Consider These Things If You’re A New Real Estate Investor

Years ago, as a new real estate investor, I imagined an industry where I could make some quick cash. But as I gained experience, I quickly realized it wasn't as cut and dry as it looked from the outside. Like any investment strategy, there were a few critical ideas I had to keep in mind when weighing my investment options. If you're new to real estate, I recommend that you also consider these ideas now to avoid a lot of unnecessary pain down the road.

Due Diligence

According to the Webster’s dictionary, due diligence is “the care that a prudent person might be expected to exercise in the examination and evaluation of risks affecting a business transaction.” Due diligence is the key that separates a successful real estate investor from a failed investor. When it comes to due diligence in real estate, there are two areas where you should know exactly what you want:

Know Your Market

Is the property located in a good neighborhood with low crime rates and highly rated schools? Is it near an airport or located across the street from the city dump? How do the comps look for the property? What’s the average time on market of properties for sale vs. for rent? Every investor should have an intimate knowledge of the market where they plan to invest. At the very least, the investor should have a trusted advisor who already knows the market extremely well.

Know Your Goals

What is motivating you to invest in real estate? The answer to this question should affect where and how you choose to invest. Are you looking for long-term passive income investments? If so, you probably want to invest in properties that offer good appreciation, low maintenance, and are located in quality neighborhoods. Are you trying to replace your current income with new streams of cash flow? If so, your strategy may lie in lower cost, higher return assets.

To Flip or Not to Flip

If you know what you’re doing when it comes to rehabbing a house, then a fix and flip strategy might be right for you. But if you have no experience in rehabbing homes, then you may want to avoid the fix and flip strategy altogether. If you’ve decided to flip a house, be sure to hire a professional contractor, or a trusted advisor, who can provide a true estimate of the rehab costs. Making estimates about rehab costs that you don’t understand often results in money lost for a first-time investor.

Paper Yield

If the fix and flip strategy isn’t part of your plan, then you’re probably looking for cash flowing real estate. But be careful. There is more to cash flowing real estate than just the numbers on paper.

New real estate investors often get fooled by what is called a “paper yield,” or something that looks profitable on paper but is usually based on a high risk, high reward scenario. Here’s an example of a paper yield:

• Property Value = $77,000
• Monthly Rent = $900
• Taxes = $950
• Insurance = $600
• Management Fee = 8%
• Est. Net Return = 10-11%

Sounds like a pretty good investment, right? While this property looks like it’s going to provide an excellent return, that isn’t always the case. Properties like the one in the example above are often located in more distressed areas of the country. Rental rates may be lower, but tenant profiles are also less favorable, resulting in higher late payment and eviction rates. With this type of property, you may have a chance at a higher return, but you also increase your investment’s risk profile. While this isn’t considered a bad investment, the investor simply needs to decide how much risk they are willing to take.

Quality Property Management

Property management is by far the most time-consuming piece of real estate investing. A property rehab may only take a few months, but managing a property is a never-ending task. It starts with identifying quality tenants that will take care of the property and pay rent consistently, then it evolves into maintenance and repairs, and it eventually returns to finding a new tenant and starting over again.

For most real estate investors, quality property management is difficult to achieve on their own. Quality tenants take time to identify, and ongoing maintenance of a property requires personal time or trust in a contractor to do good work.

Professional property management companies are a good solution for the hands-off investor, but it’s important to find a company with the appropriate infrastructure in place to manage a high volume of homes.

Turning To Turnkey Investments

If you decide that passive real estate investing is your strategy, then turnkey investments may be your best option. True “turnkey” means that there is very little work for the investor to do. It’s almost as simple as walking to your mailbox and collecting your check each month. Obviously, nothing is ever quite that simple. But, the problems of a turnkey investor are usually few and far between. That’s why turnkey real estate investments are the choice for many investors.

If you’re interested in learning more about turnkey real estate investing, check out my post about the 4 Most Important Things to Look for in a Turnkey Real Estate Provider.