This is the last post in the series. I know it has been a lot of work for Apex and I know how much all of us have learned and benefitted from it. So please join me in thanking him for this great effort.
Throughout the Real Estate 101 Series my goal has been to introduce prospective and beginning investors to the world of real estate investing.? Specifically I have tried to answer some basic questions, dispel some myths and misconceptions, and give actionable advice that can be used to move towards becoming a successful investor.? As I finish the series I hope that the information provided here has mostly met that goal.?
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This final column will act as a short summary of each of the previous columns with a link back to the original column for the full details.? Hopefully this summary column can become a quick reference tool and an overview that helps to pull all the elements together into a comprehensive story line.? Below is a summary of each column.
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Column 1: Why You Should NOT Invest in Real Estate
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Some people might mistakenly believe that anyone can invest in real estate.? It?s a much more involved investment than typical investments like stocks or bonds.? It?s more like running a business than it is an investment.? There are a number of aspects to investing in real estate that you need to be aware of before you decide to enter the business.? I listed 6 reasons why you may not want to invest in real estate.? They were: (1) It takes work, (2) It consumes time, (3) It requires management, (4) It demands capital, (5) It needs debt, and (6) It grows slowly.? Before you invest in real estate, make sure you know what you are signing up for.
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Column 2: The Benefits of Investing in Real Estate
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Since investing in real estate requires more work than investments like stocks, one would expect there to be some extra benefits.? Indeed there are a number of them and in this column I outlined 6 of them.? They were: (1) stable income stream, (2) partially passive income stream, (3) property appreciation in addition to income, (4) tax benefits, (5) significant cash flow, (6) returns are significantly compounded by leverage.? I spend considerable time in this column on benefits 5 & 6.? The first four benefits are valuable but the most important benefit is the significant cash flow and the most powerful benefit is the compounding of returns through the use of leverage.
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Column 3: Where to Start
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Real estate investing is not something you just decide to do.? It requires a little planning and there are a few hurdles that prevent many people from getting any farther than thinking about it.? In this column I outline 8 steps to getting started as a real estate investor.? They are: (1) Start by taking action, (2) Get a real estate agent who specializes in investment real estate, (3) Get access to capital, (4) Think about the type of property you want to invest in, (5) Start looking at many properties, (6) Determine if you need a management company, (7) Find out what reasonable rental rates are, (8) Buy something!? One of the key concepts I try to get across in this column is that you do not have to do this perfectly.? You will make some mistakes and that is OK.? There are no perfect deals.
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Column 4: Running the Numbers
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As with any investment it is important to make sure the numbers work.? The returns have to be worth the effort and the risks have to be manageable.? In this column I go over 4 ratios that I believe will give a good assessment of any real estate investment.? They are: (1) cap rate (2) cash on cash return (3) return on investment, and (4) cash flow margin.? I show how to easily calculate each of these ratios.? I also discuss some other metrics that are used to calculate these ratios but have assessment value in and of themselves.? Those metrics are: (1) cash flow (2) net income, and (3) net operating income.? Finally I discuss what I consider to be a minimum guideline for two important ratios.? Those are cash flow margin of at least 10% and ROI that is also 10% or perhaps very high single digits if the deal was all cash.
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Column 5: Making an Offer
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Many people think the key to successful real estate investing is getting a steal on the price of a property.? Obviously the less you pay for a property the better, but in general properties will sell for what their market price is.? You will be competing with other buyers for the same properties.? The market price of a property is simply what other buyers are willing to pay.? Market prices for some kinds of properties make for much more attractive investments than others.? The largest determinant of the price of a property is the type and quality of the property.? The most important thing when buying a property is to understand what the true market price for that property is and to know if that property is a good investment at that price.?
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Column 6: Finding Your Niche
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There are many different ways to invest in real estate.? You cannot be successful at all of them.? As you start investing it will be a learning experience.? The most important thing you can do throughout this process is listen to yourself and determine which type of investing fits best with who you are.? You will be most successful when you are able to focus on the niche that best fits with your skills and your personality.? It may take some time and it?s ok if there are some missteps along the way.? Finding your niche will be one of the most important things you do as a real estate investor.
