With lower interest rates in our economic forecast, it is the perfect time to finance an investment property. A lot of people are considering this very option to get ahead on the property ladder and as an investment option. It is well known that investing in real estate is a great opportunity as real estate tends to be a more secure way to invest. So what are my best tips for investing in real estate wisely? I’m about to share them with you…..take some notes and make sure to reach out if you have any questions.
- Treat your investments like a business – Investing in real estate must be treated like every other business, requiring purposeful planning, execution and management. If you ignore this fact you are destined to struggle or even fail. Regardless of how big or small you want to grow your real estate investing business this is my #1 tip.
- Make your money when you buy – It’s easy to overpay for real estate in a market where things are selling quickly. And trust me in Saskatoon, right now, properties in certain price ranges are moving very quickly. In general if you’re keeping the property, don’t count on appreciation as a way to make money. It can work but it’s still a higher risk than purchasing for the right price. If you’re buying a rental, look for homes that need a bit of work and have cash flow from day one. Don’t forget to add in budgets for capital expenditures and routine maintenance.
- If you can’t beat the price, beat the terms – Although, offer price is the first thing sellers look at, it is not the only thing. Terms are important. Often, someone else will offer more than you. If that’s the case, consider giving the seller favorable terms by reducing the inspection period, increasing the deposit amount, have a flexible closing date and limiting appraisals and financing conditions. Sometimes, sellers do not want to risk losing your offer by taking the riskier higher offer that is contingent on the sale of the purchasers property or on their financing being approved when they don’t even have a pre-approval letter.
- Get to know your market – When investing in real estate, it is important to learn about and become an expert in your selected market. Being well informed on the current trends, including any decreases or increases in average rent, income, interest rates and even unemployment/crime rates will allow you to recognize the current market status and plan for the future. Being able to forecast the market can help you become a more effective investor
- Set a budget and timeline – a good rule of thumb is that you should always expect to go over budget and take longer than expected when flipping a home to sell. Always, always have a reserve fund especially as a new investor. Your budget almost always goes higher than anticipated and when you’re rehabbing houses, one issue can detect another one, which can not only turn into a higher renovation cost but also can lengthen your timeline.
- Leverage the experts – Investing in real estate has a lot of moving pieces. When you’re first starting off it’s critical that you leverage experts in each area of the project to ensure success and minimize mistakes.
- Join a local Network of Investors – There are a lot of real estate investing groups all across the country. Join a few, participate and find ones that have the people and topics that you are interested in. Try to find groups that don’t pitch products but really educate and mentor you in the areas that pique your interest.
- Do your Homework before taking the advice of paid financial advisors – Your paid advisors, broker, wealth manager, tax accountant may suggest that you avoid real estate in your portfolio altogether because they are an illiquid asset or too management – intensive. Those can be valid arguments based on your specific situation, but keep in mind that they may not be the experts in real estate investing and they don’t get paid when you invest in real estate so take their advice and do your own research and ask the advice of other successful real estate investors before making your final decision.
- Don’t over leverage yourself – You can be very successful for a long time in real estate investing and still go broke if every rental you own is mortgaged to the max. If you keep some of your rentals free and clear and some of them financed then you’ll have a good mix of safety while still stretching your resources to increase your portfolio. Any unexpected vacancies or dips in your cash flow will not be the end of your career if you plan properly.
- Single family rentals are great – Single family homes are your safest bet for attracting the correct tenant. Everyone wants to live in a house and most single family homes historically have always appreciated.
- Don’t over renovate – It’s ok to budget and go with the middle of the road fixtures, especially for middle to lower-end houses. Consumers are looking for nice, clean and modern homes and they won’t necessarily pay more for more expensive fixtures. Over renovating could potentially price your home right out of the market so keep this in mind when planning your budget and stick to it as much as possible.
- Nip maintenance issues before they get bigger – a bi-annual walkthrough of your rental property will help you foresee problems. Make sure to ask your tenant if they have noticed anything you should look into but don’t rely entirely on their judgement. Have your own walkthrough checklist to inspect under all the sinks, around the toilets, around the window and door frames etc looking for water damage or any other issues.
- Have a rainy day fund – When buying rental houses for cash flow, make sure you account for all of the expenses and have a rainy day fund set aside for future expenses. Setting aside as much 45% of the gross rent is highly recommended to help cover the unforeseen expenses.
- Count of Vacancies – Factor in the carrying costs in your rainy day fund. You must assume that not all months will produce an income. This could be anything from having difficulty finding qualified tenants or needing a few weeks between tenants to do some maintenance or quite possibly need to repair damage done to your property from previous tenants, all are very likely to occur when you’re a landlord.
- Know your tax laws – Remember you are treating your investment like a business, therefore you must educate yourself on your local tax laws. You need to have knowledge in expense tracking, knowing which expenses can be deducted as well as understanding of depreciation rules for your specific situation.
- Know the Market cycle – Try to invest in the right phase of the cycle by understanding what the real estate prices will do in the following five years. Try to purchase during a recession or early stages of a recovery. Ask me about where our market is in the cycle currently.
Real estate investment can be an undertaking; however, when done properly, you can build a successful nest egg. Take your time and perform due diligence before deciding if real estate investment is right for you. Be sure you have the time and resources to dedicate to this investment strategy and build your retirement fund today. And, of course, the best way to answer all your questions is to ask me!