I bought my first investment property after working in property management for a year. I saw how investment properties worked first hand and wanted a piece of the cash flow pie.
Feeling like I had a head start in the investment game, I ventured into my own rental investments. But even though I knew the basics, e.g. that over-paying for a property is absolutely not allowed, I still had more to learn.
If you’re looking to invest in real estate, here are the top five things you should know.
1. Invest for Cash Flow
From the beginning you need to know your goal. What are you trying to accomplish? Are you hoping to generate cash flow and build up a passive income? Or are you buying a piece of land to hold until the market changes and the value skyrockets?
Property management showed me that cash flow is always the best option. Capital gains are just a perk. So look for a property with a strong potential for cash flow.
That also means you need to learn about tax regulations for passive income. It changes the way you file, so know how to classify rental income and which expenses you’ll need to track throughout the year for deductions.
Related: How to Get Started Investing in Out-of-State Rental Property
2. Don’t Sacrifice Quality to Save a Few Dollars
Of course, you want to get a good deal on the work you contract, but always check a vendor’s credibility. When I started, I chose the cheapest contractor without checking out his work history. He was saving me about ten percent on the remodel, but I didn’t realize how much he’d cost me in the long run.
A month into the renovation, a man called threatening to call the police on us. He said our contractor was stealing items from his house and installing them in ours. We had to put the work on hold, investigate the situation, and then find another contractor to finish the job and clean up the mess our contractor had made. In the end, we spent more money than if we’d chosen a credible contractor from the beginning. Plus, we dealt with stress and delays along the way.
Obviously, you want to get a good deal, but make sure you’re also getting quality work from a credible professional.
3. Underestimate Your Rental Rate
Run your numbers based on a rental rate below market average. Then, if you have to lease at a reduced rate, you’ll still meet your financial goals.
Many new landlords make the mistake of setting a high rental rate, and then waiting to rent for that amount. But they’re losing money daily. If your house sits empty for a month, you still owe the mortgage payment. Lowering your price and getting someone in sooner brings more money than waiting to hit the number you set. Even if you collect a little less than you thought, you still collect income. So divide your mortgage payment by 30 to see what you lose daily when the house sits empty. Then, if you’re not getting showings, reduce immediately.
Related:Business or Hobby? Getting in the Right Mindset for Managing Your Rentals
4. Know the Fine Print
As you look to start investing, know details about what you can and can’t do. For example, if you want to purchase multiple houses quickly, do you know what counts as income? Rental income doesn’t count towards your total income until you’ve rented the property successfully for two years. So don’t bank on using the rental income you’ve just started collecting as leverage to purchase another property soon.
5. Understand Financing Options for Multi-Unit Properties
You get better financing terms and a lower down payment if you live in a multi-unit property. You can buy up to four units — a duplex, triplex, quadruplex — with owner-occupied financing terms. If you don’t live in the property, you’ll need to put 20% down. But, if you live in one of these units, you only need a 3.5% down payment. It’s not allowed on a 5+ unit, but an owner-occupied duplex, triplex, or quadruplex could be a great way to get started.
Real estate investing gets much easier when you learn from the mistakes of others. Take these tips with you on your own investments journey so you can up your cash flow sooner rather than later.
