The Top 4 Things I Wish I’d Known When I Started Investing in Real Estate

13

Remember when you first caught the real estate bug? I do, and I remember being really excited. I remember thinking that all of my worries would soon be over and all of my dreams would be fulfilled. The people I was listening to and the books I was reading were all telling me the cash would just roll in. It would be easy. Nothing could go wrong. I was seeing the world through rose colored lenses.

So, of course, I jumped right in. I have been a real estate investor and landlord now for over a dozen years. The last time I worked a “full time job” was in 2005. And while I was not quite as naïve as I made myself out to be in the above paragraph, I was pretty naïve and the reality of things has been a bit different.

A lot of what I was t(s)old about real estate is true. It is a great way to invest and build wealth. But there is another side of the story that I had to learn from experience. In other words, I wish I had known then what I know now.  So to help out those just recently bitten by the real estate bug, here are four things I know now that I wish I had known then.

Download Your FREE Tenant Screening Guide!

Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.

Click Here For Your Free Tenant Screening Guide

The Top 4 Things I Wish I’d Known When I Started Investing in Real Estate

Upkeep is something you shouldn’t underestimate.

All of the books I read said that you should put aside about 10 percent of your gross rents for maintenance. And that is likely about right if you just think about the things people break that you need to repair. But there is often a lot more than simply fixing something after it breaks. For example, what about keeping your properties nice looking and maintained?

Related: 5 Life Lessons From the Book I’m Writing & Passing Along to My Children

Maintenance and upkeep are a bit of a different animal than repairs. What about fixing up your properties after a tenant moves out. Even a good tenant can cause significant wear and tear. I am here to tell you that 10 percent of gross rent does not even come close. It just costs a lot more money to keep everything looking nice, repaired, and in good working order. How much? I would budget at least 20 percent for repairs and upkeep when examining properties to purchase.

s-corporation

Tenants WILL drive you up the wall at some point.

No matter how well you screen them, no matter how well you vet them, there will always be one or two tenants that will drive you nuts. And as soon as you get rid of one, another starts the cycle over again. If you are going to be a landlord, there is no way around tenants. Yes, they will pay your bills, but they will also give you many grey hairs.

Recapture probably isn’t what you think it is.

One of the many things that is promoted about landlording is the income tax deduction of depreciation. Don’t get me wrong, this deduction is a great benefit. But at some point, Uncle Sam is going to get paid if you want to sell and cash out. This is called recapture.

Recapture is something that very few newbies understand, think about, or are told to think about. Basically, recapture gives a lot of that money you saved with depreciation back to the IRS when you sell. Sure, you can avoid it with a 1031 exchange, but sometimes you really just want or need to cash out. If you do, you need to be aware of how big your tax bite is going to be because you may not get all that you thought you were going to be getting.

house-hacking-tax

Your retirement plan may not take everything into account.

Have you thought about your exit strategy? How are you going to retire from being a landlord? How are you finally going to get rid of those pesky tenants and all of that upkeep? There are generally only two ways to get out of the landlording business. Either you sell your properties or turn them over to a management company.

Related: 3 Tales of Landlording Catastrophe — And the Invaluable Lessons They Teach Us

If you plan to sell and cash out, you have to think about the tax bite from recapture. But you also have to think about who will be buying your properties. Most likely, you will be selling to other investors who are looking for the same thing you were when you bought the property. And that is cash flow. So unless the rents in your area have gone up dramatically over the time, you may not get as much out of the property as you think.

On the other hand, you could keep the property and turn it over to a management company. But that is expensive to do and may seriously eat into your cash flow. While there are many good management companies out there, they will never care for your properties like you do, they make money from turnover and repairs, and you may have only traded one headache for another.

Yes — once the real estate investing bug bit me, I was hooked and jumped right in. I was excited and perhaps did not want to hear about the downside of real estate investing. However, even if you do not want to hear about it, you will learn about it at some point. Would I do it all again if I could go back with the knowledge I have today? Yes, absolutely. I would have perhaps done some things a bit differently with business structure or property acquisition. But real estate investing, despite the issues I have mentioned above, has been very good to me. And it can be very good to you as well. Just go in with your eyes wide open.

Investors: What about you — what do you wish you’d known from the beginning?

Leave your comments below!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

13 Comments

  1. Alex Craig

    Newbies I find tend to undershoot maintenance cost. I would say budget 3x if you don’t rehab the house right on the front end. Another thing newbies learn is your house will look like your tenant. Provide a tired and dated house, you will get a tired and dated tenant. Lastly, and this is within the lines of teants driving you nuts; but rarely can you rationalize with a late paying tenant even when you offer them the best deals in their favor even when it requires minimal effort from their end.

  2. Neema Fotoohi

    Good points you bring up. The one that many don’t think about is Recapture. That one will definitely get a lot of investors (unless their CPA mentions it) when they go to cash out. It’s almost like a “credit” the IRS gives you while you own the property but eventually you gotta pay the piper back.

    • Kevin Perk

      Neema,

      Thinking of recapture as a credit is a goof way to put it. And it is something every investor needs to think about. But I cannot remember one guru over the years mentioning it when talking about the depreciation deduction. Lesson learned. There is always another side of the coin.

      Thanks for reading and commenting,

      Kevin

    • Kevin Perk

      Andrew,

      I agree. But no matter how well you screen, some go bad later on. Perhaps they lose their job or go off their meds. You can never catch it all 100% of the time. It does however get easier with experience. You learn to see the tells, the signs, the red flags that this particular person may be trouble.

      If you sense something is wrong, listen to that little voice inside and dig deeper.

      Thanks for reading and taking the time to comment,

      Kevin

    • Kevin Perk

      Joseph,

      The LLC was unnecessary at first. It just created more expense and paperwork.

      I might have also tried to buy larger properties with more units under one roof as opposed to single family dwellings. Less roofs to repair, less grass to cut. etc.

      I hope that helps.

      Thanks for reading and commenting,

      Kevin

  3. Grant Javernick

    Thanks for the article Kevin. All are good points. I myself am experiencing the pain of the recapture from a 2nd home/rental prop that I liquidated bc of divorce. Wish I would have known how costly it can before I agreed. Looking at it as a learning experience that will definitely be on my forefront going forward with rentals.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php