The Guide to Profitable Real Estate Investing
We're always happy to meet or chat with a profit-minded investor! They are some of our best clients because they can maintain an objective point of view when making property decisions.
The Guide to Profitable Real Estate Investing was designed specifically for multi-property investors and those wanting to build a real estate portfolio.
1. Begin with the end in mind
If you have read 7 Habits of Highly Effective People by Dr. Stephen Covey, you’re already familiar with Habit 2: Begin with the end in mind. This habit is about envisioning or imagining an outcome first and trusting that the physical manifestation will follow.
In plain speak, this means you must set goals. Goals are outcome statements that focus your time, energy, and efforts in the right direction. Being vision-focused carries you through setbacks and keeps you from wasting too many resources on “rabbit trails.” This simple, yet powerful, concept is used by business leaders around the world.
So, what does this mean for you as a real estate investor? … It means you should begin with the end in mind… Or, if you are already in the middle of your investing experience, you should take a moment to envision the end now.
Invest 15 to 30 minutes into this today. We’ll give you a little help by listing some potential goals (though yours may be completely different and unique).
I want to quit my job and live on the income from my rental properties.
I want to put my money in a low risk, high return investment to increase my net worth.
I want tenants to pay for my real estate investments so I can cash out on them when I retire.
I want my properties to fund college for my children or grandchildren.
I want a source of monthly cash flow that will supplement my current income.
I want to capitalize on predicted upticks in the real estate market, renting to tenants in the short term.
I want to help revitalize neighborhoods by fixing up properties and providing affordable housing.
I want to rehab my existing properties so I can bring in more income per unit and increase property value.
I want to increase my net worth so I can leave a larger inheritance to my children.
I want to invest in small multi-family properties (duplexes, 4-plexes) so I can make more rent per purchased property.
This list is certainly not comprehensive, but it should give you a good starting point.
2. Be choosy about properties
We suggest you be extremely choosy when making decisions about properties. The criteria you use to purchase income properties is different from those used to buy a home of your own.
Here are the criteria you should consider when building your real estate portfolio:
- Location - Tenants will look for things like walkability; public transportation; and distance from restaurants, groceries, schools and parks. There is higher demand for rental housing in high-growth areas. There is consistent demand for rentals near major employers and universities.
- Condition – If you can find a fixer upper in a great location, it may be worth considering, if you can negotiate a great price. The investment of time and effort rehabbing will pay off in higher rents and increased equity. Make sure you have professionals do a thorough inspection. Avoid properties with major health or safety issues unless you have the time and money to deal with these kinds of problems.
- Market – The best time to increase your portfolio is when the sales market dips. You will get a better price on the property and can expect rents to increase when the sales market climbs back up since fewer people can qualify to buy a home when prices get high.
3. Tenant Treasures
Do you know how buy and hold investors make money? TENANTS
Your tenants are a key ingredient in building a profitable rental portfolio:
They reduce your expense liabilities by covering your mortgage payments, property management fees, and other ongoing expenses. Basically, they are purchasing your property for you.
They increase your monthly income through monthly rents. If you made a good purchase decision, the rent will be more than your expenses. That margin provides short-term profit and/or seeds a healthy reserve fund for maintenance.
As you can see, tenants are extremely important. You want to make sure the ones you place in your property are treasures – they pay on time, live peacefully, take care of your property, and stay as long as possible.
We could go into all sorts of details about how to identify a great tenant, but most buy and hold investors we know don’t really want to dabble in the day-to-day management of a property. They are especially reluctant to deal with recurring tenant needs because doing so drains time and energy.
As an investor, you should care more about how your property management company deals with tenants. You should be looking at each potential company’s:
Vacancy Rate – What percentage of managed properties are vacant?
Vacancy Durations – How long does it take to fill vacancies?
Lease Renewal Rate – What percentage of existing tenants renew leases each year?
Company Culture – Are staff members professional, knowledgeable, and courteous?
Tenant Ratings and Reviews – What do tenants say about the company online?
Let me clarify that you will nearly ALWAYS see bad reviews from tenants because professional property managers work for owners and investors. We must enforce lease terms and sometimes that ticks off tenants (so they let the world know…)! Remember to keep this perspective when reading tenant reviews and instead evaluate how the company RESPONDS to complaints and look for red flags.
Examples of red flags:
There is a recurring theme to tenant complaints.
