Tuesday, May 22, 2012

Residential Real Estate Investing - Part 2

My top keys for successful real estate investment in 2011.

Learn all you can. The library is the best source for this information. Yes, the Internet has good information but much of that is geared toward making money for the one providing the information and they often just tell you the good parts. The time and money involved in real estate investment is enough to warrant extensive investigation and research. In one year the value increase can be as much as any job so corresponding time should be allocated.
  1. Pick houses you would be comfortable living in. If you don't like the neighborhood, the schools in the area, or think the house is too dumpy than pass on it. You want to attract quality tenants and in the future a good sale price so if you would not be willing to live in the place yourself many other people also would not.
  2. Shop until you drop. Once you have your ideal scenario from a cost perspective work with a real estate agent, let your friends and family know, and check the multiple listings on the computer daily. Realtor.com or John L Scott both have excellent websites. The best deals often go quickly. On the other end there are houses that have been on the market for a long time that the owner needs to sell and will be willing to negotiate on price.
  3. Stairs. Although I would not pass up a great deal on a home with stairs I would choose a single story over a multi-level. It is surprising how many people have a difficult time with stairs and require or prefer to be downstairs. This would apply to a multi-unit complex or a single family residence. Of, course when you get into the condo or large apartments the story is often very different but those residences often attract a different group of the population and most have elevators.
  4. Always do a detailed home inspection. Dry rot and pests can do damage not seen that is very costly to repair. The inspection will reveal what may need to be done now or in the future before you resell. These costs should be included in your cost analysis.
  5. Obtain 30 year fixed financing with escrow for taxes and insurance. This will allow the lowest possible monthly payment. Extra payments or payment acceleration can be used to pay down more quickly. Low long term payments allow the flexibility needed if the roof needs replacement. As the market recovers property values will increase resulting in higher tax rates, plan on this now so you are not caught unawares later.
  6. Find homes that are as close to renter ready as possible. Ideally the most you would want to do is a coat of paint, clean the carpet, mow the lawn, and a few very minor repairs. Unless you get an outstanding deal you do not want to do upgrades until you are ready to sell. You cannot control everything about a tenants lifestyle so this is very important. I had just replaced the carpet and thought the new residents would be pleased and they were. But everyday the husband walked through the house with his work boots on that had red dye. After only a couple of months the carpet looked like it needed to be replaced again. Things like that are hard on the blood pressure as the deposit does not cover the damage and small claims court is a very big hassle and does not always solve the problem.
  7. Tenant selection is the number 1 key to your success. The fact is that one bad tenant can ruin years of profit or even worse if they are using drugs in some cases the home can be condemned. Not good. Many of the very worst tenants are charming, polite, and helpful in the beginning. There are those who make their way through the world by taking advantage of others. This was the hardest lesson for me to learn and I had a number of lessons.
  8. ALWAYS do a credit check. (and, if possible a background check.) Often just telling someone that you will be doing one will prompt them to tell you their life story. I always told people we were not looking for perfect credit. We were looking for things that would indicate an ongoing pattern of irresponsibility. There are times when medical problems or a divorce may cause a bad credit report and considerations can be made. On the opposite end, if a tenant trashes your place at times it is beneficial to do a small claims action. Even if you never get a dime it will alert future landlords to a problem.
  9. Month to month rentals. Leases are beneficial only to those who have the legal means to go to court if a lease is broken. For the small investor a month to month rental agreement provides the most flexibility if needed. These can go on indefinitely but you are not locked into them. You are not going to keep a tenant if they need to move anyway so why fool yourself.
  10. Maintain a reserve. Just like you would keep 3 months to a year in reserve for your personal finances the same should be done for each rental home. This then is available for repairs, vacancies, or other unexpected expenses. Let's say a tenant does damage to the place and leaves unexpectedly in the night. Without a reserve you lose both the repair cost and the vacancies because you are unable to fix the home so that you can rent it.
  11. Be sure the home has cost effective heating systems. We bought a wonderful home with propane heat. The cost to heat the home was astronomical. Electric heat is often the most convenient and cost effective system for both the property manager and the tenants. Older places may have baseboards but the new forced air boxes are more effective if you need to install something to keep you going. Do your research in this area as it varies depending on your location.
This is not intended to be a complete list but things that immediately come to mind based on good and bad experiences we have had. I have read and attended a number of real estate investment seminars and generally have not heard these items mentioned.

The number #1 issue is don't let your enthusiasm overextend your knowledge. Be wary of any get rich quick ideas you may have. Yes, many have in fact gotten rich with real estate investing through sound business practices. Many others have lost. I recently attended a real estate investment seminar put on by RICH DAD POOR DAD who was one of my original motivators to get into real estate. I had to laugh when I read someplace in their information that the success stories they share are NOT typical. They can be with proper forethought, planning, and information. As I mentioned in part 1: I love it and so might you. In part 3 I'll share some of the information about one of our rehab projects.

Originally posted August 31, 2010

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