Rules to Live by When Investing in Real Estate
Over the years of my career I have had clients discuss with me their desire to invest in real estate. In most cases rent houses and or duplexes. For those of you who do not know I have owned rental properties and have had my fair share of experiences both good and bad.
I the other day was visiting a realtor friend, Dick Gann, and I asked him for a list of his rules of investing in real estate. Here is a synopsis of what he gave me.
• When do you make money on real estate? You make your money when you buy it. If you don’t buy it right, your investment will take much longer, if ever, to pay off. This does not necessarily mean you buy for pennies on the dollar…, it may mean you buy at the right time, right interest rate, or right location.
• Do not listen to “Uncle Joe”, your brother-in-law, or other friend that does not have any money. Find an EXPERIENCED professional and get good information, then make informed decisions.
• Decide up front before entering the transaction whether you will manage the property yourself, or if you will hire a property manager.
If you manage the property yourself, you will invest your time in addition to your money, and you will recoup your investment sooner. If you do manage the property yourself follow a pattern and be consistent.
1. Do your background checks – Check their employment, check their previous rental history, check their credit. Get written permission to do so.
2. Deposit Money – If they don’t have enough money for the deposit & the first month’s rent, do not rent to them. . . Just Don’t!
3. Lease Agreement – Know what your Lease agreement says, know what it means, and enforce it.
4. Most Important – Write into the Lease that you will pick up the rent check every month. You will do so while you are changing the Air Conditioning filter. You will advise them that you will check all of the plumbing fixtures and you will change the AC filter every month. Tell them that you do so to protect your investment. Tell them you will inspect every room while you are there. Lastly, tell them they need to advise you of any needed repairs beforehand.
(if you are not willing to take the 1 or 2 hours per month to protect your investment, do not get into the business)
5. Know the relevant laws – From time to time some of the judges in the civil courts will hold a landlord and tenants meeting. This is done to clarify the laws regarding the proper and legal management of a rental property and the laws and remedies for the tenants.
• If property management is not your cup of tea. It is perfectly acceptable to use a property manager. You need to make sure they will make the monthly visits as detailed in Number 5. The property manager needs to earn their money and protect your investment too. Otherwise they are not the right manager for you.
• Know the money – The best way to buy is to pay cash. Yes, pull that $150k out and pay cash. You will make more money from one month’s rent than you will earn in interest all year, and if you take care of your property it will increase in value, and pay you dividends every month. Eight to ten years later you will have recouped all your investment, and own a property that is worth more than you paid for it.
If you use a management company, it will take 12 to 14 years to recoup your initial investment. But that is not bad.
• What if you don’t have the money to pay cash? Buy it right, take care of it, manage your tenants (be kind but manage them), and eventually you will have allowed the tenant to purchase the property for you.
The following are my additions to Dick Gann’s very important list.
• Leverage – If you do borrow money to purchase the property, be careful of being over leveraged. Too much debt will strangle your cash flow.
• Be your own handyman – You will save a fortune if you learn to repair most of the basic mundane repairs. Repairs such as paint, simple plumbing and electric, and cabinetry. Also, when the tenant turns over do you own clean up and make ready. Another note about doing it yourself. If you screw up the repair, you can learn from your error and repeat the repair, have spent less money that hiring someone and cover the cost of your tools. I have plenty of tools.
By being your own handyman, you keep more money that goes straight to your bottom line profits.
• Learn the eviction process. If you go to your local court house and request the kit, you will have all the forms, instructions and procedures you need to complete the eviction yourself. Personally, this was the one thing I hated the most. It is gut wrenching to me to stand before the judge and must listen to the half-truths and out and out lies a soon to be ex-tenant will say about you.
But you must know that bad things happen to good people. And many people are one financial hardship away from not being able to pay their rent. When that happens, no matter how good your relationship with the tenant is or was, you are the bad guy (the landlord) and many times the tenant will take their anger out on the property you own. There are legal remedies for damages to your property, but if the tenant has nothing you will get nothing.
• Working Capital – Have a working capital account for the in evitable bad tenant. Do not get me wrong, there are some great people out there and they are wonderful tenants. But if you own property long enough, you will rent to a bad one. Therefore, have money set aside to deal with a month or two or three of no rent. Also, have money for cleanup and repairs. You will need this even if you do the work yourself.
• Have a belly full of ice cubes, a strong fortitude. You will need it.
I do not want to end on a sour note. If you ever read the list of Forbes Magazine’s wealthiest people, you will find many made their fortune in real estate. In fact, I believe our current president did so too.
And if investing in real estate does not suit you I can help you with traditional investments and securities. If real estate does suit you and you need a place to put your cash and profits until you buy another property, I can assist you too.
Corey N. Callaway
Investment Advisor Representative