The company completely ignores negative reviews.
The percentage of negative complaints is unusually high.
There are zero positive reviews from tenants.
Remember, tenants are your treasure; they are your CUSTOMER. They have value! You want to make sure the property management company you hire sees tenants as treasures too.
4. Do Your Duty
While investing in real estate is a proven method of building wealth, it’s not a free ride. You don’t just buy a property, make it rent ready, and place tenants in it.
Nope. If it were that easy, more people might do it. Properties deteriorate over time. Things break. Styles change.
As the property owner, you are responsible for ONGOING maintenance, repairs, and upgrades. And, if you (or we) placed tenants worth treasuring in your property, they will expect prompt responses to necessary requests. So, you must be prepared to do your duty to maintain the property.
Here’s how YOU can be prepared:
- Put money in a separate bank account every month that is earmarked for repairs and upgrades. Upgrades can usually be planned; repairs are generally unexpected. If you have multiple properties, the amount you set aside should be fairly substantial in case more than one unit needs attention. We can make specific recommendations about financial planning during a personal consultation.
- Consider the tenant’s perspective. We understand that your property might not be a high-end, executive rental. However, it’s easier to get and retain top-quality tenants when we acknowledge and approve reasonable requests. We ALWAYS need to respond quickly to any request that impacts habitability. Legally, tenants must have a safe and healthy place to live.
- Understand that short term pain can lead to long term gain. It is never fun or convenient to invest in repairs, maintenance, and upgrades. They can be costly and consume your time and energy. However, properties that are not maintained incrementally deteriorate, meaning you must reduce rent, settle for lower quality tenants, or take a lower price at the time of sale.
5. Respect Laws
- Do you know and fully understand the Federal Fair Housing Act?
- Do you know our state’s Fair Housing laws?
-Do you know our state’s landlord-tenant laws?
- Do you have an expert attorney that will help protect you from litigation?
- Do you know what questions you should avoid when interviewing an applicant?
- Do you know what verbiage you should avoid when marketing a vacancy?
- Do you know how to respond when a tenant or prospective tenant asks for an accommodation?
Unless you’ve spent some time in real estate or property management classes, or you are an attorney, we are guessing you find these questions a little overwhelming…Totally understandable.
However, rental property owners and investors are liable for the consequences of not knowing the answers to these questions.
Whoever manages your property must know and respect the laws that govern our industry. Make sure you drill your potential property management candidates: check their background and experience, ask about past litigation involving tenants, and make sure you are 100% satisfied with their responses. In fact, you should ask us about OUR track record the next time we talk.
Lawsuits arising from negligence are a headache you don’t want to experience. They can become time-consuming and expensive. All of these consequences detract from your investing experience and the profitability of your venture.
6. Know Your Numbers
For a business to exist over the long haul, it must make a profit. It cannot bleed money.
Do-it-yourself investors can have a hard time keeping up with financial tracking. It requires time and effort above and beyond day-to-day responsibilities and enjoyments. It can get pushed to the back burner quite easily. In fact, we know some investors that hurry and scurry to enter all of their income and expenses right before tax time, having operated blindly for an entire year … Can you relate?
But you can’t make good financial decisions throughout the year if you don’t know your numbers at any given point in time.
As an investor, you will need to know more than just the current financial statistics for your properties. You will also want to calculate the following numbers as your portfolio grows and changes:
Tax implications for buying, selling, and owning investment property.
CAP rate for each property you own or consider buying.
Projected costs of upcoming capital expenditures.
Annual cost estimate for maintenance and repairs.
Exit costs when you are ready to sell a property.
As an investor, you will most likely buy and sell properties as you work to achieve your ultimate goal.
7. Rely on an Expert Team
Humans are interdependent. No single person has perfected every possible skill, acquired ALL knowledge, grown to maximum wisdom, or lived through all imaginable experiences. That’s why we rely on each other.
A profitable investment property business requires multiple person types:
A Real Estate Market Expert
A Financial Wizard
A Legal Professional
A Relationship Managing Artist
A Process-Driven Authority
A Home Repair Whiz
An Analytical Ace
A Problem-Solving Pro
And more…
It’s nearly impossible to find all of these skills in one person! You may be able to juggle all of these responsibilities for a while, but things begin to fall apart when your portfolio grows, you have problem tenants, and your properties require more and more attention.
That’s why you need a team!