Everyone’s doing it, apparently. It’s all over the infomercials, radio ads, classifieds, book store shelves, and even those scrappy hand-written signs by the side of the road: Need Apprentice! Learn to Make Money in Apartment Investing!
Real Estate Mogul Donald Trump knows how to side-step financial ruin. - Image Businessweek.com
It must be a great idea, right?
Sure, real estate investing can be a great idea, but it can also ruin you financially if you don’t take the time to learn how to be smart and make wise choices. Even the pros sometimes make costly mistakes, so as a person thinking of dipping her toe into the real estate investing pool, you really need to spend some time getting an education before you start happily shelling out your life’s savings.
Let’s talk about 7 Things You Want to Know Before You Pull out Your Checkbook And Buy That Duplex For Sale:
1) Know what you want to do. As obvious as this sounds, many people jump into the real estate market without a clear idea of their endgame. Owning property may make you feel pretty special, but being only vaguely hazy about what to do with it afterward can end up breaking you. Start with a clear, identifiable goal, whether you want to fix and flip, buy and hold, or whatever else you find really floats your boat.
2) Decide where the money is coming from. The last thing you want to do is jeopardize your own ability to live and eat by pouring all the money you own and leveraging all your assets into one daring purchase. While you might end up lucky, the “luck” part is more likely to have stemmed from making sound financial decisions than from some supernatural wink in your direction.
The most popular way to start investing is to use Other Peoples’ Money (OPM). Getting a bank loan, drumming up capital from other investors, having the seller carry back, setting up a Subject-To loan transfer, a seller second, lease option, or another creative financing arrangement are all ways to avoid using your own money to buy a property.
Get yourself thoroughly educated on the methods that are available and decide how you want to approach the financing for your first purchase. As you become more experienced, you will be able to work with sellers confidently to create a financing method that benefits both of you and makes it easier to buy California, Ohio, or New Jersey real estate and investment properties quickly and seamlessly.
3) Know when to buy. It’s almost easier to imagine investing for the long-term in the stock market. Things are volatile, but it generally trends up over the long haul. Real estate, however, can take a longer time to go anywhere. When it does go, it can go quickly (Exhibit A: the bubbles that burst in Arizona and Nevada in the last few years) and it can go in any direction. Or, it might just sit there doing nothing.
While you can’t predict everything that will happen in a given area over a certain amount of time, you can get pretty good at deciphering the signals and making decisions based on your due diligence to a particular property or neighborhood.
It probably wouldn’t be a great decision to buy a property in a neighborhood where prices have been steadily dropping, for instance, and you can’t find many redeeming qualities that would make you think it could be turned around. Read the books and articles, check with the experts, and begin using your common sense as your knowledge expands to calculate the ideal time to buy. Buying yourself a home to live in is a very different animal from buying an investment.
4) Know where to buy. Location, location, location. In some places, investment properties do not appreciate as well as in others. Some neighborhoods are on their way up while others are on their way down. Where are the schools, shopping, and work places? Where are busy main roads or geographical landmarks that may affect the property’s value? Being careful about the location of your investment is crucial to your whether you make a profit, just break even, or end up in the red.
5) Don’t get emotionally attached to your investment. Becoming less than objective about a potential investment means your decisions might be skewed, which can cause trouble. That darling little home you saw on the internet with long-term tenants may seem perfect, but keep yourself looking at the cold, hard facts and not getting wrapped up in the cozy “snuggliness” of it all.
What might have seemed perfect in the carefully worded description could be hiding a multitude of sins, so you must cultivate the ability to let any investment go if it turns out to be a bad deal for you.
Who cares if you have the deliciously old period home if you can’t get a tenant or potential buyer to also love its leaky pipes, sagging foundation, and long undiscovered termite colony?
6) Decide how you will manage your property. If you’ve decided to be a landlord, do you have what it takes to deal with problems? Could you evict a tenant who isn’t paying his rent?
Do you have the skills and time to fix the inevitable problems or would you rather have a property management company or competent complex manager deal with collecting rent, finding a reasonable plumber, and taking emergency phone calls in the middle of the night?
You’ll save money if you can be the hands-on landlord, of course, but you might also save money by hiring someone else to be tough on problem tenants if you know your fear of confrontation means you’d rather let them live rent free than deal with forcing them out. Factor in the costs for the manner in which you will manage the property.
7) Excellent due diligence can save you from ruin. When you’ve found a likely investment, it’s time to uncover anything and everything about the property before signing a contract.
- Does the property have additional liens?
- What is the local government planning for the area?
- Will this affect your ability to rent out or sell the property?
Check soil and environmental issues; you might end up inheriting thousands or millions of dollars worth of clean-up costs if there is an environmental problem associated with the property. If you are inheriting tenants, go over the last two years’ worth of rents collected, rental agreements, etc. In essence, check everything possible to make sure that the deal you think you see is the real deal you will get.
While making that first foray into real estate investing can seem daunting, once you learn the formula and get some experience, you’ll know what to look for and you’ll make better decisions. As with any major step in your life, approach it with care and caution, armed with as much knowledge as you can get, and if you make mistakes (and everyone does), make sure you learn from them.
About author: Lance Williams is a confident person who is into just about anything he can be. He does everything from snowboarding to rock climbing.
