Real estate investing can be a little daunting especially when you don’t know what to expect. It’s like being a new parent, jumping head first into a process you don’t feel qualified for. That’s how I’m feeling right now as I get ready to embark through the journey of motherhood. It’s very intimidating and I don’t know what to expect, but let’s just hope for the best. However, what I do know is a little thing or two about real estate investing and unlike parenting, I can give you a few pointers on what to expect from real estate investing. Here is what you need to know!
Know the market
If your goal is to make money from real estate investing, then you need to know your market and understand what exactly is going on around you. Take into consideration the following:
1. Property values
The only way to know if you’re getting a good deal on an investment property is by knowing its value and what it’s worth in that location. You can’t just go by the property values estimated in the media. What you need to do is get your real estate license (or better yet, use a rental property calculator) so you can have access to property values. You will get access to listing prices and closed sales prices. Why is this good? Because market values are established by closing prices, not asking prices. So depending on the conditions of your real estate market, there can be a wide difference between closing prices and listing prices. In the end, closing prices matter the most!
2. Market Rents
If you are planning on investing in rental property, then it is important that you know exactly what the going rents are in your location. The only way to make intelligent investment decisions is by getting an idea of what a property’s income potential is and by knowing the rental rates. You can find out the going rents by asking an appraiser. While ads advertising new rentals can give you some idea about asking prices, they’re not always the best representation of actual rents.
A common mistake that most new real estate investors tend to make is overpaying for an investment property. In real estate investing, if you intend for the property to be an investment in which you want to generate a positive cash flow, then you must buy at below market value. You don’t want to put into the property more than you’re getting out. Unless you are buying a property to live in, overpaying would be a ridiculous move to make.
Know that you should have plenty of investment capital
It’s quite normal in real estate investing to have more cash going into your investment property than if you’re buying a house you plan to live in. That is why every real estate investor should have plenty of investment capital. Here is why:
1. Know that you need a minimum down payment of 20%
There are no zero down mortgage programs for investment properties. That is why you should plan on a down payment of at least 20% of the purchase price. It’s true there are mortgage programs that advertise for lower down payments, but it’s not guaranteed that you will be able to qualify for them.
2. Know that you need extra money for needed repairs
When you look for low-priced bargain investment properties, you need to know that there is a good chance they will be in some sort of bad condition. It’s going to require from you extra money to repair the property and bring it up to the point where it can be occupied.
3. Know that you will have a vacancy allowance
Most real estate investors try to ignore this fact and don’t expect it to happen to them. In real estate investing, you need to know that there will be times where your rental property will be vacant. You should completely expect that there’ll be months where you won’t receive rental income. This is very normal. That is why you should have enough cash to cover expenses in cases where your cash flow from rent comes to a sudden stop.
4. Know that you will have to repair in between changing tenants
You will need to have extra cash to make any additional repairs in between changing tenants. It can be as simple as a paint job or housecleaning or as big as damaged walls or appliances.
Know the laws and protect yourself
When you enter the world of real estate investing, you should be aware of the laws involved in the landlord-tenant relationship. Even though you are the owner of the rental property, your options are often controlled by state and local law. For example:
1. Eviction process
As a real estate investor, you should familiarize yourself with your rights as a landlord and what the law allows and does not allow you to do. In real estate investing, even if the tenant is not paying their rent, by law, they have the right to be given a minimum amount of notice of eviction (generally not less than 30 days).
2. Rent security deposits
Each area is different in terms of rent security deposits. Usually, in some areas, the security deposit is equal to one month’s rent plus the first month’s rent upon moving in. While in other areas, it’s one month’s rent as the security deposit, the first month’s rent, and the last month’s rent. Make sure you find out how it is in your location and stick to it. Don’t cave in when some tenants who are short on cash ask you to ignore the security deposit requirement. No matter what they promise to give in return, always stick to rent security deposits. It’s your best protection in the event there is damage to the rental property.
3. Different insurance coverage
You should know that there is different insurance coverage for an investor than there is for an owner-occupant. Real estate investors have to make sure to have protection because of the possibility of injury to tenants. It is recommended that you get liability insurance coverage. That way if your injured tenant decides to bring a lawsuit against you, you will have it covered.
Know the different ways to make money
Before you buy your first investment property and dive into real estate investing, you should first have an idea how you intend to make money and generate a positive cash flow. There are different ways to do this:
1. Buying for income:
This means that real estate investors buy a property for the purpose of renting it out to make a stable and steady monthly income. To do this, you will have to purchase the property at a low enough price that rents will cover the basic house payment and still give you more cash to put into your pocket. You need to find a location where you are able to buy a rental property at below market value. In some areas, it’s almost impossible since property values are so high.
2. Fix and flip
Fix and flip is when you buy a property that needs a large number of repairs done. Because the property is in poor condition, you will normally get it below market value. You should be able to estimate how much it will cost to fix the property before buying it. You can make a large amount of money if you can buy the property and fix it for less than what you can sell it for.
This is basically when you buy an investment property and hold it for years in order to make the greatest return on investment possible. This not only requires you to buy a property at below market value, but you’ll also have to make sure you will be able to carry it for many years at a profit. To do this, you will need a profitable cash flow from rents.
What to expect when you’re expecting
In real estate investing, there are a lot of things you should expect to happen. It’s a rollercoaster ride with many ups and downs. The bright side is if you gain enough knowledge about the basics of real estate, you can start making profitable amounts of money to secure your future. Take your first steps with Mashvisor! Mashvisor provides investors with various tips and strategies on all aspects of real estate.
To learn more about how we will help you make faster and smarter real estate investment decisions, click here.