Top Tips for Residential Real Estate Investors
Whether you are a seasoned real estate investor with years of experience, or just contemplating your first foray into real estate as an investment, there are a number of tips which can help you succeed.
Why Invest in Real Estate?
Real estate investment, when conducted effectively, can be a highly lucrative proposition – it can in fact generate better returns on investment (ROI) than the stock market.
And, since it’s real property, it’s a tangible, physical asset.
But it’s not for everyone, and it’s always wise to learn, prepare, and plan properly. Real estate can be a great way to make money, but if you aren’t savvy about it, it can be an easy way to lose money, too.
What follows is a handful of tips you can use to determine whether real estate investment is for you.
Have Plenty of Cash on Hand
No matter what type of real estate you target, you are going to need to make a hefty outlay to purchase it – some lenders will accept 10% down, but 20% is better, and more still, if you can afford it, may get you a more favorable mortgage rate.
You should also be prepared, not only for the expenses (renovation or refurbishment, repairs, etc.) you expect, but for the inevitable expenses you don’t expect – because they will certainly come into play – real property needs constant oversight to maintain peak value.
We recommend that you create a segregated bank account for repairs, maintenance, and other incidental expenses, and that you maintain a balance in that account of ~20% of your annual rental income for that property.
Know Your Market
Whether you’re investing in residential or commercial property, it’s essential to know the area or neighborhood you propose to buy into. Some essentials to consider:
- Population density – is it going up or down? Up signals a potential surge in the market, down the reverse.
- Are prices trending up or down? If trending up, have they reached their peak? This is likely to be followed by a drop – get in while the market is warming, not when it’s at white-heat.
- What are the area’s amenities?
- Are they in walking distance?
- What is the area’s median income?
- Is the employment rate rising or dropping?
- What are rentals per square foot now? How do they compare with median income?
- What is the crime rate, and how does it break down?
One well-known real estate investor has said that if you don’t know an area like the back of your hand, you don’t know enough to invest there.
Be Prepared – Plan Ahead!
Before you spend a dime, prepare a detailed business plan illustrating your costs for purchase, closing, repairs/renovations, insurance, etc., along with your anticipated revenues, to be sure you have a good ROI in store.
Consult with your virtual CFO to help you prepare your business plan.
Be Careful About Renovations
Some real estate investors try single-handedly to upgrade a neighborhood, transforming a modest residence into a luxury property. This is a big mistake! A luxury home in a modest neighborhood will rent or sell for less than a comparable residence in an affluent community.
Instead of turning a middle-class home into a “best” home, turn it into a “best-in-class” home – one that will rent or sell at a premium price for the neighborhood.
Don’t put in a swimming pool in an area where there’s little demand for one. Some people – and some neighborhoods – like their nice lawns better.
Some general guidelines for smarter renovations:
- Don’t eliminate a bedroom for a different type of room in a family-oriented neighborhood. A family may really want that extra bedroom.
- Don’t cut into the master bedroom, its closet, or its bathroom – these spaces are precious to many buyers and renters.
- Do upscale fixtures like soap dispensers, but be smart about it – they should be attractive and of good quality, but they don’t have to be top-of-the-line.
- Same goes for kitchens – by all means, replace old or chipped stoves, sinks, refrigerators, etc., but these, too, need not be the highest-end available.
Know the Rules and Regulations
Real estate as a business is thickly planted with rules and regulations governing construction parameters – and that’s true for renovations, too. Don’t try to build out the basement into a rentable apartment before ascertaining it’s permitted by law, and desirable to buyers and renters in the area.
Build a Network
A network of other real estate investors, agents, contractors, etc., can help grow your profile, the trust others will place in you. A network can also provide mentors for new investors, and clue you into potential deals – helping you take advantage of the “hidden market.”
Some properties are snapped up by savvy investors before they ever get to a listing – check with your network for such opportunities.
Also check newspapers, whether paper or online editions, for obituaries and divorce notices – parting couples, and grieving families with their own homes, are dealing with a lot of aspects in their situations, and often eager to sell. They may not hold out for top dollar if they can sell for a reasonable price and have that property taken off their minds.
Consult Your Virtual CFO
There are, of course, attorneys who specialize in real estate, but it can often save you time and money to start by consulting your virtual CFO – so long as they (like RFG) have a specialty in serving the needs of real estate investors.
If you are thinking of investing in real estate for the first time, if you had a bad first experience, or are branching into a new market (e.g., you’ve a portfolio of residential properties and are now thinking of branching into commercial real estate), we invite you to consult with our team of experts – we’ve helped numerous real estate investors get their ducks in a row – and prosper!
Please click here to email us directly – how can we help? We are here to help you – in fact, that’s our mission!
Until next time –
Peace,
Eric