It was 2005. I had never invested in real estate. My best friend had talked me into bidding on three, yes three, HUD foreclosures. “Don’t worry,” he assured me, “there’s no way will win the bid on even one of these properties.”
He was right. We were highest bidder on not one, but two single family homes in Columbus, Ohio.
And just like that we jumped into the deep end of the real estate investing pool. I was terrified.
Fortunately, the last eight years have worked out well for our investments. We eventually bought a total of five single-family homes, one of which we’ve now sold to a tenant. Today I’m flipping properties with my sister in Columbus.
Through this process I’ve learned a lot about real estate investing. So here’s my take on the seven habits of highly effective real estate investors:
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1. Find a Real Estate Investor Mentor:
My best friend’s father has been a real estate agent for nearly half a century. He’s bought and sold more real estate in central Ohio than Donald Trump has hairpieces. As we drive through a neighborhood, he literally points to house after house that he has sold, often several times.
His experience has helped us in several ways. First, he knows the value of the properties we consider buying, both resale and rental values. Second, he has contacts for everything from financing to rehabbing. Third, he has a wealth of experience buying HUD and bank owned foreclosures.
A mentor can help you avoid costly mistakes while teaching you the business at the same time. And that’s one of the reasons I love BiggerPockets; there is a wealth of information on the site that help us do better deals and make more money.
2. Use a Portfolio Lender:
Most banks sell their mortgages into the secondary market. As a result, the loans must meet certain standards the bank has no control over. A portfolio lender doesn’t sell its loans, so they can set whatever terms they want. In our case, we found a lender that would finance 100% of the value of the property after we fixed it up. The loans have competitive rates and typically are 5 year ARMS.
Over time we refinance the mortgages with a traditional 15 or 30-year fixed rate mortgage. But using a portfolio lender to start allowed us to buy property with very little out-of-pocket costs. And in the mid-west, you can even cash flow right from the start with no money down properties.
3. Be Well Capitalized:
Even if you can finance 100% of the costs, it’s still important to have access to capital. Whether you need to replace a furnace or a tenant fails to pay rent for three months, you should assume that your properties will require some investment sooner or later. As a result, I keep enough money in a high yield savings account to cover the mortgage on all our properties for several months.
4. Become an Expert:
My business partner and I have become experts in several important areas. We are experts in buying HUD properties. We know everything from the bidding system to timing. We are experts in the school district where most of our homes are located. And we have become experts at marketing lease-option deals. These areas of expertise have allowed us to make more money with our properties.
Flipping properties is a new approach for me. But I’m still using the experience I’ve gained since 2005. The property we bought to flip is a HUD foreclosure in a school district and neighborhood we know inside and out. In fact, my sister lives about a block from the home, and we grew up less than a half mile from the property. We know it well.
Whatever approach you take to real estate investing, become an expert in your niche.
5. Avoid Unnecessary Costs:
One of the hardest things to learn for me was the rehab process. What do you repair or replace? How much do you spend? Should you get stainless steel appliances? What’s a fair price for labor? The list goes on.
In our first home, we completely remodeled the kitchen for less than $3,000. We reuse everything we can. We charge supplies on either a cash back credit card or a Lowes card that offers a discount. While you can go too far, spending more time than the cost savings is worth, it’s more likely that you aren’t watching your nickels and dimes as you should.
6. Keep Impeccable Records:
Let’s face it, taxes for real estate investors are a royal pain. I hire an accountant to handle my taxes. But he can’t help me if I don’t have detailed records. Keeping track of rents and expenses is fairly simple. But it’s the depreciation expense that gets me every year, particularly if I’ve purchased appliances or other capital assets. The key is to keep detailed records of all of your transactions.
One thing I’ve found helpful is a simple paper scanner. I scan everything into PDF format and save it in a free DropBox account. The process reduces clutter in my home, and I know where everything is. At tax time, I can get the paperwork to my accountant by printing it, emailing it, or giving him access to DropBox.
7. Think Long Term:
What’s the single biggest expense for a real estate investor? If you said vacancies, then you speak from experience. It’s great to try and get an extra $25 a month when the lease renews, but if your tenant moves out and the property sits vacant for three months, it will be the most expensive $25 you’ve ever spent.
And tenant turnover is very expensive even if you are able to rent the property immediately. The cost of painting and cleaning the carpets can easily consume a month’s rent or more. As a result, we encourage long-term leases. We will offer a discount for a two or three year lease. We push long-term lease options on terms favorable to the tenant.
Back in 2005 when we first started investing in properties, we prepared a spreadsheet of projections. We made “modest” assumptions about the number of properties we’d buy, how much rent would increase each year, and our total net worth.
Today we laugh at that spreadsheet. Real estate investing is a great way to build wealth—slowly. Take your time, surround yourself with smart, experienced people, and grow your investments steadily each year.