The Dos and Don’ts of Property Investment
Every type of investment property – whether a fix and flip, a rental property, or another type of investment – has its own set of tips and tricks to increase the likelihood of a successful (meaning, profitable) investment. This article describes the dos and don’ts for each of these investment types:
The Universal Do
Do Get the Right Team in Place
Regardless of what type of investment you are looking to make, one of the most important steps is to ensure that you hire the right team to help you achieve your investment objectives. The team that will support your investment endeavors should include:
- an investor-friendly realtor, which you can find on sites that focus on real estate investment such as BiggerPockets.com;
- a lender that can offer a variety of financing options outside of the standard primary residential context, in the event you are not purchasing outright for cash.
- an insurance agent that can advise you regarding the various types and levels of insurance that you should carry depending on your use of the property.
- a trusted general contractor, in case your investment property requires any repairs (whether immediately in the case of a fix and flip, or at various times during your period of ownership in the case of long-term investments) – you might start with up to three general contractors based on references, so that you can get quotes from each and get a more accurate picture of expected costs; and
- a tax, financial and/or legal advisor that can help you structure your investment in a way that is most beneficial to you.
When you have the right team in place, they can help advise you about potential pitfalls that may apply in your geographic area, to the specific property or type of property you are considering, or to your particular financial situation. Consulting with your trusted team upfront can help prevent costly mistakes down the road.
The Dos and Don’ts of Fix and Flips
Do Your Homework
The real estate market is always evolving. Prior to getting started with your fix and flip investment, it is important to do your due diligence, both into the state of the overall market, but especially the local market in which you are investing. The local real estate economy can vary from one neighborhood to the next, so the more data you have, the better off you will be. If you are not sure where to start, consider connecting with an expert local real estate agent sooner rather than later. Just look for the signs.
Do Learn How to Price Improvements
A big part of a successful fix and flip is, as the name implies, making fixes. When evaluating properties, you need to have a good idea of what improvements need to be made, how to make them, and how much they will cost. Whether you rely entirely on professionals or do at least part of the work yourself, the work will come at a cost. If you buy a home in poor condition with no concept of what repairs will cost you, you may find yourself with a money pit, especially if your mental math estimates are off in multiple areas. With both a trusted general contractor and an investor-focused realtor on your team, you can make more accurate estimates as to how much improvements will cost and how much you might be able to sell the resulting improved property for, making it more likely that you can achieve your profit goals.
Do Partner with Pros
Access to quality professionals, like contractors, electricians, and plumbers, can be a critical asset when fixing a house. While some projects will be things you can tackle yourself, anything complex, such as that involving wiring, really should involve a pro. When you have relationships with trusted area resources, you can better plan for improvements, including expected pricing, before diving in.
Do Be Prepared to Take Risks
A property with obvious potential will have many suitors, and investing in real estate is not risk-free. If you plan to invest in real estate, you need to be willing to shoulder at least a little risk. Never go beyond your personal tolerance, of course, but understand that there is always a potential for loss. Not every property will net you a huge profit, but if you have done your due diligence and understand how best to approach repairs, you can minimize costly problems as much as possible.
Don’t Buy On a Whim
Going over budget in certain circumstances can be okay – for example, buying an expensive watch. But that is generally not a good way to approach real estate investing. When planning to fix and flip properties, all purchases should be approached carefully and with adequate due diligence. The wrong property can quickly turn into a lot of spent cash. Always plan to the best your knowledge at the time of the investment. If someone is willing to pay more for a property and your calculations tell you otherwise, another better property will be around the corner.
Don’t Ignore DIY Opportunities
Having handyman skills is not a requirement for fixing and flipping, but knowing how to do some basic DIY home improvement can be a big advantage to your bottom line. Some tasks are more tedious than challenging, and paying a pro may not be worth the expense for things you can do yourself. This does not mean you need to do everything yourself – and you should not; some ventures are dangerous for inexperienced practitioners (electricity, plumbing) – but if you can save a little cash by tackling tasks yourself, you may want to consider it.
Don’t Cut Corners in Key Areas
The average fix and flip is a blend of necessary functional repairs and flashy cosmetic upgrades. It is okay to cut some corners on the latter category, like choosing granite over pricier marble for the same basic appearance, but you should not cut corners in functional areas. Cheap solutions will not meet buyer needs, and that is a good way to ruin a potential sale. Make sure you take the right measures in all the places that matter most.
The Dos and Don’ts of Rental Property Investment
For those who want to invest in real estate but are not interested in fixing and flipping, buying and holding rental properties can be a good alternative. This real estate investment opportunity allows for less risk on the whole, but unique complications in other areas. If you are considering moving into the rental property market, make sure you keep these important dos and don’ts in mind.
Do Choose Wisely
As you search for a rental property, you need to be confident that the property you ultimately purchase is appropriate for the tenants in your area. In addition, you need to be confident that any repairs a property requires are within your budget. Otherwise, you may find yourself with a tough to rent property.
Also consider whether you prefer to rent to a long-term tenant for stability, or short-term tenants (for example through Airbnb or VRBO) that may offer greater rental income but more ongoing work for you or your property manager, and more risk of downtime in between paying rentals. Your local market will help determine whether a long-term or short-term rental is a more attractive investment opportunity, as short-term rentals are more common in vacation destinations such as lakeside or beachside. If you are considering short-term rentals, you will also want to consult with your team of advisors regarding local restrictions – for example, some counties or cities prohibit rentals shorter than 30 days.
