5 Things All New Real Estate Investors Should Know

When I started in real estate I didn’t have a mentor or anyone helping me navigate the minefield that is investing in real estate. Here are five things I wish someone had told me when I was starting out.

1. Start small – My first property was a duplex. I know, a duplex is not exactly a huge property, but owning a multi-family property is a different animal and comes with many more potential problems. For example, I found out after I purchased the property, that here in Tennessee, any rental property with 2 or more rented units is considered a commercial property for property tax purposes. Of course, the commercial tax rate is 15% higher than the standard residential rate. When I researched the property the taxes were calculated at the residential rate. A previous owner (not the one I purchased from), several years earlier, had apparently lived in one side and rented the other making the property qualify for residential tax rate status. The state had apparently missed the fact that it was no longer owner-occupied and both units were being rented until my sales transaction was recorded. During my pre-purchase property analysis, I had based my cash flow numbers on previous tax bills which were now going to be considerably higher. I was concerned because I financed the property and my numbers were tight. Fortunately, when the dust settled, it still cash flowed and soon thereafter, I was able to raise rents to the current market rates. Thus increasing my cash flow.

2. Screen all tenants – In 2002, when I start investing, tenant screening wasn’t as easy or as common as it is today. After I got burned by a bad tenant, I learned quickly not to trust what people say and to verify everything. Back then we had to use paper applications that were physically signed by the tenant. Then fax them to a screening company and wait for up to 24 hours to get a reply. Now we use electronic applications and can get a response in a few minutes. These screenings cost me a few bucks but are worth every penny. I used to not charge an application fee, but I realized some people would fill out applications knowing they have a bad history (credit, criminal, or rental) because they had nothing to lose. I got tired of paying for bad reports. Charging a fee, and shifting the cost to the prospect, weeded out a lot of these bad applicants.

3. Cash flow is king – Never buy a property that doesn’t cash flow well. In the beginning, I was using a 1% rule for gross income to find a deal. This means that if I paid $100,000 for a property then it should rent for $1000 (1% of $100k) per month. Now, I wouldn’t even look at a deal lesson with less than a 1.5% gross rent per month. This comes from experience, as you get better at finding deals you also should get better at analyzing and negotiating deals. Once I did a little research, I found that my first property was rented under market rate. So as soon as the tenants turned, which wasn’t very long, I raised the rent. Which raised my return.

4. Pay Cash – This may not be an option for you, especially in the beginning, but having the ability to pay cash for a property gives you a huge edge in the negotiation stage. While other investors make offers with financing contingencies your offers can be cash with a quick close. The cash does not have to be your cash, it could come from a hard money lender, a friend, a relative, or a Home Equity Line of Credit (HELOC). Taking the contingencies out of the deal is the key. The best deals are almost always purchased by a cash buyer!

5. Be prepared to move quickly – When I was looking for my first property, I couldn’t afford to pay cash for it. I knew I would have to finance the property. This meant every time I submitted an offer I had to make it contingent on financing. I also did not know how to properly inspect a property, so I also included a contingency for a property inspection with all my offers. This caused me to miss many deals, early on. Contingencies slow down the deal process and make your offer less attractive to the seller. Most of the truly good deals on properties sell quickly and many times have multiple offers. This means the seller can often choose the best offer from those submitted. If you have another investor making a competitive offer consisting of all-cash with a quick close, that is very appealing to a seller. I wasted a lot of time chasing deals I had no chance of ever getting, only because of my contingencies.

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#StartSmall #ScreenTenants #PayCash

Chapters
0:00 Start
0:39 Start Small
6:56 Screen All Tenants
15:29 Cash Flow is King!
18:44 Paying Cash
21:56 Be Prepared to Move Quickly
23:52 Conclusion
24:10 Outro