How to Make a Better Real Estate Investment
Investing in real estate has lots of risks that can derail even the best-looking deals, so you need to make sure you are addressing the known perils and doing the hard work to diminish the chances that something will go astray with your purchase. And here’s the most important part: You must start before making the purchase and continue during ownership.
When you buy real estate, you must make sure that it’s a smart financial decision. Rentals make sense if they are cash-flow positive and provide a fair rate of return on the invested equity. Investors should not purchase negative cash flow properties, period. If you pencil out your rate of return on a negative cash flow property, you’d probably realize it would have been better to invest your money elsewhere in an asset with better returns.
Buy a property in good shape
Skip the fixer-uppers: They almost always cost way too much to repair. Many a buyer has theorized that it would be fun and profitable to buy a property, fix it up and sell it at a profit. Rarely does this scenario come true — usually the buyer ends up losing money. This may work for a construction contractor who is experienced in estimating the costs of repair, but for the Average Joe, chances are you will lose your money.
Secure long-term financing
Make sure to take out long-term fixed interest rate financing. It costs significant amounts of money every time you finance or refinance a property, so try to do just one financing at purchase and enjoy the peace of mind knowing you won’t have to worry about interest rate changes in the future. Go long!
Review your title documents
All buyers should review the title insurance policy, schedule of exclusions, title abstract and a plat or survey of the property. Schedule an hour for your title insurance agent to go through all those items with you, in detail, so you can address any issues before you purchase. Significant issues are rare, but you have to address them before you close escrow.
Property and liability insurance
Make sure to keep the proper insurance in place and for an appropriate amount, as needed for the specific property and your specific circumstances. You should sit down with your insurance agent and discuss your complete financial and insurance picture so that if something does happen — such as a fire, dog bite, flood or slip-and-fall — your insurance company will work with you to reduce the chances it would significantly impact your finances.
Manage rentals well
If your property is a rental, make sure to secure good tenants and keep them for as long as possible. Treat them well, keep your property in good shape, address issues and resolve them quickly. You’ll make the most money with the least hassle by treating your tenants the way you’d like to be treated.
So, if you want to make a better real estate investment, the areas above are good places to start. You’re reducing the likelihood of property issues occurring that could cause you financial pain or take up an inordinate amount of your time. And if you talk to long-term investors — and you should do that, too, to pick their brains — they’ll probably have many “I learned that lesson” stories to share. It’s better to learn these lessons from other investors than to learn them the hard way during your property ownership.
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Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.