Real Estate Investment 101: Don’t Let Your Property Manage You

With interest rates low, housing prices relatively low, rental rates increasing, and rental demand increasing, investors are looking to housing. Safe investments, such as the 10 year treasury are not providing much return in this economic environment. Nationwide rental properties yield more than 6% on average, estimated by Goldman Sachs economists. In 2011 27% of home sales were by investors, up from 17% in 2010. In the 12 months ending March 2013 international investment in US real estate was 6.3% of the US home sales, $68.2 billion.

First time real estate investors have some important questions to ask themselves. First, do you have the time? Treat real estate investment like a part-time job with variable hours. Second, are you able to fix things yourself or manage contractors? Alternatively, you can hire a person like myself, a property manager, and have them find tenants, manage the property, make fixes, and collect rents. Depending on your budget, how you will finance, and what type and condition a property you get will determine your short and long term profit for this investment.

A good real estate agent should be able to take all these factors and give you an estimate and layout of the financials. One such measure is the cap rate. To find this, take the annual rental income expected from the property and divide it by purchase price. This gives an annual percentage return on investment. When you do this minus known and projected costs for the property, you could see how many years the property would take to pay back the initial investment and future years would then be purely income, if the property was paid in cash. The higher the cap rate the better, but be aware of local market trends and when you may want to sell your property as sometimes higher cap rates can be found in stagnate and depreciating markets, such as the current Florida market.

Look at current economic conditions, trends, and demographics. Markets with low unemployment, college towns, and positive job and migration growth trends are often good rental markets. Consider distressed properties. Shorts sales, REOs (bank owned), foreclosure auctions, probate sales, tax sales, and estate sales can be a good place to find investment properties at a great value. Prepare financially by saving up at least 20 – 25% of purchase price as well as six months of reserves to pay that property and two months of reserves for each of your other properties. Interest rates can be higher as well for investment properties.

Tour the property with a contractor and real estate agent to get quotes on fixing and updating items as well as insight into what will add the most value in the current rental or sale market, if you are flipping the house. Consider hiring a property manager. For 8-10% of your monthly rent a property manager will conduct regular property inspections, vet prospective tenants, collect rent, evict tenants if need be, and be on-call in the case of an emergency. If you will self-manage the property, find and vet good tenants with a good application and credit report, the National Association of Independent Landlords has a good one. Also have a good real estate attorney for closing on the property, for helping clarify tenants’ laws and to aid in eviction, if needed. To protect your assets, form a LLC or other entity that limits your liability. Carry the appropriate dwelling insurance policy and liability policy for the property. Please speak to legal and tax specialists to get legal and tax advice as to how best to plan, prepare, and manage your real estate investment.

Please share your real estate investment stories, comments, and questions. Contact me if you need help buying, selling, renting, managing a real estate investment or are interested in getting into it and want a consultation.

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