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Column 7: Getting It Rented
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Tenants pay your bills.? If you don?t have tenants you have losses.? That?s why vacancy should be the number one thing a landlord tries to minimize.? Too many landlords are complacent about getting a property rented when it is vacant.? This is a serious financial loss to the business.? A vacant property should be aggressively marketed with the intent to rent it as soon as possible.? One common mistake is holding to a rent that is higher than the market is willing to pay.? It is far better to lower the rent and get it rented than it is to hold out for higher rent leading to months of vacancy.? Vacancy will happen, but a diligent landlord will do everything they can to keep their vacancy rates as low as possible.
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Column 8: Finding Good Tenants
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While a vacant unit is a problem, a bad tenant is a far worse problem.? There are many good tenants to be found but it is your responsibility as a landlord to find them.? To do this you need to advertise your property appropriately to attract good tenants.? More importantly you need to do careful screening on all applicants to find good tenants.? This includes background checks, credit checks and most importantly previous rental history and income verification.? Good tenants tend to have a history of paying their rent and making sufficient income to do so.? If you are not careful about whom you rent to, your tenant quality will likely suffer.
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Column 9: Keeping Good Tenants
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Once you find a good tenant it?s far easier to keep them than it is to find another one.? Turnover costs you time, effort, and money.? There are a few basic things that will help you keep good tenants.? It starts with treating your tenants fairly and with respect.? You want to keep your properties in good condition and respond to your tenants needs.? Do not gouge them on rent or fees, and if possible try to use leases that have longer terms to keep both you and them committed to the property on a longer term basis.
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Column 10: Managing the Property
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One of the biggest concerns for prospective landlords is how to handle the daily management operations of a property.? Areas of concern often center around issues of how to deal with tenants that are not paying rent, tenants that are violating the lease, and how to deal with the maintenance issues of the property.? Most money issues with tenants can be resolve with a few simple steps.? Eviction is rarely required if you have screened your tenants well but even if required there are services that can help you complete it.? Repairs can also be handled by management services for anything beyond your comfort level.? You can manage the property to whatever level you feel comfortable and simply hire others to manage what you do not.
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Column 11: The Lease
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Your lease is a contract between you and your tenant.? Your ability to set the rules and retain control over what happens in your property depends on the quality of your lease.? Your lease should not be something you just throw together or download from a generic lease site on the Internet.? It is very important that it follow local statutes so that it is legal in your state.? It also needs to state very clearly what will happen when terms are violated and under what terms it can be terminated.? In addition you want to use the lease to communicate any rules or expectations with your tenants.? A good lease makes your job easier and resolves conflicts before they happen.
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Column 12: Financing
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Real Estate is a capital intensive business.? You will need significant capital if you intend to get very many properties.? You will need both your money and other people?s money.? You likely cannot get very far with just your money but you also cannot get other people?s money if you don?t have any of your own.? There are various means of acquiring financings from conventional financing, to home equity loans, to private and commercial financing.? It is important to always be exploring your financing options because the more debt you have financed the harder it becomes to get more.
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Column 13: Taxes
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Real estate investing provides certain tax benefits that are somewhat unique to real estate.? However some people put more emphasis on tax benefits than they deserve.? The major benefits include depreciation of the non-land value of a property, 1031 tax exchanges to transfer taxable gains to different real estate entities without incurring taxes, and deduction of all expenses associated with the business.? These benefits are actually common to a number of businesses but what makes real estate unique is that you are able to take a depreciation allowance on an asset that actually appreciates in value.? Because of that there are special recapture rules that attempt to tax the depreciated value at a future sale date.? It is important to understand how these tax benefits work.? They have significant benefits in the near term but they also come with future drawbacks.? Real estate investing is not about tax benefits, it?s about running a profitable business.? Tax benefits alone are never enough to justify an investment.
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Conclusion:
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Real estate investing like any business is a journey and a process.? It takes time to get things started and even more time to begin to get comfortable with your business.? With enough time and experience you can settle into a process that works well for you and which you can be successful at.? I hope this series has been helpful as a starters guide for some and perhaps as a refresher for others.? This series, however, won?t make you a good real estate investor.? Only you can do that.
Source: http://www.freemoneyfinance.com/2013/01/real-estate-101-summary.html
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