89693"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/89693\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/118371"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=89693"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=89693"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=89693"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}