You’ve done a bit of investing. You’ve bought a few stocks that your sister-in-law recommended and own some mutual funds in your 401(k). Through your research, you’ve educated yourself on the rules and merits of diversification. Mainly, don’t put all your eggs in one basket, spread your money out across various asset classes, and if those balanced mutual funds perform poorly, perhaps the stocks you hold will pick up the slack in your portfolio.
Speaking to family and friends at holiday gatherings and cocktail parties, you inevitably strike up a conversation with someone who has ventured into real estate investing. They buy and rent out homes for profit or current income, extolling the fiscal virtues of being a landlord. Purchase a property, make some repairs, find some tenants, and watch the cash roll in. From what you’re told, it all sounds pretty simple. As with someone who won a bundle at the casino but doesn’t tell you how much they lost in the previous five trips, it’s what they don’t say that should raise concerns.
Buying and Renting Out Investment Properties
As opposed to gambling, real estate investing isn’t an all-or-nothing proposition. Property investment bears some risk to principal but unlike the mutual funds you’ve acquired, there doesn’t exist a seasoned, professional money manager at the helm who decides which stocks do or don’t belong in their portfolio, and when the worthy ones should be bought or sold. The difference is, in the real estate arena, you pilot your own ship. The success you realize will be determined largely by you, and somewhat by the forces of the market. When buying investment property to rent out, stay mindful of several do’s and don’ts that will help you optimize return on investment and avoid many common property investment pitfalls.
Here’s a few of the most important do’s, don’t, and best practices for buying rental investment properties:
- Research the market. Impulsive purchases can sometimes be unwise. You want something so badly you’re unconsciously willing to overpay for it. Real estate purchases differ from cashmere sweaters, however. You’ll be forking over six figures in most transactions so it will be a grave error to buy a four-unit apartment building for $175,000 when similar properties exist across town for $140,000. Study the market and comparable properties. Choose locations that are close to schools, shopping, and public transportation. Also, be sure the rent you require meets the level of payments in the same neighborhood.
- Play to your strengths. Buying rental homes fleshes out more like a small business operation than an investment that you can set and forget. You’ll need to make property updates, find quality tenants, and manage the financial end of the equation. You must be handy, fiscally savvy, and administratively adept to juggle all these responsibilities. If not, don’t despair. Decide which tasks you can handle yourself and delegate the ones that give you pause. When necessary, leverage the expertise of contractors, real estate agents, and mortgage advisors.
- Conduct background checks. How many nightmarish stories have you heard involving bad tenants? Property damage, criminal activity, and past-due rents increase cost and liability, and limit cash flow. Don’t be that person who accepts the first tenant able to come up with the first month’s rent and a security deposit. Perform credit and background checks. Whether you do it yourself or enlist an agent’s help, uncover as much information as possible on your prospective occupants. Credit scores might not predict future problems but they provide an objective means for comparing applicants.
- Rush into the mix. Everybody else is doing it, why can’t you? Contrary to what you might feel, being a landlord isn’t for everyone. Talk to other investors and take stock of yourself. Do you want 3 a.m. phone calls when a pipe bursts at one of your properties? Consider that property ownership isn’t a 9-5 affair. Weigh the inconvenient possibilities before you jump into the fire.
- Overextend yourself. You may carry significant long-term debt and believe that you can eke out one other payment for an investment property. No one knows your monetary situation better than you, but it’s always prudent to consult a financial advisor before committing to another loan. Likewise, draining your cash reserves might put you in a liquidity squeeze if home repairs or medical bills pop up unexpectedly.
- Bypass the inspection. If you do decide to pull the trigger, a walkthrough will point to obvious cosmetic faults in the property. Despite your gut instinct, more expensive issues might lie beneath the surface. Skipping a professional home inspection could leave you with a home that can’t be inhabited without expensive structural repairs. Worse yet, the building may need to be condemned.
Best Practices for Building a Rental Portfolio With Confidence
Much more so than with casual securities investing, real estate speculation involves a lot of moving parts. HomeVestors® removes much of the uncertainty from the real estate investment process by providing you with a dedicated and experienced Development Agent to help you through each detailed step of the purchase. Jumping on board as an independently owned and operated HomeVestors® franchisee grants you access to industry-leading tools such as the ValueCheck®, a surefire proprietary software to help you evaluate the right property at the right price.
Contact HomeVestors today, leverage our expertise, and discover how you can quickly become a savvy, successful real estate investor in your own right.
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