Real estate has always been one of the most effective ways to build wealth. From small residential properties to sprawling commercial office buildings, opportunities come in all shapes and sizes to fit just about any type of investment need.
For most people, however, the best way to get started investing in real estate isn’t through a complex commercial deal, but instead by purchasing a single-family home or condo that will provide a steady stream of income each and every month.
In this article, we’re going to go over a few of the most important things that any new investor should know before purchasing their first rental property.
#1 – Stick to What You Know
You don’t have to be an expert investor to get started with real estate. Sure, a basic understanding of finance is a necessity, but more important than anything is your knowledge of the market that you’re investing in. For new investors, that often means starting locally – either in the neighborhood in which they already live or a nearby community.
Investing locally will not only mean having a better understanding of the area, but it will also make the entire process of purchasing and managing of a rental much simpler than attempting to work with Realtors, property managers, and service providers from a distance.
#2 – Cash Flow is King
Long-term wealth building isn’t about finding the hot property that’s about to experience huge growth over the next couple of years: it’s about finding a solid investment that has positive cash flow – the income that’s left over after all expenses are paid – in the present, as well as the opportunity for steady appreciation in the future.
Ignoring cash flow on the expectations of future growth in value is an almost always a surefire recipe for disaster for new investors. If a potential rental property doesn’t show positive cash flow on paper with expenses like property management and home-owner association fees already worked in, it’s time to move on to the next option.
#3 – Keep Cash Reserves
Just because a property has an overall positive cash flow doesn’t mean that there won’t be months where you wind up shelling out more than you bring in. Whether it’s from unexpected repairs or gaps in vacancy (unless you’re in a highly competitive rental market, you can expect at least some length of vacancy between tenants), you’re going to want to have some cash set aside for a rainy day in order to avoid dipping into your personal savings or other unrelated investments.
As a general rule of thumb, most expert recommend contributing 1% of the property’s value each year to a reserve fund in order to cover unplanned expenses.
#4 – Think About the Future
Investing in rental real estate is a long-term wealth building strategy and as such should be far more focused on the future than the present. Yes, your investment should have positive cash flow right out of the gate, but you should able be able to expect the same results years down the road.
This means understanding trends in the local market and doing research to find neighborhoods with a growing demand for rentals. One of the best ways to find properties with good future potential is to focus on areas that are investing in infrastructure – things like improving roads, building new schools, and adopting new technologies.
#5 – Watch for Hidden Costs
Due diligence is a core part of selecting the right rental – you’d probably be surprised to find out how quickly a good opportunity can turn sour because of hidden costs. Before getting serious about any potential investment, always have an experienced home inspector go through and assess every facet of the property.
From the roof to the floors and everything in-between, make sure you have a detailed timeline of what will need to be repaired or replaced in the near future, as well as what will require your attention over the next decade of ownership.
#6 – Enlist Professional Help
Do you want to know the biggest secret of the majority of successful real estate investors? They don’t try to do it all themselves.
Too often, in a bid to cut costs or increase cash flow, new investors try to take on every single aspect of their rental property on their own. From securing tenants and handling the day-to-day management of the property to keeping up with the local licenses and accounting, you’re almost always going to be better off seeking the help of professionals.
For single-family rentals, a good local property manager should be able to handle the majority of the work for you. In most cases, this service will cost you around 10% of the monthly rental income, although the costs of trying to do everything on your own – and making expensive mistakes in the process – are likely to be far greater.