By Forbes Real Estate Council
Real estate is a tricky business with a lot of ins and outs that can be difficult to navigate. Getting informed is the key to battling information overload and fatigue. We wanted to know more about what first-time investors should consider when looking for properties to put money into.
We asked members of the Forbes Real Estate Council for their best tips for investors setting out after their first deal. Consider this advice if you’re in the market for your first property investment.
1. Don’t Speculate
All too often, I see first-time real estate investors speculating on a home or condo with an eye toward a price appreciation. My advice is for a first investment property to be one that generates cash flow. A good, stable, middle-class rental property is an example. By doing so, the investor limits their risk in a downturn. True real estate wealth is based on cash flow.
2. Don’t Over-Improve Your First Flip
Investors need to reexamine the “Why?” of their first investment. Who is your target demo and what are their limitations? If you are improving for the purpose of renting, choose a simpler and replaceable finish (butcherblock counters and subway tile). If you are buying to resell, look at what is working best in the neighborhood where you sell and use it as guidance.
3. Dig Deep
Take your best three available deals and compare them. Be realistic in costs, your expected return and holding timeframe. If there are existing leases on the property, read each one and make sure there are no requirements for the landlord to reinvest down the road or other obligations. Check the areas and go to city departments and make sure there are not any road changes or new developments.
4. Find an Expert
Take your time and really understand the market. You don’t have the buy near your location, but you do need a trusted advisor that is local. Be careful, and don’t blindly trust the numbers. Verify with an advisor who doesn’t have a stake in the deal. Find a good property manager who can give you an unbiased assessment of the rent and the property.
5. Keep Your Eyes Open
Do it, but be prepared for the unforeseen costs involved. Rehab or not, there will always be upkeep on the property; city, and possibly county, taxes (with the occasional re-assessment); capital gains taxes; etc. Real estate is a great investment, just be sure you’re prepared for what you’re getting into.
6. Carefully Screen Tenants
Your property will only be as successful as the rent-paying tenants who sign the lease. The only way to legally find a qualified tenant is to utilize tenant screening resources. A credit report gives you a look into a renter’s bill-paying habits, a criminal report sheds light on a renter’s rule-abiding behavior and an eviction history report show if a renter has a court record of an eviction.
7. Establish Your Budget
Always establish the amount of money that you are willing to pay before looking and deciding on the best place to buy. Sticking to a budget is key for an investment, and it can be easy to get carried away with emotional or aesthetic attachments when looking at homes or picking out details for the renovations. If possible, when choosing an investment, select somewhere near where you live so that you can easily keep an eye out and work on the property. You will also be very in tune with what is happening in the neighborhood and local property trends.
8. Value Your Time
If you go buy-and-hold, make sure you’re properly forecasting all the costs of managing a property. Many first-timers only check that the rent will cover their mortgage. But don’t forget about vacancy and maintenance costs. You’ll also spend 200+ hours per year managing the home, so consider hiring a technology-enabled property manager if you value your time at anything more than minimum wage.
9. Know Your Exit Strategy
Are you looking to hold the property and rent it for positive cash flow, or are you seeking to fix and flip for a quick profit? If renting, understand the rental market. If flipping, check your rehab estimates and your after repair value (ARV). Can you still profit if costs are higher or the sales price is not the full ARV, if you need to drop the price for the property to sell?
10. Start Small
My best advice to first-time real estate investors is to start small. Make sure the mortgage payment is one that you could pay on your own in the event that a tenant stops paying rent. Find a property that is easy to manage and has low operating costs.
11. Don’t Skip the Education Step
The most common mistake I see new investors make is to jump into investing without taking the time to get educated about what the best strategy is for them. This can lead to bad investments, lower returns and much higher risk. Which resource do you have more of, time or money? This will help you determine which type of deals to do.
12. Distinguish Between Income And Future Value
Many first-time investors learn terms like cash-on-cash and CAP rate and based on these current figures decide if an investment is worthwhile or not. It is important to distinguish between immediate income and future value. Many properties are located in transforming neighborhoods that are currently showcasing lower returns but offer higher future returns for your money. Pay attention to the area.
13. Learn The Market
The most important thing a new investor can do is learn the market they want to invest in. Do not rely on a real estate agent, lender or friend to tell you what a good deal is. You need to know market values better than anyone because getting a great deal is the biggest advantage of real estate.
14. Don’t Go It Alone
Without question, connect! Aspiring investors are well advised to tap into the expertise of others who have successfully executed the kinds of deals they want to do. The key is local. We all know that real estate is local so focus on people with knowledge of your market. The right mentor or mastermind group can also put you lightyears ahead. Soak up as much knowledge as possible and whenever you can, pay it forward and return the favor.
15. Base Your Decision On The Cost To Buy And Upgrade
When you’re choosing a property to fix up and rent or resell, focus on the three most important factors: the cost to buy, the cost of improvements and how much you can sell or rent for after you renovate. A mediocre home in an up-and-coming neighborhood has the most potential for profit. Make your decision based on the potential for profit, not based on the home you’d personally like to live in.
16. Ask If It’s A Good Investment
For apartment investments, don’t confuse where you would want to live with where you should invest.
17. Keep Your Emotions In Check
I guess the expected answer from me would be to analyze a ton of data, but I think it’s even more important that you stick to your principles and don’t overbid just to get your first deal done. All the analysis in the world is meaningless if you get in a bidding war. Know when to pass, and keep searching for the right deal to set you up for future success.