Everyone who does real estate investing should treat it as a business. If you start off on the right foot, then there is a higher probability for success. It's important to know the basics of real estate investing, prior to making any large mistakes. This blog will help you out with some fundamentals and help you be successful.
Do's of Real Estate Investing
Do keep great records
Many new real estate investors seem to think record-keeping isn't important. If you don't keep good records of your investments, how do you really know how they are performing? If you keep excellent records on all of your investments it makes every year around April 15th go much smoother as opposed to rummaging through your piles of paperwork trying to put everything together just weeks before tax time. If you have a renovation loan with a lender, it is especially important to keep meticulous records of all the receipts and payments you have made to construction laborers and suppliers. Most lenders, if they are providing construction loans want all the work and material that have been done on the home accounted for. And if you are partnering with another party for your real estate investment, they will also want to see how monies were spent.
Do have an exit strategy
Whether you are planning on fix and flipping a home or buying and holding it, you better know before you purchase the home. Especially if you are utilizing a hard money lender, they like to know what your plan is. Not having an exit strategy is like having the cart before the horse; it becomes very challenging to make a successful real estate investment. This is especially important with market volatility. Unfortunately, no one is able to predict the market, so it's important to have a plan in place in case the housing market crashes, again. You shouldn't just count on everything working out perfectly, but run several scenarios so that you cover yourself. Have a plan for if you are not able to sell the property for your estimate because of a market shift. Are you able to hold it and rent it out? Can you move in and assume payments?The last thing you want to happen is lose the property in its entirety and have a foreclosure on your record.
Do know your investment expenses
This will tie in to a latter point of unrealistic math. Before you purchase a property, know what your investment expenses are going to be. Do factor in carry costs such as utility, water/sewer, taxes and trash. Some first time real estate investors seem to forget to factor in the carry costs and later find out that it might not have been the best investment. Not only should you factor in your carry costs, but you should also factor in other costs as well such as potential legal fees, improvements/maintenance, bookkeeping and eviction if necessary. Does the investment still work if you have to pay the loan for a longer amount of time than your original estimate.
Do know how to recognize neighborhood trends
Most successful real estate investors envision the future of the neighborhoods in which they build. As the population continues to increase, there will be more up-and-coming neighborhoods than just the ones that are currently popular. If you own real estate in future areas of redevelopment and hold onto them for the next 15-30 years it makes not only finding and keeping good tenants easier but also it will maximize your return. You will find yourself paying a higher premium in the already established neighborhoods. It's also extremely important to drive by the property at different times/days in the week to make sure you are comfortable with your investment. If there is a freight train that comes barreling right by your investment at 5 am every morning, it may make buyers think they could get your property at a discount.
Don'ts of Real Estate Investing
Don't over-leverage yourself
Don't get me wrong, leveraging yourself can be extremely beneficial and useful. It is when you start to over-leverage yourself that you can get into trouble. When you over-leverage yourself it means that you have too much debt that you can't make the monthly interest payments. Most successful real estate investors build their real estate investment portfolio over a period of time not right away. Especially if the market crashes, and you are overleveraged and housing prices fall, it will be hard to recoup anything and most likely you will be facing foreclosure and perhaps even bankruptcy.
Don't under-estimate your expenses and over-estimate your profit
First of all, if you are renting a property don't just assume the vacancy rate is going to be 5%. Do your research and check the average vacancy rate within the area of your rental property you are planning on purchasing. Additionally, I see the biggest error on maintenance/improvement expenses. Don't just plug in a number into your excel spreadsheet, do the research to find out exactly what type of improvements and repairs you will need to do and which ones will help your bottom line the most. Lastly, make sure you are coming up with realistic numbers for the ARV (after repair value). Do your research, check recent market comparables to make sure your numbers are accurate. Also have the data to back up your numbers. Don't just trust your real estate agent to come up with the correct ARV, double check their work to make sure it's accurate.