Reduce Your Real Estate Investing Risk
Real estate investing can be risky, especially for those that are new to it, and even for those that have a few transactions under their belt. There are, however, many ways you can significantly reduce or even remove those risks and enjoy better ROI.
These following tips are geared at those investors that like to buy, hold and rent, not for rehabbing and flipping. Having a real estate portfolio that produces positive income requires some thoughtful decision making on your part.
Look at the home, but don't play psychic regarding the market.
Yeah, we've all heard "Buy low and sell high" blah blah blah, and it's true, that works, but there's more to it for those seeking rental income for a while until the time is right to flip. The market could be up, it might be down or uncertain and even though I personally believe it's going to be "up, up and up" slow and steady for some time come, I wouldn't place all my eggs in that basket.
Don't get caught up in market hype, but rather, focus on whether or not that home can produce an income for you in the here and now, and for the foreseeable future. Avoid market timing as savvy investors avoid marketing timing on the stock market and go for the longer view, gauging the rent roll vs. expenses. Your investment should be bringing you a return regardless whether the market is up or down.
Consider real estate in metro areas first.
Have you ever noticed that people do tend to go where the jobs are? As metropolitan areas have a much greater number of employers, there's a much greater number of jobs and people will always need to rent. Your odds of finding good long term renters and keeping the property consistently rented out go up exponentially in a metro are with a diversity of employers and area with a more dynamic economy. Don't buy in an area fed by only one major employer, that's just asking for it.
Historically, you should be able to sell easier when the time is right as well.
Even so, know the area and take a good look at it. Every major metropolitan area has suburbs and a menu of neighborhoods on the rise or decline. Choose neighborhoods that aren't in decline, but experiencing a turn around. A neighborhood life cycle is about 25 years or so between rebirth and decline. Choose wisely.
Consider buying the worst home in a good neighborhood.
Think about it this way, it's easier to increase a house value on the low end than it's going to be to drive up the value of a house already on the higher end of a local market. Too, from a renter or buyer's perspective, it's much more desirable to live in the "worst home" in a decent neighborhood than live in the "best home" in a bad one. Some have even told me that they won't rent or buy the best home in some cases because it makes them feel like a target.
In addition to rental prospects, buying at a below the median price for the area will also help ensure the marketability of a property in just about any market should you find yourself in a position where you simply must sell, but don't hit the absolute bottom of the totem pole either. After all, you don't want to invest in a war zone or high crime area.
Caution and Calculators on Repairs.
Investing in a property than needs repairs should be approached with both caution and a calculator. Bear in mind the larger the project(s) the greater the potential there is for running into "unexpected costs", if your a real estate investor, but not an inspector or contractor your're going to want to take someone worth their salt with you when you investigate likely homes. The same goes for older homes, be very cautious not to be an older home that you can't restore to good living condition or homes whose outdated features have no cure or remedy.
Reserves and Future Expenses for Cap Rates.
There's a lot of different formulas for figuring cap rates (rate of return on investments) some simple, some very complex, but simple enough for single family housing investing, however, one thing I see over and over are investors cutting it too close not planning for that new roof, lawn care, plumbing repairs, boiler replacement as things happen. You should know and understand the life expectancy of such things, and it helps to have a great home warranty as well. That way it's not on you to do the repairs but a professional and many times a newer or better item replaces the old if the repair is impossible. I personally recommend 2-10 home warranty.
For newbie real estate investor future expenses, our Managing Partner David Mussari spelled it out in a simple and easy to digest manner in his post:
I also recommend a property manager if you have more than one property, for as low as 7% of the monthly rent and typically the 1st month's rent they will screen prospects for credit, rental history, review and contact referrals, previous landlords, gather deposits and handle evictions. Having a property manager will reduce the chance of evictions by the way which can eat up if not destroy your ROI.