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For the first time in a long time, you can actually get both a short- and long-term gain on a real estate investment. With prices down, interest rates at record lows, and so many would-be buyers deciding to rent instead, it’s a great time to buy a real estate investment.
Most new millionaires are made during real estate recessions. Here are Barbara’s insider tips on how to turn the real estate slump to your advantage.
I. Find a Good Beginner Property
The best deals for you are always in your own backyard. Most of the money lost in first-time real estate deals is lost in somebody else’s backyard. You know your town, your area, what’s going on there, and the good streets from the bad. You’re far less apt to lose money when you know your way around.
The best way to become a real estate shark is to start small. Big shots always get burned. Consider the condo studio next door, the duplex down the street, or the mother-daughter house on the next block. Also consider buying a small vacation home you can rent out part time to see if you even like having tenants.Set Yourself a Clear Goal
Anyone can set a clear goal and it’s not even sophisticated. Figure in advance how much cash you have to invest and how much of a return you hope to get each year. For example, some long-term investors get 80% financing and only expect to break even month to month on their rents. Other investors want to put in more cash but expect to get a 20% return on the money they put in. Knowing what you’re after can get you the right property.
Make Sure the Property For Sale Is Legal
Many property owners illegally rent out their units in areas that don’t allow rentals. Check out the local zoning at the town clerk’s office.
Buy the Block, Not the House
The same house only two blocks over can be worth 20% more. Every town has good blocks and bad blocks, and what’s on the corner sets the tone for the block.
Don’t Settle for the First Property
If you see a property you absolutely love, put in a bid and ask for a contract. Meanwhile, keep looking at other properties for sale because nothing’s more attractive to a seller than an investor who’s already committed to something else!
Use a Local Broker to Find the Best Deals
You can spend your time reading death notices, going to local auctions or scouring foreclosure Web sites, but the best deals are usually found by a shrewd local broker. Today’s most successful investors rely on one or two smart brokers to ferret out the best deals in town.
II. Know What to Check Out
I bought a 12-unit motel that had a great rent roll, but learned after closing that none of the tenants had paid their rent for the past nine months.
Get a Fixed Rate Mortgage
Current adjustable rate mortgage rates are only slightly lower than fixed rates. Loans on duplexes are similar to single-family home loans, triplexes and four-plexes tend to have higher rates, and commercial is a whole other ball game.
Don’t Assume Taxes Will Stay the Same
Taxes change every year and can go up drastically after a purchase.
Factor in Lost Rent for Vacant Apartments
Usually 8 percent to 10 percent. It’s rare that one tenant moves out on the 30th and the next tenant moves in on the 1st.
Factor in the Cost of Your Tenants Moving In and Out
The biggest surprise for most new landlords is the expense of tenant turnover, like advertising for a new tenant, agent fees, cleaning, repainting and replacing new carpet.
Get an Insurance Quote in Advance
Insurance on investment property is much more expensive than on a house.
Figure Out Realistic Maintenance Costs
If the house is brick, you won’t have to paint, and wood decks need constant maintenance. A smaller property is easier to maintain than a larger property. And more units mean more money spent. If you buy a property 30 miles away, you’ll use more gas driving back and forth.
If You Don’t Like Your Tenants, Factor in the Cost of a Professional Manager
Professional managers charge anywhere from 5% to 20% of your rent roll.
III. Find Yourself a Good Partner
Finding a good business partner is as important as finding a good property. The best real estate partners are always opposites. One partner knows how to pick the best property, and the other knows how to manage it. One knows how to get the best rents, and the other is good at managing the money. Many of today’s best real estate partnerships combine a guy with the cash and a guy with the contracting know-how.
People With Money Don’t Have Time, and People With Time Don’t Have Money
There’s a partner for everyone.
Sign a Partnership Agreement Before You Buy
Most arguments and lawsuits result from not having a clear legal agreement in place. In real estate, it’s the equivalent of a great pre-nuptial.
Ask Mom and Dad to Be Your Partner
If you don’t have the cash but do have the know-how, ask your parents to be your partner. They can provide the money while you provide the management, and you can share the profits 50/50.
Use Less Money to Make More Money
Leveraging your cash is the secret to making money in real estate. For example, if you pay all cash for a $100,000 property, and the property’s value increases by 10% in the first year, you make a 16% return on your cash.
If you buy the same $100,000 property with only 20% cash down, and take out an $80,000 mortgage, and the property’s value increases by 10%, you make a 50% return on your cash.
IV. Dos and Don’ts for Finding Good Tenants
Ask for the tenant’s Social Security number, past landlords, W-2 forms and permission for a credit check. You can get complete applications and leases online at ezlandlordforms.com.
Do Make Sure Phone Numbers and People Match
You’re often talking to a family member posing as the landlord! Go to whitepages.com to make sure the names and numbers are correct.
Do Go on Nopaytenant.com
Here’s where landlords list the name of bum tenants who still owe them money.
Don’t Rent to A Tenant Who Can Move in Tomorrow
If they can move in tomorrow, you probably don’t want them moving in at all.
Don’t Accept Cash or Rent Up Front
Rent paid in advance keeps you away from the property and you won’t know what’s going on. Rent offered in advance, especially all cash, is always a bad sign.
Don’t Rent to a Tenant With a Messy Car
If their car’s a mess, that’s how they’ll care for your property.
Don’t Call Their Current Landlord
Current landlords might lie to get rid of a bad tenant. Call the previous landlord because they don’t have the same secret mission to get rid of them.