Are you looking for some real estate investing tips to start building your real estate empire? Or maybe just to generate a stream of income separate from your day job.
You’re in the right place. Today we’re sharing our top 10 real estate investing tips for new investors. More specifically, we’ll discuss tips for long-term residential rental properties. Of course this isn’t the only way to invest in real estate. Check out 18 different ways to invest in real estate to scout your other options.
But before we jump into those real estate investing tips, we should probably explain why real estate investing is a worthwhile venture.
Why You Should Invest in Real Estate
- Cash flow. Even if you finance your investment property, you’ll still enjoy a positive cash flow (assuming you did your due diligence to make sure the property would be a wise investment). And once your tenants pay down your mortgage, your cash flow sky rockets.
- Tax breaks. Even with the new tax plan, there will be plenty of deductions available for investment property owners.
- Appreciation. In addition to the cash flow and the tax breaks, real estate generally appreciates over the long term. Of course the exact rates vary heavily between markets and years. So I really consider appreciation to be the icing on the cash flow cake.
- Highly passive income. Once you have good tenants moved in, you’ll just need to handle a few repairs and a lease renewal annually. Or you could hire a property manager to make the income entirely passive.
- Perfect for real estate professionals. As a real estate pro, you already know your market and have insider information to help you make smart investment decisions. Plus the cash flow will help stabilize your income during your slow season or even through a down market.
- Asset-building. If you spend your spare time collecting smart rental properties, you’ll be able to build quite a property portfolio over the years. These assets give you options later in life. You will always be able to live rent-free in retirement. You can pass the properties along to your family, or you can liquidate the portfolio to leave behind a strong inheritance or charitable donation.
With all those great reasons to invest in property, let’s talk about our top 10 real estate investing tips.
Quick side note: this post was originally published in 2018. Here’s the new and improved version!
Our Top 10 Real Estate Investing Tips for New Investors
1. Find the balance between rushing in and procrastinating
Most new real estate investors go 1 of 2 ways. They either 1) get so excited about investing that they rush into a poor purchase, or 2) keep making excuses and procrastinating out of fear or anxiety.
Both are perfectly normal and entirely understandable. And both urges need to be kept in check if you’re going to find success in real estate investing.
Pay attention to your natural tendency to leap or to freeze. Then ask yourself (and maybe a trusted advisor) if your emotions are clouding your judgment.
2. Make sure you’re financially ready to invest
How do you know you’re financially ready to invest in real estate? Take this little quiz:
- Do you have an emergency savings account with enough money to cover at least 3-6 months’ worth of living expenses?
- Do you have a well-funded retirement account to which you’re making regular contributions?
- Are your high-interest debts (like credit cards) paid off?
- Are your low and moderate-interest debts (like student loans and/or a primary home mortgage) well under control?
- Do you have great credit?
- Do you have sufficient savings (aside from your emergency and retirement funds) for a down payment on an investment property?
If you can answer yes to all of the above, you’re probably in a solid financial position to invest in income property.
3. Focus on Cash Flow
Real estate typically appreciates over the long term. But that’s not why you’re investing in a rental property. You’re investing in a rental property for the income! The appreciation is the icing on the cake. So make sure you select a property with a good monthly cash flow.
You’ll need the rent to cover the principal, interest, taxes, and insurance, of course. But it should also cover your property management expenses, maintenance, and routine repairs. And provide a solid income even after all those costs are paid.
A common rule of thumb is the 1% Rule. The 1% rule states that the monthly income should exceed 1% of the acquisition price. The acquisition price is the purchase price plus any amount invested upfront on repairs and replacements to ready the property for the rental market.
By this rule, you should confirm that a property could generate at least $1,000/month if you plan to acquire said property for $100,000. As another example, a $250,000 property should generate at least $2,500/month.
The purpose of this 1% Rule is to make sure your returns will be comparable to the returns you could receive by investing in the stock market. We won’t get into the math behind this relationship here, but it’s worth mentioning so you know there is a good reason for this 1% figure.
4. Look for spillover markets
You already know real estate is all about location. If you can afford something in an up-and-coming neighborhood, go for it! It’s most likely to enjoy greater appreciation than other neighborhoods.
If that neighborhood has already grown too expensive for your budget, look for the spillover markets. Spillover markets are the still-affordable neighborhoods near the highly-desired neighborhood. It’s where buyers and renters move to enjoy the perks of the best neighborhood without the absurd prices. The “Beverly Hills Adjacent” neighborhoods.
These spillover markets benefit from the growth of the nearby hot market, but they are still accessible.
And you don’t want the most expensive house on the block. The lower-end houses on the block are more likely to provide the best returns.
5. Create a property management plan
Will you manage the property yourself or hire a property manager? Either way, you need a plan to manage a rental property.
How will you screen potential tenants? How will you collect rent? What will you do if the rent is late? How will you handle repair requests? How will you turn the property between tenants?
