Real estate investing is one of the best ways for many Americans to start a profitable business, even if you have a day job or don’t think of yourself as an “entrepreneur.” Real estate is truly a business, however, so smart investors consider each and every cost to purchase and hold their real estate assets just like any other business owner.
While the “business” aspect of real estate investing may seem intimidating to some, it’s actually fairly simple if you take the time to plan out what you intend to do with your investment property – your “exit strategy” – and make sure you have the means to buy the right property for you and your goals and maintain a profitable business from start to finish.
Following are 5 questions to ask yourself as you start down the path to becoming a real estate investor:
How Do You Plan To Make Money?
There’s more than one answer to this question, but most variations come down to either “buy-and-hold” investing (in which you rent out your property) or the “flipping” strategy made popular by TV home improvement shows. Whichever you choose, do your research and make sure you’re considering every cost to buy, maintain and sell your property whenever that day arrives.
How’s Your Credit?
Just as when you’re shopping for a new home, most lenders expect borrowers to have good or excellent credit. Before you look into traditional financing, check your credit report and take the necessary steps to repair your credit if you find any errors or evidence of identity theft.
Full Retail Or No?
When you hear about bidding wars, the parties involved are paying full retail for their next home. If you want to turn a profit on your investment property, avoid this type of sale at all costs.
That said, the “no” category can run the gamut from would-be retail sellers who have slashed their listing price multiple times after one or two other sales fell through to homes in foreclosure or that have been repossessed by the bank. In many cases, foreclosed homes have been unoccupied for extended periods of time and may be in a state of disrepair.
If the property you’re looking to buy is available at a steep discount, you need to have a very good understanding of why the price is so low. If the home needs extensive cosmetic or even structural repairs, you need to build all those costs into your purchase price in addition to any loan terms, points or closing costs rolled into your loan.
Owner Or Tenant Occupied?
While you can generally expect homes for sale to be owner-occupied (or last occupied by the owner if vacant), it’s fairly common for “tenant-occupied” rental properties to be advertised on the MLS as well. Buyer beware: while it may appear that the seller is generously saving you the trouble of fixing up and then marketing the property for rent, horror stories abound among seasoned real estate investors about experiences with inherited tenants. Before you get under contract, try to get a sense of why the current landlord is selling and whether you’re ready and willing to take on whatever the seller may be unloading.
What Else Are You Paying For?
To repair or not to repair? Different investors feel differently about doing repairs on their flips and rental properties. Some rental property owners are comfortable doing repairs on their tenant-occupied properties in order to save money they would otherwise spend to send over a plumber after receiving a phone call from a distressed tenant. Other property owners, including out-of-state owners and owners of multiple rental properties, prefer to pay the extra money to send over repair technicians and even to hire out the service coordination to a property manager.
Even if you fall into the DIY flipper or landlord camp today, run your numbers as if you are planning to hire contractors or a property manager so that if the day ever comes that your day job sends you out of state or you decide that doing the manual labor is no longer feasible for another reason, you won’t find yourself in a position of having to sacrifice an already thin margin to pay a property owner or contractor and essentially break even. Set yourself up for success by making sure that your future investment property numbers make sense with or without contractors or property management as one of the costs of doing business.