Successful business owners are often looking for ways to invest their money, as letting cash sit in the bank isn’t the best use if you are looking for a solid return. This leads many to explore investing in real estate, with a focus on rental properties.
Some buy turnkey properties that they can put tenants in right away or already have a tenant in place, while others like to buy rehab properties cheap and fix them up and then put them on the rental market. Regardless of what strategy is more appealing, there are some basic tips you should take into consideration before investing.
Have enough cashflow to maintain the property if a tenant defaults.
The biggest mistake many real estate investors make is spreading themselves too thin in terms of cash flow. You never want to rely on the tenants rent payment in order to hold a property. Doing so can put you in a bad situation in the event those rent checks stop.
“There is always the possibility of a tenant defaulting and not paying. There are many laws in place that can keep your property occupied for several months or even a year without receiving any income from the property. Never buy an investment property that you can’t hold without tenant money,” says Dr. Brett Moore, DDS, Smile Design Dentistry.
Start small, buying smaller units that you can comfortably afford to hold and cover yourself. It’s a smart strategy that will help you learn the ropes.
Focus on covering expenses rather than turning a profit in the beginning.
Remember, most real estate will be an asset that increases in value over time. Focus on getting quality tenants in the property that will cover the holding expense. Beyond that, you are gaining equity every year as your mortgage is paid down.
“Sure, profiting on a property is nice, but don’t expect it. Focus instead on covering all expenses related to the property, including mortgage, taxes, insurance and upkeep. If you can build your assets up without coming out of pocket you are doing well,” advises Jonathan Rolande of House Buy Fast.
Once you master this formula you can then continue to add more properties to your portfolio. As it grows your leverage increases, and as you pay down the mortgages you can then use the equity in the properties as collateral to acquire additional properties. This is how real estate portfolios snowball quickly.
Look for properties in areas with a lot of colleges and universities.
Naturally you will want to look for investment properties in areas that are economically sound. You don’t want to buy in areas that have high unemployment rates or bleak job markets. “Middle-class neighborhoods with low unemployment rates are the sweet spots, and where you will find the most initial success,” says Jeff Djevdet of Speed Property Buyers.
One popular strategy is purchasing properties in areas with several colleges and universities. Not only do you have a constant flow of students looking for housing, but the teachers and faculty as well. These areas usually result in very little inventory, so the odds of you constantly at full capacity are high.
Condos and multi-family homes are great scores in these areas. Multi-families will typically produce more cash flow that single family units, especially for those investors that buy fixer uppers and foreclosures at a discount and then rehab them. The key is to team up with an experienced real estate agent in these areas, specifically one that is able to bring you off the market deals before they are listed on the MLS.
