11 Fundamental Tips for Successfully Investing in Rental Properties
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Buy Close to Home
One of the most valuable things in life is your time. Do not underestimate how valuable your time is. With that in mind, I suggest buying close to home. Not necessarily next door, but not an hour away either. Doing so will save you tons of time, especially if you are managing the properties yourself. If a property is an hour away from you, that is two hours just to get there and back. Remember, your time is very valuable. Learn to conserve it.
You may also consider the value of a property management company. Using a property manager will reduce your drive time, reduce your headache, and you have a trusted company to run your property if or when you decide to move out of state.
Keep Properties Clustered
This tip also focuses on saving your time. Do you want to be driving all over your city to show or maintain your properties? Would it not be easier if they were clustered in one or two neighborhoods?
Don’t Buy Somewhere You Are Afraid to Visit
Seems rather obvious, but the cash flow numbers can look really appealing in rougher neighborhoods. Why? Because of two words: increased risk. Risk to your property and risk to you. If you can handle the risk, go for it. If not, think twice before buying.
You will always get a better return on your investment if you buy in an area you wouldn’t mind living. This ensures that tenants will feel safe and neighbors are pleasant.
Save for Expenses
Stuff breaks. It breaks all the time. And if you don’t repair it, you and your property can quickly fall into a downward spiral. You simply have to keep some money set aside for repairs.
Remember: Cash Flow is King
The rental property business is all about cash flow. If a potential deal does not cash flow, do NOT buy it. You do not want to be in the situation where you have to write a check every month rather than cashing one. Cash flow is king. That said…
Don’t Bet on Appreciation
Some think they can forgo the cash flow because they will be able to sell the property later for a profit. And while that can happen in red hot markets, markets are tricky and fickle. You are making a bet that you can time things perfectly. It can happen, and if it happens to you, great. Do not forget the crash of 2007 and 2008.
Write Down Your Rental Policies
Do this before you get started. What is your rent going to be? What will your income requirements be? What about past criminal offenses or evictions? How about pets? Smoking? The thing is, if you are wishy-washy about these criteria, you can be accused of discrimination and potentially fined. Determine your rental criteria now, write them down and stick to them.
This is really where a property manager comes in handy. A property manager usually has this sort of criteria in place and they would be the ones to enforce it, instead of you knocking on someone’s door.
Know the Law
First, know that Federal Law states that you cannot discriminate based upon the seven protected classes, including race, religion, color, creed, sex, familial status and national origin. Turn someone away because there are “too many” kids, and you might be in big trouble.
Plus, there are a myriad of state and local laws that spell out the eviction process, how much rent or late fees you can charge or add additional protected classes. Seems like a lot to cover and it is, but running afoul of any of these laws can be a hard lesson to learn.
Get Your Lease Reviewed
The lease is your most important document in this business. It is the contract between you and your tenant that spells out the numerous details related to renting out your property. Should you trust some boiler plate document you bought at Office Max? No, you should not. Find an experienced real estate attorney in your area and have him or her review your lease. The few hundred bucks this will be money well spent.
Please do not go out and buy a 30-unit building as your first purchase. If you do, you are most likely setting yourself up to fail. Managing rental properties can be a tough business, and I suggest you start small, get a feel for the business and then build your way up.
If you start small you will have a better understanding of the kind of properties you would like to own, plus only dealing with one tenant at the beginning is ideal.
Think of Your Exit Strategy
One day you will likely be ready to sell these properties and move on. Who will you sell them to? Most likely to another investor. What will that investor be looking for? The same thing you were looking for — a cash flowing deal. Be sure you think about that now when you buy, rather than later when you are trying to sell.
These 11 key tips are a lot to think about and digest, but one should not blindly march forward into the real estate investing arena. The more you do on the front end, the more successful you will be on the back end.
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