Those new to the real estate investment field are typically excited when they close escrow on their first property. However, that feeling can quickly turn sour due to unforeseen changes.
Nevertheless, real estate investing can be a great way to improve long-term wealth.
Below are a few items to consider when preparing for the future as a real estate investor.
MANAGING THE BUDGET
Spend Your Time, Money Wisely
As the closing date approaches, many first-time investors assemble a list of wanted improvements, but this can be difficult as most first-timers have an unrealistic timeline concerning the completion date. There are always unexpected shortfalls, such as upgrades, renovations and other unforeseen costs. So, it’s important to be cautious when estimating a quick turnaround at a low cost. It rarely works out that way.
Be Prepared to Make an Investment of Sweat Equity
To minimize cost overruns and become better educated, a real estate investor should plan on spending a significant amount of time onsite — from the closing date until the tenant has occupied the property for a short period. Being an investment property owner is a lot of work. The owner must get bids from contractors, wait for deliveries, review work, shop for supplies, advertise the property and review rental applications. It might start out as fun, but in the end it is a lot of work. However, real estate investing is a long-term and wealth-building proposition. That’s why it’s important for an owner to invest his energy and time at the present moment.
Don’t Accept the First Contractor’s Bid
As with other major purchases, it is important to get several competing estimates to ensure a fair price on contracting work has been agreed upon. The more costly the job, the more bids the property owner should get. The bidding process can be long and tedious, but doing research now leads to better and less expensive bids in the end.
Concentrate on Small Upgrades
In most house flipping situations, things like flooring and paint usually require some work. Luckily, these are some of the easiest and most cost-effective upgrades to make. First impressions are everything and potential renters are more likely to keep things looking nice when they see that things are turnkey ready. It costs money to make these upgrades, but it pays off in terms of charging tenants higher rents.
- Paint: Use neutral, bright colors and paint all the walls the same shade. When touch-ups are necessary — and they generally are — it’s nice to have only one color to consider. When buying paint, choose one that’s easy to clean and buy more than needed, so it’s easy to do touch-ups later on.
- Flooring: Tile, vinyl, wood laminate and carpet. Tile is great for bathrooms and kitchens due to high moisture levels, and wood laminate is ideal for other rooms for easy cleanup and durability. Carpet isn’t usually advised for rental properties as it is easily stained and every tenant will want new carpet. By shopping around, an investor can find good deals on easy-to-install laminate flooring.
Look for Electrical and Plumbing Issues
A property that’s more than 20 years old should have its electrical outlets and water valves replaced. Get bids from plumbers and electricians before the property is listed. Water lines, valves, dishwasher hoses and drains can pose the biggest threat regarding leaks and floods. Electrical outlets aren’t as big of a risk, but they can end up looking unsightly after years of being painted over. An electrician can quickly change out all of the outlets and switches in a few hours.
Don’t Base Supply-Buying Decisions Solely on Price
When an investor gets bids and review costs at home improvement warehouses, they shouldn’t base purchase decisions solely on the price. Lowball estimates never stick when it’s time to make decisions on what to purchase. If the investor ends up buying the higher-priced item, they can end up going over their budget.
FINDING THE RIGHT TENANT
If rent is any different than other monthly bills, it’s because it is the most expensive monthly bill that someone pays.
Follow Fair Housing Rules
It’s important to know that it is illegal to discriminate against rental applicants based on race, nationality, religion, gender, heritage or disability.
In addition, check to see if other states have their own Fair Housing Rules. These rules are put in place to prevent discrimination and alert landlords when leasing out properties to tenants for other reasons, such as felony convictions, income and employment or tenant history.
Perform Criminal Background Checks
It can be difficult to obtain the full story and, in some states, prevent a landlord from leasing due to a criminal conviction. That being said, it is certainly a good idea to check criminal backgrounds, which are public record and can be requested by email or at a local courthouse. Always be sure to check that an application hasn’t been falsified by verifying the person’s ID.
Look For Financial Responsibility
Also, it is important to have a tenant who shows financial responsibility. Run a credit check to see if a potential tenant appears to have trouble keeping up with car and phone payments. Moreover, it is likely that they will also have trouble paying their rent. Don’t let financial woes affect a real estate investment property. Another way to ensure that tenants will make on-time payments is to check employment history by requiring them to provide two payment receipts and proof of employment for the past six months. It is not ideal to have a tenant living above their means or one that changes jobs too often.
While this is by no means a comprehensive guide to investing in rental property, these tips provide a great starting point. Real estate investors should supplement these tips with their own investigative work, as well as guidance from other, more experienced rental property owners. Other rental property investors can be a good source of advice and they can help new buyers set their expectations to a realistic level. Being a property investor is not easy; it’s more like a marathon rather than a sprint. However, if an investor paces himself and works hard success will come.