There are almost as many ways of investing in Real Estate as there are Real Estate Investors. From various ways of acquiring properties to various exit strategies. There are also many things that many expert investors have in common. Sophisticated investors measure deals in terms of risk as much as reward, novice investors seem to be mostly concerned with reward. For those of us who have been in the industry, we have seen that risk can potentially wipe out almost any return on investment for years to come if not planned for from the beginning. Buying and holding rental properties is one of the best ways to accumulate long-term wealth. Having a tenant pay down your mortgage while your home appreciates and still leaving you with a little cash flow is a great way to build wealth. However, there are several steps that sophisticated investors know to take before they get there.
5 Fundamental Steps to Managing Investment Properties
Whether you are an out of state investor or investing in your local market, establishing your team will save you time and headaches by giving you expertise and insight to your options and liabilities. There are many important components that need to be considered and while many believe that a one-stop-shop can work efficiently, many investors have poor experiences with that. Networking with several different professionals create checks and balances as well as options. A good team member can often recommend services that they have a first hand knowledge and good experience with. Important components to consider are:
- Real estate brokers
- Other real estate investors
- Property managers
- Contractors / Project managers
- Insurance agents
Purchasing the right investment properties:
The old cliche is “location, location, location.” While every marketplace is different, there will always be desirable and less than desirable areas. Understanding the rental price ranges and target audience is key to understanding what type of experience that you may have. Rentals near a community college will likely have more turnover and damages than a stable family home in the suburbs. Choosing size and amenities are also important. In most markets, 3 or 4 bedrooms are more desirable than efficiency apartments. In some markets, a home must have certain amenities or it will not compete well against other rentals in the areas. By working with a real estate professional in the area that has a pulse on the local market, you will be better equipped to find the right location and amenities for your chosen market. They can also help you decide on necessary improvements for the property. It is important to make the right improvements for the area to have desirable and competitive rental properties.
Numbers are the basis for everything decision that you should make as an investor. Always do your due diligence. The person selling you a property is going to make their money with that transaction. They are going to present the property in the best possible light they can get away with. As a property management company, we make our money by placing a quality tenant in a well-maintained home. You will almost always get more accurate numbers from your property manager regarding rent ranges than from brokers or investors. It is especially important to use the most accurate numbers for investment properties so you can to analyze the deal properly. You need current figures about specific neighborhoods. Never take the seller or realtor numbers as the truth. Do your own due diligence on the property taxes, rents received, utilities, and more. Numbers are the foundation of good investment properties. It is imperative you are using the correct ones and these are usually best provided by property managers.
Some investor prefer to buy with cash, others use creative financing, while others use traditional financing. How you finance your rental has a direct impact on the bottom line and the strategies used to obtain profits. Some investors are seeking long term cash flow while others are looking at short term cash-on-cash return. By identifying your financial abilities and your investment goals, you can decide which strategy is best for you. These are often times best discussed with attorneys, accountants, or other real estate investors.
You should factor in the cost of property management, even if you think that you don’t need it. By working the cost of property management in to you overall budget and deal analysis, you create a cushion should things change. A good property manager can help identify risk factors and help with overall performance of your rental property. With the multitudes of Federal and Local housing and landlord/tenant laws, a good property manager can avoid costly mistakes. Poor property management is expensive itself. Also, the headaches of being your own landlord are alleviated because of the systems that they have developed to handle the day to day issues that come with managing rental properties. Without a property manager, you will be the one answering the phone every time something goes wrong. This takes time away from your daily affairs or from other projects. It is also important to have contacts you can call when you need them. A good property management company will have their own maintenance team and team of contractors who have negotiated rates because of the amount of work they are given, but if you have to scramble around for a plumber or electrician, you may be forced to use someone you aren’t comfortable with or pay a higher price. Good property management will help you retain your tenants longer which mean less vacancies. The number 1 reason for tenant turnover is slow or poor maintenance and inattention to the tenants needs regarding the property.
A great rental property can change your portfolio allowing it to grow even more. There will be months when you won’t get any calls on the property, and at other times you will get several in the matter of one week. This is the reality of investment properties. It takes time and diligence to build your team, acquire the right property, and manage investment properties, but the rewards are great.
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