Investing in real estate can be complicated, costly, and even scary, if you don’t know what you are doing. The risks involved with any investment, particularly real estate, must be clearly understood before deciding to invest. As with all investments, sometimes they are successful and go up in value, sometimes they are the opposite and lose value (as seen in recent history).
With real estate values and interest rates creating the perfect buying storm, now may be a great time to start investing in real estate.
Helpful Tips for Beginner Real Estate Investors:
- Work with a licensed real estate broker. The advice of an experienced professional can be invaluable when investing in real estate. A good broker will be able to advise you on locations, future growth potential, rental rates, property management and much more.
- Know the locations you are thinking about investing in. Are the schools good? Is there shopping and dining close by? Is there easy access to freeways? Think about the things you would want in a home because your future tenants will want these same luxuries too.
- Study the rental markets. Ask your broker for good rental comps. This means you should consider single family homes and apartments. Understand what amount of rent you could typically expect. Rent prices can fluctuate faster than home prices in any given area. Are tenants in the area paying for utilities or is this cost paid for by the landlord?
- Discover what expenses you will have to pay. Examples incldue utilities, real estate taxes, property insurance, monthly maintenance, landscape maintenance, capital improvements (such as roof, flooring or appliance replacement).
- Plan for future expenses long in advance. Have a local licensed contractor inspect the home before you purchase. He or she will be able to give you estimated useful life expectancy of the major components of the home such as flooring, roof, plumbing, electrical, HVAC, pools, etc. Your contractor can also give you estimated replacement costs. Divide the replacement cost by the number of months remaining in the life of the component, then you know how much you need to save each month. Do not let a $2,000 HVAC replacement sneak up on you.
- Create a ProForma. A ProForma is a projected series of cash flows. Plot out your projected monthly rent, allowing for adequate vacancy between tenants. Plot out all the operating expenses, utilities, marketing, real estate taxes, insurance, repairs, turn costs, capital improvements, mortgage payments, etc. Once you have these incomes and expenses plotted, you can see what your monthly free cash flow will look like. This can be used to calculate Capitalization Rates and Rates of Returns to decide if this is the right investment for you.
- Plan for vacancy. No rental property can be rented 100% of the time. Even if it rents quick there is always a down time between tenants when the previous tenant moves out, repairs are made and a new tenant is found. Save up a few months reserves to allow you to cover the monthly carry costs while you are not collecting rent.
- Get a security deposit. Your real estate broker can advise you on the maximum allowable security deposits, these vary if the property is rented furnished or unfurnished. In most places the maximum security deposit is two months if the property is unfurnished or three months if the property is furnished.
- Screen your tenants. Bite the bullet and pay for a background check. These checks will reveal credit history, evictions, etc. Knowing your tenants ahead of time can save you a lot of money in uncollected rent and eviction costs.
Investing in real estate can be a very profitable endeavor. Zeromillion.com recently surveyed millionaires and found that 80% of them made their money in real estate. As profitable as it sounds not everyone makes money who invests in real estate. You have to know what you are doing, be smart and yes, have a little luck too. A smart investor always does his homework.
Educate yourself, ask for tips, and most importantly, work with an experienced professional like the team at CAPropertyFinder.com. Make the decision if real estate investing is right for you only after fully understanding all the risks and costs associated.