Reader Question: We have spent the past two years reading for real estate investing. We have a plan laid out that we believe is achievable, and we are ready to buy our first two-to-four family fixer-upper. Once we identify what we think to be the right property, what are your best buying tips to ensure we are successful with this property?
Monty’s Answer: There is little any person can do or say to ensure that you will be successful. A good comparison here may be to a pro golfer. Only they can take responsibility for their success or failure. It may be helpful before you make the big step to review this real estate investing article at DearMonty dot com. Because buying the right property is the most critical part of investing, tips on smart selection are included. After all, at this point, you are still rookies.
Identifying the right property
1. You have your team members lined up. A real estate attorney, home inspector, real estate agent, and subcontractors for heating and cooling, plumbing, electrical, and a remodeling contractor. Quick access to advisors is beneficial when buying and placing the property into service.
2. To buy right use data to drive your decisions. You should understand the market in which you are buying. Learning as you go is risky. For example, if you plan to purchase two-three and four family flats in gentrifying neighborhoods, you need to know the per square foot rental rate, that properties in those neighborhoods are appreciating, the market conditions, and more. How do you discover this data? The municipality, real estate agents that work investment property, secret shopping, MLS data, and other reliable sources.
3. A supply chain is beneficial. Courthouse foreclosures, Banks with REO, wholesalers, a prospecting system in your neighborhoods, real estate agents that specialize in REO and short sales, and do not forget the MLS which can have excellent buys. Look for distressed properties.
4. Before you set foot in a house, you should know how much you can pay for it, how much you can borrow against it, what the rents will be when you freshen it up, what it will cost to add value, and what you can expect for a return on investment. Let the neighborhood market drive your choices rather than your personal preferences. In real estate, you will make money being patient and using your calculator wisely. You want to have two or three properties identified and negotiate first on your number one pick. Rookies tend to be long on optimism and short on patience. This business is not easy and not a get rich quick play.
5. If there is seasonality in your market, look to buy when it is slow. Look at property others have passed over, or listings that expired unsold. Sometimes the market’s response to a property will soften a seller over time. Do not buy a property from a flipper or one that needs no work.
When you have secured the right property
6. How much remodeling or freshening up is necessary? For example, you decide that all it needs is to replace the kitchen cabinets and a fresh coat of paint. You finish that, and now the new cupboards make the floors look like they need replacing. One improvement can often lead to another unexpected one, or two, or three. Perhaps you should have just repainted the cabinets. You have to be careful about justifying the higher expense upfront, so your return on investment is not affected. Avoid pets if the market allows it.
7. Standardize your material purchases whenever possible. Use the same bathroom faucets, type of flooring, paint, and other components to simplify purchasing. The more work you can do on your own and build “sweat equity” on your property the better. Or, use contractors or tradespeople when there are jobs outside of your expertise.
8. Don’t be afraid to evict tenants. If they are high maintenance with unrealistic demands, late with rent payments, generating neighbor complaints, or not following the rules, replacing them with good tenants will strengthen the property. Do not be afraid to increase the rent when the market tells you to do so. Become experts at screening tenants; use credit reports, check with past landlords and drive by their current residence.
9. Build cash reserves based on the cost of components replacement and the expected remaining life, and you can manage unexpected repairs with ease. Include a property management fee even if you are self-managing.