Do Make Repairs
Repairs are not just for a fix and flips; many rental properties will require a little refresh before tenants can move in. Take time to make sure electricity works properly, that there are no issues with pipes or HVAC, and that all appliances are in working order. If the property looks outdated, like containing shag carpet or linoleum tiles, take time for cosmetic upgrades, too. A few simple tweaks can be a great way to appeal to tenants in search of a comfortable, modern place to call home. Adding extra benefits (like an EV charger) may not necessarily increase the rental price, but can rent a property faster, netting you more money on your investment.
Do Understand Market Pricing
Pricing a rental property is about more than deciding what kind of profits you want to see each month. Instead, you need to make sure your price points are in line with similar properties in the area. For example, a one-bedroom unit without upgrades on a low floor will not merit the same rental rate as a luxury two-bedroom unit on a higher floor. Evaluate everything from square footage to appliances and fixtures to location to building amenities. A competitive rate can get tenants through your door, making it easier to keep units full. Each week the unit sits empty, you lose approximately 25% of the potential monthly rent.
Do Screen Tenants Properly
Not all tenants are made equal. Some will be polite, respectful, rule-abiding, and easy to work with, while others will be the opposite. Rather than offering your apartment to the first person who calls you up and asks for the unit, do some legal screening. The extent of the background check you need to do will depend on the standards in your area and your personal risk tolerance, but at minimum, a criminal background check and a credit check are a good idea. You want to be sure your new tenant has adequate income to afford rent payments and does not have an eviction history. Your trusted realtor or legal advisor can help you ensure that you comply with applicable laws in your review of potential tenants.
Do Follow the Law
In many areas, tenant protections are quite strict. For example, in many parts of California, landlords cannot evict easily or raise rents without justification. Review landlord and tenant rights and responsibilities, and be sure you are following the letter of the law. The last thing you want is to give a tenant a reason to take legal action against you. Again, the trusted realtor or legal advisor on your team can ensure that you are complying with applicable laws.
Don’t Ignore Tenants
Some tenants are needier than others, but no matter how many requests your tenants make, ignoring them is never the right answer. Many issues that tenants have, like faulty pipes, a broken HVAC system, or a leaking roof, require immediate attention before the problem becomes worse and so that the unit is not uninhabitable for your tenants. Being a landlord is not something you can always do around your own schedule. If tenants need help, you need to be available to address problems and come to resolutions.
Don’t Try to Do It All Alone
Being a landlord, particularly to multiple units at a time, can be a big job. From bookkeeping and rent collection, to scheduling maintenance to property landscaping to marketing vacant units and screening tenants, there are lots of tasks associated with management. When in doubt, seeking the help of a third party can be the best possible choice. Whether that means hiring a management company or befriending some good contractors for fast repairs, it is good to have other experts in your corner.
The Dos and Don’ts of Buy and Hold Property Investment
Now you know about the dos and don’ts of real estate investment for fix and flips and rental properties, there is a third option: buy and hold investment property. This kind of property is purchased and held rather than immediately put into use. For the right investor, this can be a valuable opportunity, but it is not right for everyone.
Do Understand the Market
All real estate investment requires a strong knowledge of the market, and that is equally true for buy and hold property. Before buying investment property, you need to know the state of both the local market as well as national trends. For example, knowing whether it is a buyer’s market or a seller’s market, as well as the factors influencing that outcome, can be substantial. No matter your level of market knowledge, you need to do your due diligence, including understanding whether you will be able to profitably exit your investment property sooner than expected if your circumstances change.
Do Have a Long-Term Plan
Since this investment strategy involves buying and holding, you need to be able to look beyond the day to day. This kind of investment has no immediate income, so a long-term plan is more valuable than a short-term plan. Before buying any kind of property, ask yourself what you hope to gain from the property and the timeline you have in mind. How long do you plan to hold the property? What kind of profit are you looking for? Do you need to sell by a certain time for the sake of liquidity? Know what you want out of a purchase to move forward with confidence.
Do Have a Plan for the Property
Are you going to hold the property for a long period of time? Live in it for the time being? Is it going to be a vacation home that will not generate revenue? Have a plan for the property before purchasing it. Your property may ultimately turn into a fix and flip or a rental investment.
Don’t Buy Without Research
Due diligence is the name of the real estate game. Most investors understand the basics, but in the case of buy and hold investments, the future market is just as important as the current one. This means not just doing research on the state of things today, but also the potential opportunities in the future. This research needs to continue while you own the property, too. If you ignore the current workings of the industry, you may miss the ideal time to buy – or the ideal time to sell before prices fall.
Don’t Be Stubborn
Buying real estate to hold requires a certain amount of flexibility. You need to be ready to sell at a moment’s notice, regardless of what you had planned for the long term, because market movement can be unpredictable. Say, for example, a huge change to the market occurs years before you anticipated and now prices are at a premium. Being too stubborn to sell can mean a loss of profits, so keep eyes on the prize and be ready to sell whenever the market turns favorable.
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