Hi Everyone,
There is a secret to investing in real estate that you need to know.
Chances are, if you have been investing in real estate successfully, you have figured this out.
If you are new to the world of real estate investing, you probably don’t know this by now.
The advice that I am going to offer in this article is straight forward and seems like common sense.
However, you must know that this is not common sense.
This realization has taken me 7 years to fully understand.
It has been close to 7 years since I bought my first rental property. Luckily, my first rental property purchase was a great success. So much so, that I still own that property today despite temptation to sell due to the increase in value that it has experienced.
If you can follow the advice presented in this article, you will be a successful real estate investor, no problem. All you need to do is focus on the follow 3 principles when you are buying your first rental property.
Here are the principals in no particular order:
1) Buy in an area experiencing above average appreciation.
When I bought my first rental property, I understood this concept completely. I purchased a property in a town with above average appreciation compared to surrounding towns. This was the smartest move I have made in my real estate investing career as this property will double it’s value within the next 5 years from the time I purchased the property. (property was purchased for $250,990 in 2005. The estimated value of the property in another five years will be approximately $500,000)
For the most part when people buy a rental property, they are motivated to do this due to two reasons. The first reason is to build wealth through property appreciation, and the second reason is to generate an income stream. Speaking of income streams…
2) Your property should cash flow
Notice that I use the word, ‘should’ and not ‘must’. Here is the reason why…
My first rental property did not cash flow when I first bought it. In fact, it was a negative cash flow property by about $200/month. I bought the property because I knew that it was going to appreciate. I knew that the appreciation of the property would cancel out any small loss I was incurring on a monthly basis.
This was back in the year 2005. Clearly things have changed since then with our world economy. As such, we are not experiencing the same levels of property appreciation year over year in many real estate markets.
I say that the property ‘should’ cash flow because it does not ‘have’ to cash flow. I think it ‘should’ cash flow because you need that cash flow to pay for any operational costs associated with running the property.
Here is the reality…
If you own a rental property for any given period of time, there will be some repairs and maintenance that you will have to take care of. Whether it is replacing the furnace, air conditioner, or updating to new wood flooring, there will be some additional cost that you will incur down the road that you have to take care of.
The money required for your repairs and maintenance will either be coming from your own personal funds, from borrowed funds such as a line of credit, or from the cash flow being generated from the property.
A rental property that you purchase ‘should’ cash flow because you will need this cash flow in order to pay for expenses related to the property.
I have used cash flow from my properties to pay for Christmas gifts for my tenants, as well as Welcome Baskets for tenants when they first move in. The money required to pay for these gifts has to come from somewhere. If it is not coming from out of your own personal funds, the second best place it can come from is the cash flow generated from the property.
3) You need tenants making an above average income that are low maintenance
This last point is going to spark some controversy no doubt. But here is the reality. The controversy that will result from this statement, will be generated from people who own or who have some sort of interest in properites in low income areas.
The plain truth is that, if you have a tenant profile that is making an above average income, chances are is that they will be low maintenance.
Low maintenance meaning that you will not be faced with tenant and landlord issues such as evictions.
I have experienced owning properties with tenants earning below average incomes as well as above average incomes.
If I had the choice (and I do) I would chose to have tenants making an above average income. Knowing this, in return I would be rewarded with an easy property to manage.
Generally speaking, I believe this to be true because tenants earning an above average income for the most part experience less social problems.
On the flip side, tenants earning below average incomes are peppered with social problems. (this is not everyone of course. However, if you stick around as a landlord long enough, you will see what I am talking about)…How is that for a controversial statement?
So in summary, when you are buying a rental property, and especially when it is your first rental property, stay focused on the following:
Buy for appreciation
Remember, you need ‘cash flow’
and…
Get above average income earning tenants!
Until next time.
Regards,
Neil
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Great facts indeed!! Buying/renting home in the right location can boost most of your career especially if you chose to live near schools, offices, public parks and hospitals.Good attitude from your neighbors or landlord, safe environment and healthy lifestyle.