11. Set a budget and timeline (and expect to go over both)
“My rule of thumb is that you should set aside 50% more of your budget as reserves, 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, etc.
For example, fixing a leaky pipe may turn into replacing the pipe and removing mold damage and replacing the drywall. In terms of timeline, I would say that the same thing goes: If your timeline is 60 days, prepare for the project to take 90 days. With added expenses, comes added time.”
-Allison Bethell, Fit Small Business
12. Have a rainy day fund
“When buying rental houses for cash flow, make sure you account for all of the expenses and have rainy day funds set aside for future expenses. For the last decade of owning rental properties, our annual expenses (excluding debt servicing costs) have averaged between 45-55% (depending on the year) of the gross rent. These are for properties that rent between $800-1,000 per month.
If you are renting out higher-end properties, your ratios may be different, but for most markets, your ratios will be very similar to these. Make sure you keep a reserve in place to cover unforeseen expenses because you never know when they will hit.”
-Brady Hanna, President of Mill Creek Home Buyers
13. Treat your investments like a business
“Real estate investing is a business and like every other business, it requires purposeful planning, execution, and management. The most successful businesses are run by high-quality people at every level of the organization.
Those that ignore this fact are destined to struggle or even fail. Regardless of how big or small you want your investment to grow your real estate investing business, if you want to succeed then you must run it like a business.”
-Chris Counds, Texas Ideal Properties
14. If you can’t beat the price, beat the terms
“Although the 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.
You can improve terms by using the seller’s escrow agent, reducing the inspection period, increasing the earnest money deposit, having a sooner closing date, and limiting appraisal and financing contingencies.”
-Lucas Machado, President, House Heroes LLC
15. Count on vacancies
“Unless you have deep pockets, you want to avoid the hole a vacancy creates in your cash flow. The only way to do this is to factor it into the cost of carrying the property. For most landlords, this means assuming that not all months in a year will produce an income.
For some that means 2% less in revenue, for others, it’s as high as a 10% loss in revenue. The key is to assess the property, the type of tenant and then to factor in how much revenue loss you should expect on an annual basis.”
-Michael Jakobczak, Sales Representative, Zolo
16. As your portfolio grows, stop being a jack-of-all-trades
“Most of the time, new real estate investors convince themselves that they’ll manage the property themselves. That’s fine, as long as you have the time, energy and know-how. But as the number of rental units you own grows, you will probably need to outsource this task and this outsourcing comes at a cost.
To avoid any nasty surprises when buying a property, consider crunching the numbers to factor this cost in before you actually take on the cost. That way when you decide to hire a property manager the fee is already factored into your profit-and-loss calculations. In the meantime, remember that acting as your own property manager is an expense—so pay yourself.
This will help lower the tax owed on the revenue you earn, and it helps to remind you that your time is worth more than a freebie.”
-Michael Jakobczak, Sales Representative, Zolo
17. Know your tax laws
“Now more than ever, it’s crucial for real estate investors to be up-to-date with the new emerging tax laws. This means more than simply knowing what a Schedule E (Form 1040) is—it’s knowing how to file for the right deductions and taxes based on your state, county, and city.
For example, the new tax code allows residential property owners to deduct personal property costs (including furniture) and benefit from the reconfigured bonus depreciation rules.”
-Nate Masterson, Marketing Manager for Maple Holistics
18. Make your money when you buy
“It’s easy to overpay for real estate, especially in this market where things are selling 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 buying right.
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.”
-Joe Horan, Owner of Wrightwood Homes
>>Tip: It’s easy to evaluate and purchase cash-flowing rental properties on Roofstock.
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19. Maintain contact during escrow to secure your deal
“The deal is not closed once you open escrow. If you are buying off-market, the seller will likely have some level of anxiety over the deal and whether everything and everyone is legitimate without a real estate agent.
Have the escrow/title company reach out as soon as possible to introduce themselves and to let them know that they will be preparing the paperwork. This will provide 3rd party validation to the seller and put them at ease.
Also, set the expectation upfront that you will be touching base periodically throughout the escrow period and be sure to do so.”
-Jack Tangy, Redbridge Properties
20. Have multiple exit strategies
“One should never buy a property without having multiple exit strategies. Take flipping for example. If you’re just starting out or don’t have a ton of extra capital, you want to mitigate your risk factors by buying properties that have good enough numbers to be a rental as well.
If you’re buying flips and the market tanks, but the property would be even or negative cash flow when rented out then you’re most likely going to lose tens of thousands of dollars.
Flipping starter homes that are in the price ranges that can be rented out for solid cash flow every month allows you to either build wealth by keeping them as rentals or mitigate your risks when things go sideways.”
-Shawn Breyer, Breyer Home Buyers
21. Learn about market cycle theory
“Try to invest in the right phase of the cycle. This is not speculating, but trying to generally understand what will happen with the real estate prices in the following five years.
I’ve always purchased my investments during the recession and early stages of recovery phases. This has enabled me to earn significant capital gains in addition to rental income.”
-Paul Koger, Head Trader and Founder, Foxy Trades LLC
22. Find wholesalers and negotiate
“I flip $10M worth of real estate annually and have for over a decade now. My go-to move is to reach out to my network of wholesalers every time I need a new home. You can leverage social media to find groups of wholesalers to connect with.
Never accept the first offer from a wholesaler. Always ask for a lower price. They need to move homes fast, so offer to close quickly for a discounted price.”
-Ryan Stewman, Hardcore Closer, LLC