Important Tips For A First Time Investor
How to make sure your purchase is the right investment
By: Scott Autenreith, Realtor® with the Apex Real Estate Network
1) Stay Logical, Not Emotional
When purchasing a regular home, roughly 90% of the decision is emotional and only 10% is logical. This makes sense; as this is the place where a family will live, create memories, etc. When that same person(s) invests in real estate, it’s important for them to be 100% logical. They need to analyze the financials, property condition, before and after rehab valuation, etc. What will prospective tenants or buyers think of the property at first glance? Does the property’s layout make sense? Will this investment hit the target returns? Very often, new investors will try their best to force the numbers. If you’re doing this, it may be a red flag. Get back to the basics and understand that it’s okay to say NO to a deal. While one of the most important things to do as a newer investor is to get started, we need to make sure you’re getting involved in a GOOD DEAL.
2) Have An Experienced Investor Sign Off On The Deal
As a newer investor, you’re a bit “green” meaning you might miss something that an experienced investor will flag as a “no-go”. As you begin to network with other investors in your area, find one that you respect and that is willing to approve on the deal. What I recommend is having them drive by the property to get a feel for the location and then have them review the (proforma) financial projections. Have them provide any concerns, potential roadblocks, etc. To this day, my associates and I, who combined have done 200+ deals, still have another set of eyes review the newest investment opportunity. Simply, this can pay dividends especially when you’re new to the industry.
3) Do Some Of The Rehab (If necessary)
There are many newer investors that just want to leverage a contractor/handyman for repairs or updates needed with their first property. While I understand that many jobs require the involvement of a licensed general contractor, I recommend trying to complete some of the simple tasks yourself if you’re inexperienced. It may be frustrating, time consuming, and a downright headache but it will be worth it. You’ll be able to know how to do it, understand material costs, and the timeline necessary for completion. You can then apply this knowledge for future properties, which is a great takeaway.
4) Understand That Something Will Go Wrong At Some Point
One of the main reasons why people avoid real estate investing or even simply buying a home they will live in is due to fear of the uncertain. Some common arguments are related to the overall status of the market, commitment to a mortgage payment, and repairs required with renters. Yes, those are all potentials issues and they need to be included in the projections. One, if the market takes a hit, real estate has still appreciated on an average of 5.4% since 1968. With that, the property will eventually regain its value according to historical data. Two, the commitment to a 30-year mortgage can be addressed quicker by making additional payments or investing in property that will rent at a price to cover the property’s mortgage payment. That way, if you move out and want additional income, you can rent out the property to gain cash flow and equity. Lastly, repairs needed with tenants are always a concern with first time investors. I don’t think you’d be a great investor if repairs didn’t concern you! That’s why you need to budget monthly rental income towards repairs. Thankfully, over the last couple years, we’ve been able to determine a fairly accurate expense projection for a property. If a property is completely remodeled the budget can vary anywhere from 7-9% of the rental income. If the property is in decent shape (hasn’t been remodeled for 5-15 years, consider 10-12%. If it’s an older property that hasn’t been upgraded for 15+ years, estimate anywhere from 13%+ in repair expenses. Repairs can make or break a deal so be sure to consider those number in your projections!
If you’re new to real estate investing, it may seem overwhelming. There are a lot of moving parts to figure out. They include identifying an investment opportunity, running the proforma, doing the rehab, renting it out, selling the property, etc. Thankfully, there are many people like other investors, property managers, contractors, lenders, real estate agents, etc., who you can help you with the process. There is so much help out there! If you want to invest, the most important thing is to get started. Then, apply the tips I mentioned above in order to make sure your purchase is the right investment.
(Autenrieith is a Agent and Realtor® with the Apex Real Estate Network.)