What are they? I certainly don’t know all of them because I don’t have experience with all of the different aspects of real estate investing, but that’s why we have BiggerPockets- let’s create the list together.
When I say fundamentals, I’m talking about the first thing you would say to a brand new investor who knows nothing about investing. What is the one thing that stands out above all else that a new person has to know? Without it, they are doomed to failure.
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For rental properties, the number one must-have is positive cash flow.
Unless you are intentionally buying a property in hopes that it will appreciate and that’s where you plan to see the profits, there must be anticipated positive cash-flow every month.
What does this mean?
It means that the amount you collect in rent from your tenants has to be greater than the total amount of your expenses. This seems oddly simple, but you’d be surprised how many people who are interested in real estate investing, but haven’t yet entered into our world of fun, don’t realize what constitutes a profitable rental property.
I know before I was ever in real estate I had the misconception that just owning a rental property was a good move. I got suspicious about the profit side of it after I looked at a handful of properties in Orange County, CA and couldn’t quite put my finger on why but something about the numbers didn’t make sense to me. Pay $270,000 for a small torn-up property that would rent for $1200/month? I didn’t know what I should be calculating, but that struck me as off. Sure enough, now that I am in real estate, I know for sure those would have been horrible deals. The mortgage cost alone on that property wouldn’t have been covered by the rents.
You should never get duped into thinking that just owning a rental property is a good move. If it costs you money every month to own it, you aren’t getting the benefit that a rental property should be giving you. People skip over this basic lesson usually for one of two reasons:
- They have only been taught that owning a rental property alone is a smart move and no one dug into that concept further with them, or
- They live in an area, such as LA or NY, where prices are so high that rents would never cover the expenses and they have no idea that isn’t the case in other markets.
Being able to buy the same house in Atlanta for $120,000 that someone in LA would have to pay over $1,000,000 for barely seems realistic, but it is.
Okay, that’s my vote for a rental property fundamental and I’m starting the list with that. You can either expand on that concept or give us your own. Especially flippers, appreciation investors, wholesalers, note buyers, and any other type of investors- give some direct input about your field so anyone interested in that field can be aware of those fundamentals. As you start commenting, be sure to specify the type of investing you are referring to or if you are just speaking to real estate investing in general.
What is the first fundamental lesson you would teach your grandkid as soon as they say they want to become a real estate investor?