I’ve always been an entrepreneur at heart. At the age of 13, I would sneak out onto the local golf course at night and dig out golf balls lost in the pond by amateur golfers over the weekend…and then I would sell them back to those same golfers the following weekend! I loved it.
By the age of 30, I had started two successful businesses, and at the age of 34, I decided I wanted to be a part-time real estate investor. Well, after I bought my first rental property, I was hooked. By the age of 38, I owned nearly 40 rentals.
Despite having prior experience as a business owner, however, nothing could prepare me for what I was about to encounter as a real estate investor. It came with challenges and victories I wasn’t prepared for.
Here are 10 lessons I’ve learned about real estate investing that will hopefully increase your chances of success, and help you avoid some of the unnecessary pitfalls that I encountered.
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Lesson #1: It’s a business; not a ministry
There is certainly a rewarding side to being a rental property owner. For one, you get to provide homes for people. Additionally, when something goes wrong with the property, you get to fix it, and make someone’s day a little bit easier. There is also a sense of satisfaction in taking a beat up property and giving it a sense of purpose.
With all this being said, though, owning rental property is a business, and it must be viewed that way. You need to hold your tenant’s accountable when they are late on rent or simply stop paying.
You need to take the time to screen your tenants well and even your workers. Don’t be afraid to say “no” despite how badly someone wants a job or needs a place to live. It’s a business, and as such, you have a fiduciary responsibility to protect it. You need to have certain qualifying standards, and hold to them.
I failed at this. I was too lenient. I had to learn this lesson the hard way. Let that not be the case for you.
Lesson #2: You need high volume
The net cash-flow from a single rental property isn’t as much as you might think. A typical single-family rental for me in Springfield, MO, costs me about $60,000 with purchase and rehab.
After I take out a mortgage on the property and factor in other expenses like taxes/insurance, maintenance, vacancies, etc., net monthly cash-flow is around $200.
This doesn’t factor in other expenses such as CPA, bookkeeping, gas, software, phone, etc. that it takes to run a rental property business. If you’re thinking of living solely on income from rental properties, it’s likely you’ll need a sizeable portfolio.
Lesson #3: Partnerships are a double-edged sword
Depending on your real estate goals, you might consider taking on a partner. Partnerships certainly have their advantages. Partnerships are usually looked at more favorably by banks than single-owner entities because partnerships bring additional assets and revenue to help guarantee bank loans.
Furthermore, having a partner can help spread out the responsibilities of running a real estate business. It’s also nice to have someone else in the mix with you for moral support.
However, partnerships sometimes don’t pan out how the partners originally planned. It could be that in a 50/50 partnership, the burden ends up being unequally distributed, and one partner feels like he or she is carry more than 50% of the responsibility.
Additionally, partners can experience sharp disagreements in how the business should be run or with buying decisions which can create tension and put stress on a company.
If you feel you need a partner, but you’re not comfortable with a 50/50 arrangement, you might consider a “silent partner.” A silent partner is someone who may have a less than 50% stake in the company, and is only a partner in the sense that they provide capital.
With all this being said, partnerships can take on a variety of shapes and sizes and certainly have their pros and cons. Take your time and consider carefully whether or not taking on a partner is the best move for you.
Lesson #4: A keen eye is critical
Being able to tell the “studs from the duds” is something you’ll just have to learn over time. As you gain more experience as a real estate investor, you’ll get better at discerning quality tenants from the bad ones, you’ll hone your skills at assessing renovation costs, and your negotiating prowess will improve. Just like anything else, you’ll improve with practice.
In the beginning, though, you don’t have that knowledge and experience, so you’re going to have to rely on the expertise of others. Join a local real estate investment group or find a mentor that you can follow around from time-to-time to get a grasp for how they make decisions and approach real estate investing.
The rookie mistakes are costly, so get all the advice and help you can. Bookmark real estate sites and blogs to educate yourself. In addition to Real Estate Hacks, here are some other good sites to keep in your arsenal:
Lesson #5: Keep ‘em close
I’ve learned it’s a good idea to keep your rental properties within close proximity to each other. While most of my properties are within 2-3 miles from one another, I have purchased a couple properties further away in neighboring towns. There are some challenges that come with having your properties spread apart, such as:
- Managing different city utility accounts
- Increased maintenance costs from longer drive times
- Different cities; different laws
- More difficult to keep a close eye on your rentals & tenants
Lesson #6: Cash is key
While you don’t need cash to invest in real estate, cash can really give you the upper hand when negotiating. Additionally, some sellers will only accept cash offers.
If you don’t have the cash you need to acquire real estate, you might consider partnering with a friend or family member who has cash, or, better yet, look into a sizeable unsecured personal loan or line of credit from companies like PersonalLoans.com.
Lesson #7: There’s wisdom in a multitude of council
This ties into what I was mentioning earlier about seeking the expertise of others. Don’t ever get to the point where you think you’re beyond getting other people’s council.
Before I purchase a property, I always bring my foreman to the property, and simply ask him, “Am I crazy for wanting to purchase this?” Sometimes he answers in the affirmative.
Lesson #8: Keep it simple
I spent a couple years going gangbusters – buying up as many properties as fast as I could. This was a mistake. A larger operation creates more costs, more mistakes, and will eat into your profits…it could even result in a substantial financial loss.
If you’re like me, you’re aggressive, but be patient. Take your time. Learn on a small scale. Trust me, you’ll be glad you did.
Lesson #9: Self-managing is better
I worked with a property manager for my first two rental properties. By the time property number three arrived, I cut the cord with my property manager and began self-managing.
Property managers might tell you that you need them, and that self-managing isn’t scalable. Well, all I can say is, I’ve self-managed close to 40 properties at once, with relative ease, while maintaining a full-time job.
I’ve found that by self-managing, I’ve learned ways to save money on maintenance costs, been able to find quality tenants quicker, and benefited from having close insight into my properties.
Whether you decide to self-manage or hire a property manager, I strongly recommend you at least self-manage your first few properties. You’ll learn valuable lessons about tenants, property management, and the real estate industry as a whole. This first-hand knowledge is the best kind of education.
To self-manage successfully, you’ll need software. I strongly recommend Buildium & Rently. Buildium will handle all your property management needs from promoting your rental property, to seamlessly handling online rent payments. Rently allows you to save a ton of time by not having to show properties.
Lesson #10: Leverage is the friend that bites
At least for most of us, the only way to scale a real estate investing business is by taking on debt. Banks will typically allow you to borrow 80%-85% of a property’s value, but I would encourage you to only borrow what you need.
A mortgage, just like any debt, needs to be paid back, and the less you owe, the less stressful your real estate investing career will be.
There is something undeniably alluring about real estate investing that seems to be capturing the interest of more and more people. I’ve found it to be an exciting & adventurous pursuit.
Continue learning, act wisely, be patient, and lean on the expertise of others as much as possible. Don’t pursue real estate investing like it’s a sprint. Take your time. Enjoy the process. I wish you much success.