When it comes to real estate investing, do not become emotionally involved in a deal. You should have a checklist to make sure you've thoroughly gone through all contingencies and are fully confident the deal will perform as you anticipate it will. Here are 10 things you should consider for every deal.
Don't over-leverage the property. Borrowing money to purchase and improve a property is a good strategy. Just don't overdo it. Two things happen when you over leverage a property. You may not have adequate financial reserves to take care of any unexpected problems that come along. Also, it costs money to borrow money. It will eat into your profit. Today’s low-interest rates are tempting but do the math first. If the interest rate is likely to go up later (balloon payment or adjustable mortgage), run the numbers for the worst-case scenario before committing to the loan.
Be conservative in your cost estimates and schedule. It almost always costs more and takes longer than you think it will to make repairs or remodel a house. Especially if you don't have a lot of experience with real estate or a particular type of deal. Be conservative when estimating costs and schedules and then add another 20% to both. The bright spot here is that when you come in under budget and ahead of schedule, the extra money goes into your pocket.
Use common sense. If someone is offering to sell you a property at a deep discount, keep in mind that when something seems too good to be true, it probably is too good to be true. If you don't understand exactly why the person is willing to sell at a very low price, demand to know all of the details and be prepared to walk away from the deal before you get burned. There will always be another good deal just down the road. Also, there is no substitute for your own due diligence.
Due proper due diligence. This is especially true for people that are new to real estate investing or even experienced investors taking on a project type that they have never been involved with before. If you don't know the right questions to ask, find someone that does. These professionals are often attorneys and accountants that specialize in the type of real estate deal that you are considering. Of course, it could be a good contractor that’s needed. Getting your answers to most questions from the person selling you the property is not the correct approach.
Always get a professional inspection of the property. I know at least one investor that does his own inspections. He prides himself on being able to inspect a property and estimate repair costs in a half hour. I think that's a foolish idea. Especially when you're new to the business. My acquaintance, who does his own inspections, once knew that it was going to cost him a few hundred dollars to clean up the debris in the back yard. What he didn't plan on was filling in an old water well that was found after the debris was removed. A second set of experienced eyes is always a good idea.
Have a clearly defined partnership agreement. Handshake agreements are great but then put it all in writing. Too often, one partner ends up with the bulk of the responsibility but both are profiting equally from the deal. Write out what each partner is responsible for. While we're on the subject, it's never a good idea to partner with family and friends. It doesn't take much to sour a relationship when a business goes bad.
Don't pay a guru for an education. Too many people think there is a get rich quick scheme that a fast-talking guru can teach them at a $4,000 weekend seminar. There isn't. What they end up doing is pressuring you to pay a few hundred more dollars for their books and audio courses. These gurus also introduce you to others wanting to sell you side-services at an additional cost. Instead, spend a hundred dollars or less on well-reviewed books to learn the nuisances of real estate investing. Another approach is apprenticing with a successful local investor. Carry his or her briefcase and sit in on the deals he or she is negotiating. Travel around town looking at the properties the successful investor is considering. That's how to get a proper real estate investing education.
Don't buy properties without viewing them. This goes beyond having an inspection done. You need to see the property in its overall environment. Walk around the neighborhood as well as the property. An inspector will tell you about an electrical system on the verge of failure but he or she is not going to tell you that the family-style house is across the street from a strip club. Go look for yourself.
Don't think you're buying a discount property when you're not. Just because a property is for sale for less than what neighboring houses are selling for doesn't mean it's being sold at a discount. The price reduction could very well be based on a material defect in the property.
Always maintain cash reserves. Properties require maintenance and repairs. This is especially true of rental properties. Something as simple as a clogged toilet can overflow and cause water damage to the tune of a couple of thousand dollars. Without proper maintenance and repairs, your properties will deteriorate over time and you'll lose money in the end.
What can you add to the list? Please comment.
Also, our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions, inquiries, or article ideas to [email protected].
Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News