Investing in rental properties – especially single-family and multi-family residential rental properties – is a surefire way to build wealth. However, some investors are more successful than others.
Why is it? And how can a novice investor increase his chances of hitting the mark the first time? We’ll cover everything you need to know here.
Why do rental real estate investments fail?
When you invest in a rental property, you either make money or lose it. If you research the reasons, there are really only a few ways this investment can go wrong.
- You bought the wrong property. If you buy the wrong one, it doesn’t matter what you do. You will never earn the profit you need to make it a worthwhile investment. It all depends on the acquisition of suitable real estate.
- You mismanage the property. Success does not transpire at the closing table. You need to manage your holdings in a way that ensures they remain profitable for years to come. This includes both how you manage the physical property and building healthy relationships with your tenants.
Obviously, many facets will fall under either of these categories, but those two are basically all there is to it. If you want to be successful, you just need to buy the right property and manage it well.
Six Ways to Guarantee Your Success
Asking you to buy the right property and manage it well isn’t a very helpful article, so let’s break that down and look at some of the specific ways you can guarantee success.
1. Know what you want
It is crucial that you know precisely what you want from a property before you start looking for one to buy – certainly before you make any offers. Keep in mind your short-term goals and your long-term vision.
Is your goal to earn a few hundred dollars in monthly passive income? Or are you hoping to build a full portfolio of properties?
Are you only interested in investing locally? Or are you ready to invest anywhere on the numbers?
Do you prefer single-family properties or multi-family properties? Or could you be open to anything?
By defining your objectives and expectations from the outset, you will benefit from a targeted real estate search.
2. Run conservative numbers
Real estate investing is above all a numbers game. If they’re working on paper, it’s usually a pretty big investment; if they don’t then you should look elsewhere.
The question is, how do you manage the numbers so you rarely (if ever) go wrong? The answer to this question is in two parts: first, you need the right equations; second, you need accurate inputs.
To be more precise, you should use conservative numbers. There are too many relevant equations to list them all in this article – such as net operating income, cap rates, cash flow and cash yield – but you just need to recognize that this part of the process will take time.
Most of your time as an investor will be spent doing the math. If you make a habit of taking shortcuts here, you’ll pay for it later.
To run the numbers conservatively, always round expenses and round income. For example, if it looks like maintenance will cost you $237 per month, use $300 in your calculations. If you think you can get $1,775 rent, bet $1,700.
In addition to all this, always plan at least one month of vacation per year.
3. Remove emotions from the equation
There is little room for emotion in real estate. If you’re buying a house to live in, of course, you can let your feelings play a part.
But a rental property is a pure business opportunity. Numbers work or they don’t. If you find excuses to twist the numbers, it’s a sign that you’re about to make a mistake. Keep it black and white.
4. Create your own team
Much of your success as a real estate investor will depend on the people you surround yourself with. If you can build a solid team of talented and trustworthy colleagues, you should be as successful in this industry as you want.
You should have a few specific people on your team. The first is an experienced real estate agent who can help you find deals (especially off-market) and do the math.
The second is a professional property manager like GreenResidential.com to handle all day-to-day management tasks (including tenant screening, rent collection, repairs and maintenance, accounting, etc.). The third is a good real estate attorney and/or CPA. This person will help you maximize your protection and cash flow for a better return on investment.
5. Be a meticulous examiner
Even the most conservative numbers can drop if you have bad tenants who don’t pay and/or treat your property poorly. The key to finding good tenants is to be a meticulous sorter.
Sometimes a thorough screening may seem unnecessary and intrusive, but you have to do it. Perform background checks, verify income, speak with previous owners, speak with their employer – do whatever you can!
Spending a few extra hours scouting ahead of time can save you thousands of dollars in the future.
6. Save and reinvest profits
As soon as the first rent check is deposited in your bank account, you will probably feel the temptation to start improving your own lifestyle. You’ll think, “I did it!”
But don’t go crazy just yet. The most successful real estate investors are those who use the money they earn strategically.
First, you need to plan at least three months of expenses for each property. If it costs you $1,500 a month to pay the mortgage, insurance, taxes, and utilities, you should put at least $4,500 in a dedicated checking account.
Once you have this emergency fund in place, we recommend spending every extra penny on a down payment on a second property. Repeat this process with the second property, and it will lead to compound income. At that point, it might only be a few months before you can buy your third property, and so on.
Ultimately, success in rental property investing is all about choosing the right properties and managing them well. If you do this regularly, it will only take a few years before you have your own mini real estate empire.
And all it takes is five, 10, or 15 properties to start building massive wealth. Good luck!