Why is real estate investment such a great opportunity? The biggest reason is that everyone needs a place to live, making real estate something that is more than a fad. Owning property to rent to others can be a great way to make money and produce an ongoing income. However, if you aren’t prepared, you can lose money.
Remember, being a landlord takes commitment. After you’ve purchased the property, you still have to pay taxes, keep the property up, and find tenants. Rental properties require hands-on involvement, unlike investing in something like stocks or bonds. That’s why preparation is key.
How do you prepare to become a landlord? Here are five things you should do before buying your first property.
#1: Get Your Finances in Order
In order to buy real estate, you are going to need some of your own funds. Yes, there are many ways to finance a property with little down but having your personal finances in order will be key to helping you get started on your real estate investing journey.
How do you know if your finances are in order? Take a look at your current spending habits. Most financial planners suggest that you use the 50/30/20 rule which states:
- 50% to needs
- 30% to wants
- 20% to savings
Additionally, you will want your credit score to be as high as possible. This will allow you to work with banks to get better interest rates on investment property loans.
#2: Be Ready To Learn
Learning to be a landlord will take some time. Although it isn’t rocket science, there are complexities to buying and renting properties. Things you’ll need to understand include:
- City, county, and state laws about tenant’s rights
- HOA/POA rules
- How to handle deposits
- How to find qualified tenants
- The best way to rehab a rental property
- And more
Failing to learn the basics can cost you money.
Before buying real estate, you will need to research the market in the area in which you wish to buy. What kinds of things will you need to know?
- Types of units currently for rent
- Going rates for rental properties
- Vacancy rates
- Types of people living in the area
- Job market
- Revitalization in the area
- Public transportation
- Area amenities
- School performance
- And more
Be sure that you do your own due diligence. Always get statements about the property you wish to purchase. Never rely on the claims of the seller without concrete proof.
#4: Ability to Handle Financial Issues
When you rent properties, there will be times when the property costs you money. For instance, when a tenant leaves, the property will be vacant until you find a new tenant. If you cannot absorb the cost of a vacancy, you may be tempted to put the first person you find into your investment property. This can be a costly mistake since not every person who wishes to rent from you will make a good tenant. Always remember to get a background check and credit check. These are much cheaper than the eviction process. To prepare for vacancies, I recommend setting aside 6% of your property’s gross annual income.
You will also have to face ongoing maintenance costs as a landlord. This can be emergency issues like broken pipes or ongoing maintenance like new paint or roof replacement. To prepare for these expenses, you should set aside 1% of the property’s value.
#5: Understand Yourself
Not everyone is cut out for every job that goes along with being a landlord. That’s why it is important to get a team in place to help you in areas where you are weak. Your team should include members such as:
- Someone good at financing deals
- Property manager
- Insurance Agent
- Escrow officer
If you prepare to become a real estate investor by following these five steps, your chances of finding success go up considerably. If you’d like to learn more about real estate investing, Real Estate Knowledge Institute (REKI) is a great resource. Call us today to learn more about meeting your specific goals.