My recommendation is to always budget for property management services when assessing potential investment properties. Even if you plan to manage the property yourself. Planning for the expense of hiring a property manager is a little extra assurance that you have the option if you decide property management is no longer worth your time.
If you do plan to handle the management yourself, make sure you invest in some inexpensive, but effective, property management software to help you stay on top of your rental(s).
6. Expect the unexpected (and budget for it)
You already know to plan for certain maintenance expenses. The roof, appliances, and HVAC systems will all need to be replaced at the end of their useful lives, so you can set aside a certain amount of your rental income for those planned expenses.
But real estate pros know things don’t always go according to plan. In fact, they almost never do. Every deal offers its own obstacles for you to overcome. And income properties are the same way.
There are lots of unknowns in real estate investing. The property can have not-so-great surprises like mold, infestations, or malfunctioning appliances. The tenants may not always behave as you would expect. And even the weather can create unanticipated problems and expenses.
Everything in life is a gamble to some degree. Real estate is on the safer side of the gambling scale, but it’s still important to mitigate some of the risk. Rather than using all the income produced by your rental property, set some aside in an emergency fund to help with these unexpected but inevitable costs. My personal preference is to save up to 50% of the cash flow in a mix of high-yield savings accounts and bond-based index funds.
Some years you’ll only have a few minor repairs to address. Other years, you may need to replace a roof and repair a surprise plumbing disaster just weeks apart. So expect the unexpected and build it into your budget.
7. Be prepared to hold the property through a down market
Most of us remember the Great Recession all too well. Around 10 million homes went into foreclosure. And around 15 million homes were in negative equity, meaning that the seller owed more on their mortgage than the property was worth.
As a country, we’ve taken precautions to avoid some of the mistakes that led to the recession. But we also need to remember that real estate is cyclical. Home values will rise, and they will fall. Savvy investors understand the importance of being prepared to hold property through a down market, even sustaining mild monthly losses if necessary. If you’re playing the long game, you’ll still come out ahead.
“But what if the market drops and doesn’t recover?”
Well, if that were ever to happen, we’d all probably have much bigger problems than losing our investment.
8. Stay organized
You’ll need a way of tracking the financials for your investment property. Many of your ownership expenses will be tax-deductible, so it’s important to track those expenses. And of course you’ll need to track your income.
While there are many accounting software solutions to help you stay organized, my favorite by far is FreshBooks. FreshBooks is taking over the accounting software market from giants like QuickBooks and Quicken.
What’s so great about FreshBooks?
- It’s great for managing multiple streams of income. So you can use it for your investment properties and your financials for any of the other 25+ Income Streams we recommend for real estate professionals. All-in-one solutions make your life easier.
- It’s cloud-based, so even if your computer crashes, you’ll still have access to all your data with no downtime.
- It’s mobile-friendly. You can pay bills and invoice clients right from your cell phone.
- There’s a short learning curve, so you don’t need to waste hours trying to figure out how it works.
- You can invoice online and receive credit card payments without hassle.
- You can track expenses on a project basis.
- The time-tracking function allows you to accurately pay any admin or additional hourly assistance on a project.
- They offer a FREE 30-day trial so you can make sure the software suits your life and your business.
If you’re truly recession-proofing your real estate business by adding multiple income streams, FreshBooks will save your sanity.
But if you’re simply looking to organize your financials for 1 or 2 investment properties, you may want to start with a free, limited-feature software solution. Consider Rentec. The basic program is free for up to 10 properties. It tracks income and expenses, includes a tenant-screening function, and provides management reports. It’s a solid starting point for new real estate investors who are looking to manage the financials for investment properties only (and not all those other potential income streams).
9. Assemble a solid team
You know real estate is a team sport. Surrounding yourself with experienced specialists will make your investments more sound and your transactions smoother.
Consider:
- attorneys
- tax accountants
- property managers
- mentors
- lenders
- maintenance pros
- etc
On a similar note, you understand real estate deals are often about relationships. If you want to be the investor who finds gems before they even hit the market, you need to nurture these industry relationships to stay in-the-know.
10. Be persistent
“Be persistent” is just good life advice! And it makes our list of real estate investing tips because it pertains to every aspect of income property ownership.
Finding the right investment property isn’t easy. You need persistence to sift through hundreds of options and choose the best fit.
Selecting good tenants also takes persistence. As does working with vendors on maintenance and repairs.
Whatever stage you’re at in your investor journey, keep at it! Your persistence will pay off.
That wraps up our real estate investing tips for new investors. Best wishes to you and your business!
Next Steps
Think real estate investing might be for you? If you want to learn more, I highly recommend a few books to get started:
If this income stream isn’t your cup of tea, check out our previously-mentioned 25+ Potential Income Streams, and see if you can find a better fit.
And whatever income stream you decide to pursue, make sure you join our Community for notifications of new money-making, life-changing content!
PS: What do you think of our list? Do you have other real estate investing tips to share with our community?
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