Two years ago my wife and I purchased our first investment property, and it’s been the best financial decision of our lives! With just $18,000 down we now have a property that brings in an extra $700 every month!
There are many advantages to owning real estate as a long-term investment vehicle. For one, it can provide additional cash flow every month which could lead to an early retirement much faster and easier than traditional investments. Your tenants will pay down your mortgage, you’ll get TONS of tax advantages, and real estate almost always appreciates in value making it a great hedge against inflation.
Our rental property costs us about $1,000 every month here in NJ where property taxes are very high, but it rents for $1,700 to wonderful military tenants. Our rental is also right next to a little stream, so we have flood insurance of $700 a year, but that stream makes the property that much more desirable.
If you’re just starting out and wondering were to begin here are some tips I wish I could've told my younger self. Just follow these tips to get started investing in real estate.
- Do Your Research
There are a ton of wonderful websites out there to learn about real estate investing. I highly recommend Biggerpockets.com, a wonderful online investment community focused on real estate. It’s important to learn as much as you can because investing in real estate is not as simple as buying a home off Zillow and renting it every month.
- Don't Suffer From Analysis Paralysis
If there’s anything I’m guilty of it’s analysis paralysis. I researched long term real estate investing for probably 2 years before we finally pulled the trigger. You will get to the point where you know everything you need to get started. I would keep reviewing the same things over and over and over. I ran hypothetical numbers hundreds of times. In the end I suppose it all worked out, but at some point you need to get off the internet and start making things happen.
- The 1% Rule (buy right and never lose)
The 1% rule is very simple, but a great way to judge an opportunity at a glance. Essentially it just says that you need to get 1% of the purchase price in rent each month in order to make the purchase worth considering. Now this will depend on your location, as property tax will play a huge roll in this. For example here in NJ you should really shoot for 1.15%. So if you're looking at a $150,000 house you should be able to get $1,500 a month in rent, or $1,725 here in NJ.
- Know Your True Expenses (Cap ex, property manager, vacancies, damages)
This comes with doing your research, but there’s more costs to owning an investment property then just the mortgage, taxes and insurance. You’ll have to put money aside for vacancies, damages, property management and capital expenditures. This will vary depending on your location, the property, and your skill level. For example, we self manage the property so we don’t need to worry about 10% for a property manager. We have military tenants who are very respectful so damages are minimal and vacancies are typically short. And for capital expenditures the property has newer HVAC, roof, oven and Dryer, so we’re limited on what major items will need to be replaced. These are all things you’ll need to consider depending on the property and your skill level.
- Reach Out To The Township and Ask Questions
There are plenty of things I didn’t know when I started, but I learned along the way. If you call the township housing division and let them know you plan on buying a rental property and just want to know what forms or inspections you need to do they’ll let you know. We needed a fire inspection, a landlord form, a sale inspection, and HVAC inspection. It sounds like a lot but it really wasn’t bad and we just took care of everything along the way.
- Let Everyone Know You’re In The Market (look for off market deals)
Our first property ended up being an off market purchase from a friend of the family. I let everyone know I wanted to buy an investment property. This person caught word and let me know they were getting ready to retire and move out of state. The home was in great shape but just needed some little updates. Because it’s off market the seller saves on realtor fees and doesn’t need to worry about trying to sell. The home appraised for $140,000 but because we were willing to work around the sellers schedule, buy as-is and save them on real estate agent fees we got it for $97,500.
- Avoid a Fixer Upper at First
Fixer uppers are high risk high reward. They can open a whole new can of worms that you might not be ready for. They can be very tempting but until you really learn the ropes it’s best to avoid them at first or it might end up being your first and last real estate investment.
- Know How To Turn a Wrench
Real estate investing is not for everyone. For those of us that know how to turn a wrench and do a little DIY work it’s almost a no brainier. In 2 years I’ve had to replace 1 toilet flapper, unclog 1 drain, and clean 1 dryer vent. Before we rented the place out I also refinished the hardwood floors on the top floor, painted everything, fixed a whole in the wall, and power washed the patio. This was a little sweat equity that could have cost a pretty penny if I had to hire someone.
- Treat it Like a Business and Build a Team
Find a plumber, and electrician, a handy man, a mortgage broker, an accountant. Save this info, have these people on file and treat them almost like employees. You need a go to team you can trust.
- A Penny Saved is a Penny Earned
We removed carpet on the third floor and refinished the hardwood, this left a noticeable gap between the trim and the floor. Instead of going to the hardware store for all new trim we went to a local habit for humanity and were lucky enough to score trim for pennies on the dollar. Every penny you save is a penny you earn. Look for auctions in the area, jump on sales, use coupons. Fun Fact, you can buy coupons for Lowes Home Improvement off email and get them delivered via email in seconds. You spend $2 for the coupon but could save $100 on your purchase!
- Don’t Fall In Love With the Property
This is tricky, you want to love the property but not be IN LOVE with the property. You need to remember it’s an investment. If you’re going to put money into it you need to be getting money out of it. Don’t do something because you love the home and think it’ll be nice. If it’s not going to add value you shouldn’t do it.
- Put As Little Down As Possible (Maximize your ROI)
The trick with long term real estate investing is leverage. The less you can put down the greater your return on investment to your initial down payment. Most lenders are going to want 20-25% down but you can find some that’ll give you 15% with a slightly higher rate (don’t worry you’re going to get rid of that higher rate anyway).
- Buy a Place With Equity, Refinance and Repeat
There is a strategy called BRRRR which stands for Buy, Rehab, Rent, Refi, Repeat. You should look for a place that isn’t a fixer upper, but maybe needs some little touch-ups. You want to get it for less then market value, and low enough that when you fix it up a little you’ve added enough value that you can hopefully do a cash out refi that will eliminate PMI if you put down less then 20%. This will also give you back your down payment to roll into the next property, and let you get the lowest interest rate possible.
- Get a Good Accountant
My real estate accountant cost me $1,000 this year, but he saved me probably $3,500 worth of taxes. Did you know that your investment property can be depreciated over 27 years, but everything inside of it can be depreciated in the first 5 years (oven, fridge, sink, toilets, etc.) yea neither did I… hence the good accountant.
- GO FOR IT!
I often read online the hardest part is just getting the courage to go for it. You’d be amazed how true this is. If you’ve done your research, looked at all the numbers and it makes sense, you’ll just need to go for it at some point. Was I scared? You bet! Was it stressful at times? Not as much as you’d think. Would I do it again? I plan on buying 1 every year for the next 10 years and retiring in my mid 40's. You could too if you follow these tips to get started investing in real estate
- Bonus: Military tenants are the BEST!Not everyone lives near a military base, but if you do, consider targeting these renters. The pros outweigh the cons by a huge margin. They have good jobs that you don't have to worry about them losing. They are respectful of the property. You can get their CO's information and if they don't pay or are being disrespectful, you let the CO know and they'll handle it (never an issue). They get a housing stipend to pay rent. And there's always military personal looking for off base housing. The only real con is that they can get orders and leave with very little notice. This is hardly an issue as there's likely a new military family ready to take their place in your home ASAP. Consider partly furnishing your home for the military tenants, it gives you a leg up so they don't have to worry about buying a big couch or dining table
I always recommend starting with a single family home. They are easy to rent, easiest to get loans for, and easiest to work on. Get your feet wet, treat it as a business and grow. Before you know it you could be buying a small 12 unit apartment building, quitting your job, hiring a property manager, retiring and traveling the world living of your real estate investments.