Imagine what it would be like if you owned a few really good looking homes, in family oriented neighborhoods within the top local school districts? And imagine renting to hard working nurses, and state workers, and young professionals who pay their rent early and maintain your homes. Those are the homes I want to buy and the tenants I want to rent to, and in fact I have many situations just like this and it's really an enjoyable experience.
By: Zack Wiest
Throughout my 17 year career as a full time real estate investor here in Central PA, I have watched many aspiring real estate investors come and go. Some have done very well, and created fabulous lifestyles never available to them before real estate, while others have failed miserably and were left wondering where it all went so wrong!
The investors that fail typically make rookie mistakes that are avoidable with the proper education, plan and team. The old saying “you don’t know what you don’t know” is certainly true for investing in real estate. I would like to share with you some best practices when investing in real estate so you too can enjoy the many benefits that real estate investing has to offer. And if you didn’t know, right now is a great time to be investing in real estate due to historic low interest rates, an appreciating real estate market, and a strong demand for well-located rental properties due to the subprime housing collapse.
For the investors who succeed, there are rewards enjoyed that not many alternative investments can offer. Imagine buying well- located, quality built, single family homes that grow in value without you doing any real work. We call this automatic appreciation and it happens when buying real estate in what I like to call “the path of progress.”
You must also consider the many tax incentives offered to real estate investors. The tax breaks alone, one of which is depreciation, can save you thousands of dollars a year on your earned income; yes I said earned income, not just passive income.
Another great benefit of investing in real estate is the cash flow it generates, or as some call it, passive income. If you are smart, each single family home you buy should produce a net cash flow between $200 - $300 per month, after expenses, debt service and property management fees are considered.
So how do you avoid making all of the rookie mistakes and enjoy the benefits from day one? Over the last 17 years I have developed some best practices that you can implement to increase your chances of success, even on your first deal. In future blog posts, I will break down each one of the following concepts in great detail, but for now, here is a high level overview of what I think every investor should do when entering the real estate business.
1] Create a Strategic Plan – This plan ultimately becomes your blueprint for success. This comprehensive and well thought out plan should take into consideration your risk tolerance, overall objectives, target neighborhoods, target cash flow, your tax savings plan, a financing plan, your team, and a plan to protect you from potential liability. I routinely assist new investors in creating such a plan and it's such a rewarding experience each and every time.
2] Build Your Success Team – Sometimes it's not what you know, but rather who you know. Assembling the proper team from day one will have a lot to do with your long term success. Chose your team wisely and work with seasoned professionals with a proven track record of success.
3] Buy Quality Homes in Quality Neighborhoods – I am here to tell you from first-hand experience, it does not pay to buy cheap houses in marginal neighborhoods, even if the cash flow potential looks terrific. Buying cheap, poorly located homes, even when they are dirt cheap, is almost a guaranteed recipe for disappointment and little to no real return on your invested capital. And remember, quality tenants want to live in quality homes located in quality neighborhoods.
4] Use Debt Wisely – Real estate can be leveraged easily, in fact, it’s one of the few investments where a bank will loan you 80% of the money needed to complete the transaction. In today’s world, investors can borrow money to buy income property at 4.5% or less, fixed for 30 years usually with only a 20% down payment.
5] Hire the Best Property Manager in Town – I do not believe part time investors should manage their own homes. I think it is better to hire an experienced property management company who has time tested systems, a trained staff, and a technology platform that allows you to manage your homes remotely with little to no effort on your part.
With the volatility of the stock market increasing over the last two decades, more and more wise investors are looking to real estate to provide them with the double digit returns they are after. It’s not uncommon for successful real estate investors to earn 12-16% a year on their invested capital plus enjoy a variety of tax benefits. And if you are anything like me, you really appreciate the fact that real estate is a tangible asset. Feel free to learn more about this topic at www.PAdeals.com.