As is the case with any business or career, learning to invest in real estate takes time to get good at it. As a result, many people get frustrated easily and give up. It’s essential to study and learn as much as you can about the process, the industry and the areas in which you’re interested in investing. In order to gain rental real estate fortunes, following are six concepts that should be considered when investing in rental properties:
• Create property analysis spreadsheet
You need an Excel spreadsheet to analyze any and all possible deals—it’s not necessary to buy the first rental property you see. Start with the Fair Market Value (FMV), money down, improvements and mortgage/carrying cost; and subsequently move it through rental income, expenses and wrap it up with a cash-on-cash ROI figure. If the ROI isn’t good or it’s not in your favour after putting the numbers for a property into all the columns, move on to the next one. Base your decision on the key factors generated by your spreadsheet.
• Buying numbers, not property
Many investors tend to get emotional about their purchase and even envision themselves living in the rental property they’re analyzing. However, this should be avoided. Realize you aren’t buying a property, you’re buying numbers. You need to understand it’s not about your personal wants and needs; it’s about how much you can make off the property. Investing a lot into the property to get a higher rental rate can backfire.
• Do your homework
It’s necessary to research again and again. Many new investors buy the first rental they see. You need to take your time. Also, instead of looking at a property as to why should you not get this; look at it as to why I should I get this property. Make the numbers prove it to you. Don’t assume you’re going to buy it unless you find something wrong with it.
• Always go for local
There is no need to get hyperfocused on buying local so you can check on the property. It’s far more important to buy quality rental properties—like reputable location etc.—rather than local. But, if you’re living in an area where there’s a strong rental market with legitimate returns on investment (that aren’t dependent on putting down a fortune), consider yourself lucky.
• Handle your property manager efficiently
Unless you’re a full-time real estate investor and one tough SOB, get a property manager. You may not be cut out to be a property manager even if the property is local. You may not have the time, skills or system to be your own property manager. Be a realist. Have a budget in your rental property analysis for a property manager (approximately 10 percent of gross rents).
Never do the mistake of investing in too many properties. Preferably purchase rental properties in just one or two markets, or “bundle” as it’s called. With this type of bundling, your property managers can handle a few properties at the same time. You’ll not only save travel time and expenses, but also be more efficient with your tax and legal planning.