Originally published on the Real Estate Deal Talk blog here.
Investing in real estate can be an excellent way to diversify your portfolio, enjoy a steady stream of current income and build long-term wealth for the future. Even so, becoming a landlord is not for the faint of heart, and not something you want to rush into. Before you jump in head first and buy your first apartment building and get giddy because of the first rent check, you need to do some research and understand exactly what you are getting into. This article, for example, is great research! So let’s dive in.
In this article I’ll go over the following:
As with any type of investment, one of the best ways to avoid common pitfalls is to learn from the experience of others. Teaming up with a trusted mentor who is already a successful real estate investor or joining a mastermind group with veteran investors are perhaps the two best ways to learn the ropes and avoid common first-timer blunders when getting started investing in real estate.
Let me guess you’re thinking, “Where do I meet these people?”
Head to www.meetup.com and type in your city name. It will automatically pulled up groups that were near me. It also gives me the option to search groups within 25 miles. Even if you live in a remotely urban area, you should be able to find a group!
If you're new to real estate investing, I suggest joining all of the groups that have more than 100 members and make sure they've been meeting regularly.
What's the next step? Attend the meetup and shake as many hands as possible.
Now keep in mind that everyone you meet is not going to be a match to be your mentor. That’s okay! You can learn the ins and outs and the good and bad from everyone. However, keep your eyes and ears open for someone you feel you really click with and has significantly more experience than you. This person should be your highest priority list for being your mentor.
Want to know something crazy? Having the right team around you is so important that I discuss it daily on my radio show, Think Realty Radio. Tune into the show every day for more great insights from industry leaders and experts you can trust (example: Doug Duncan - the Chief Economist at Fannie Mae)!
We just discussed that having a team and finding that mentor that will help you elevate your real estate mindset and game. But when you first start out, you need to also be soaking up and learning as much as you can about your local real estate market, trends, etc.
Because of this, you will want to work with a real estate agent who knows the area very well. In larger cities, different real estate agents will know different areas very well. For example, in Atlanta, the agent I use in Kirkwood is completely different than the one I use in Buckhead. Why? Different demographics, different networks, and most importantly, totally different parts of the city.
The advice and guidance of a real estate agent can be very valuable, but always remember that the motive of a real estate agent is to sell you the property. A genuine, exceptional agent will take your needs, wants, and circumstances into consideration, but there is no substitute for doing your own research not only on the property, but also the real estate agent!
When you do your own homework, you'll find out pretty quickly what the real estate agent knows, doesn’t know, or doesn't want you to know about the property. This could include things like a spotty foundation, outdated HVAC system, buckling interior walls, fake brick on the exterior of the home covering up holes in the original brick (yes, this actually happened to me), etc.
When you are just getting started it is easy to be distracted by the excitement of doing your first deal and the real estate agent's excitement of selling the property. Be very aware of this feeling and do as much as you can to learn about the deal, the neighborhood, and your team, on your own in the beginning.
It's pretty self explanatory that doing your own homework is essential, and the legwork you do now could prevent you from making an expensive mistake later. What constitutes as "doing your own homework?"
Here are a few examples:
If you're like me and you have no interest in spending your weekends patching up damaged decks or your nights unclogging stopped-up toilets, you will absolutely, 100% want to find a quality property management firm.
In exchange for a percentage of the rent roll (anywhere from 7%-10%), the property management firm will take care of everything from needed repairs to collecting the rent, freeing you up for more productive endeavors — like finding additional investment properties!
Be aware some property management firms that ask for a percentage of rent will often have their own maintenance staff that they automatically send out for issues. Once you’ve scaled your rental business, this might not be a problem. However, in the beginning, you may not want to send out an expensive plumber going out to fix that clog when a handyman can do the job for much less. Just remember, you get what you pay for.
As always, check the numbers when looking at property management firms. If the percentage they want is going to cut too much into your bottom line, it might be beneficial to look into a customized management firm vs. full service.
No matter what route you go with your management, it is important to keep in mind that not all property management firms are equally experienced, or equally responsive, so it is important to do your homework and get the opinion of fellow investors. Finding a great property management firm is not always easy, but it is an important cornerstone of building wealth through real estate as it allows you to scale your business operations.
While some investors choose to hold rental real estate in their own names, establishing a separate legal entity for those holdings is typically the best alternative. The right business structure allows real estate investors to minimize their taxes, reduce their liability, and maximize the return on their investment.
When an investment property is in your own name and something were to go wrong on the property, the liability falls squarely on your shoulders. While we would like to hope that everything will be smooth sailing in reality, real estate, much like life, can bring about some unexpected surprises. To protect yourself from this you’ll want to open a limited liability company, "LLC" for short, to put the properties under.
At this stage, it is crucial to work with an experienced real estate attorney and a good tax accountant when setting up your new business and entity structure. A good attorney can help you choose the right business structure, while an accountant can help you understand your tax liability and how to best structure your rental income.
If you are interested in real estate as an investment, buying an apartment building or rental home is not your only option.
A real estate investment trust (REIT) allows you to pool your money with those of other investors, and those funds are used to purchase commercial and residential properties. The rental income generated by the REIT is distributed to the investors in the form of dividends or reinvested into building the real estate portfolio.
If you think that a real estate investment trust is right for you, it is important to choose one that trades on the open market. Non-traded REITs can be difficult to liquidate and hard to value, so stick to publicly traded funds with a reasonable cost and low management fee.
Investing in real estate can be a great way to build long-term wealth, but being a landlord is not right for everyone. Understanding what is involved in a real estate investment, how to protect yourself and your money, and deploying the right strategy that makes sense for you is the best way to enjoy the benefits while minimizing the risks.
As you can see, there is a lot to consider when diving into your first deal. From finding the right to mentor to doing your own research it can seem overwhelming. However, if you continue taking the right steps, like reading awesome articles like these, you will have the ropes down in no time. At the end of the day though if you do your research and decide being a landlord is not for you don’t forget there’s always alternatives to direct ownership.