What I do have are a very particular set of skills.” – Bryan Mills, Taken
As a path to wealth, few approaches beat real estate investing. Even with such a proven strategy, though, some investors will see much better results than others. Your abilities and understanding of real estate investing are what will make the difference. To maximize your returns, you need to develop the core skills that every real estate investor should have, or work with someone who already has them. These skills make the difference between disappointing results and wealth accumulation.
“Patience isn’t my strongest suit.” – Logan/Wolverine, X-Men: Days of Future Past
So you’ve decided to invest in real estate and saved up enough for a down payment. Great. Don’t give in to the temptation to go out and buy the first decent property you find. Cultivate your patience, especially if, like Wolverine, you don’t have much of it.
Finding the right property could take weeks or even months, especially if you aren’t working with a real estate investment firm. Once you do find a property, they may not be willing to sell for what you think it’s worth or what you need to pay to have the numbers make sense for your burgeoning real estate empire.
Don’t succumb to the appeal and excitement of getting a deal done if it isn’t the right deal. You need to bide your time and wait until you find the right property at the right price to maximize your profits.
“I’m going to make him an offer he can’t refuse.” – Don Vito Corleone, The Godfather
Everything is negotiable. Keep that in mind as you navigate the waters of real estate investing. Hone your negotiation skills. They can save you thousands or even tens of thousands.
It starts with the purchase price of the property. You’ll need to negotiate the best deal to get the best possible investment return. You may also need to negotiate the terms of the purchase, including things like who pays for closing costs or how long you have until closing, and especially who pays to repair any issues found in your inspections.
If the walls are black and hot pink, you can ask the seller to paint them a neutral color. If the carpet has stains, request that they be cleaned or replaced. If you think your tenants will want a fenced yard, ask the seller to install fencing or give you a credit toward doing it yourself. The seller may deny some or all of your requests, but you won’t know unless you ask. Getting the best deal for yourself requires being bold.
Once you’ve honed your negotiating skills on the purchase, you can use them to deal with contractors and tenants. Learning to negotiate should be a non-negotiable step for a real estate investor. Learn how to make offers the other party can’t refuse.
3. How to Select Properties
“Round up the Usual Suspects.” – Captain Renault, Casablanca
As a novice real estate investor, one of the first things you need to learn is that money is made when real estate is bought, not when it is rented or sold. Sure, you won’t see any deposits until you start collecting rent or eventually sell the property. But, you make money by selecting the homes with the best income potential. That’s where the money happens, as well as the mistakes.
To be a successful real estate investor, you must have the skills necessary to evaluate properties and know which will best meet your goals. That allows you to separate the winners from the usual suspects. Here are two vital things you need to understand about selecting the right properties:
A successful investor understands the local market, which allows them to determine what a property is truly worth and how much they can expect to receive in rent. Knowing what tenants are paying and what they are looking for in your area will steer you toward the best properties.
Familiarize yourself with neighborhood amenities. Renters may pay more if they have access to a pool and other desirable comforts. If you are in an area where public transportation is common, a property’s proximity to stops or stations should be paramount. If the property is likely to attract families, consider the school district.
Understanding all these factors will help you select the highest-earning investment properties.
Positive Cash Flow
If the mortgage is $1500 and you can collect $2000 in rent, you are making $500 per month or $6000 per year, right? Wrong. Cash flow has to include all the expenses associated with the property. That means rent, insurance, property taxes, marketing fees to find tenants, and anything else you spend on the property. You also need to account for future maintenance costs. A good rule of thumb is that you will spend about 1% of the purchase price on annual maintenance.
Your cash flow projections should also account for vacancies. Sometimes finding the perfect tenant takes a while. Even if your property is highly desirable and easy to rent, you will likely have small breaks between tenants during which you perform some basic maintenance.
Once you account for all those factors, you have your estimated cash flow. When you add those to that property that would rent for $2000, you may be making almost nothing. It may be wise to skip that home and keep looking.
Outsourcing the Skills
“It is not our abilities that show what we truly are… it is our choices.” – Dumbledore, Harry Potter and the Chamber of Secrets
If you want to take advantage of all the great opportunities that come from residential real estate investing but don’t have the time or patience to learn everything you need to know, there are residential real estate companies that can help. Choosing to consult the experts, instead of relying on only your own abilities, can often be the best choice. These firms provide the expertise and use their market knowledge to help you choose properties most likely to make money. Their understanding of local real estate markets can replace the skills you are not inclined to learn.
If you want more certainty and reliability in your investment decision-making, a home investment company can remove the guesswork. Through them, you can find the best properties for buying and holding as rentals even if you don’t have all these property-evaluation skills yet. Many will also help you with property management if you want to make your real estate an even more passive investment.
Residential real estate is a fantastic investment. It’s not an exaggeration to say that rental properties are one of the best ways to build wealth and obtain financial freedom. But snatching up properties without learning the business basics relies too much on luck. Make sure you understand the essential skills required to run your fledgling real estate empire or work with a real estate investment firm that will lend you their expertise. Then curl up in front of a great movie and enjoy those rent checks.