What is the biggest obstacle that holds people back from investing in real estate?

Fear.

Fear of losing money, not finding deals, not knowing how to make repairs…the list goes on. Like any other investing opportunity, if you get educated and surround yourself with the right people, you’ll increase your odds of success.

I’ve bought and sold real estate for myself and clients. Let me share five things I wish I knew when I started real estate investing to help on your journey.

1. Most real estate agents are not good at analyzing deals

If you’re buying an investment property the numbers and potential returns need to make sense.  Your typical realtor is used to helping buyers according to their monthly living expense to ensure the PITI (Principal, Interest, Taxes, Insurance) payment stays around 30-40% of monthly income.  

Below is an example real estate profit and loss statement:

The big difference with investing is there is another element of tenant income.  In short, the monthly income needs to be greater than the monthly payment to produce a return.  So, you and your agent need to be able to analyze a profit and loss statement to make sure you’re buying right.  

On the other hand, a buyer who is purchasing a primary residence to live in may fall in love with a beautiful home and may be okay with overpaying.  We do not want to fall in love with an investment property.  The numbers need to make sense in terms of providing a return on your capital in the long term.

2. You may have to look off market for a deal (1% Rule)

Using the 1% rule is a quick way to see if a property is worth looking further into. This means the monthly gross rent should be at least 1% of the purchase price for you to be able to get an adequate cash on cash return.

 For example, if the gross monthly rent is $2,200 and the purchase price is $200,000 that would calculate to 1.1%.  We can ‘buy right’ by comparing the average days on market to the days on market for this property.  If there is something wrong with the price or condition, we may be able to get an accepted offer less than the asking price.  This would improve our ideal monthly rent percentage and would be worth fully analyzing. 

The 1% rule is a quick and easy ‘back of the napkin’ method to analyze deals. More than likely you’ll need to analyze 100+ deals to begin to see how rent relates to purchase price in your desired market. 

3. Real estate rehab costs are always higher than your estimate

Take any repair estimate described in a listing with a grain of salt.  More times than not, repairs take more time and money than anticipated.  

Obvious updates like paint, trim, and minor drywall are fairly simple to estimate.  When you run into updates related to structure, plumbing, and electrical, it is possible you’re unpeeling layers of prior issues and materials and labor could be higher than planned. 

Through personally rehabbing my investment properties I’ve developed a good grasp of basic rehab costs. You can always read about this concept in books but you’ll learn the quickest by spending your own money and making many trips to Lowe’s or Home Depot.

4. Beware of inheriting tenants

Often properties are sold because landlords are tired of being landlords.  Time and time again they’ve had bad experiences with tenants, resulting in mental or financial stress.  If you take on a tenant when you buy, be sure to ask for their current lease and rent history to make sure they’re paying on time.  

There’s always a story and you need to find out why someone is selling. 

Up until closing any problem is the seller’s.  After closing all their problems transfer over to you.  If possible, you want the seller to clear up any issues prior to closing.  If a tenant has historically been a problem, you can write up an addendum requesting a specific unit needs to be vacant at closing. 

After going through the long, drawn out eviction process of an inherited tenant, in the future I would be very hesitant about purchasing a property that is not vacant. There’s always a concern of, ‘what if I can’t find good tenants?’ By developing a simple tenant screening process you can give yourself much better odds of finding a great tenant. 

5. Examine existing lease agreements

‘Lease’ is a loose term.  Does the lease in place come from a real estate attorney and address policies on smoking, pets, abandonment, early termination and who pays utilities?  I’ve seen leases that have no verbiage on all of these.  You want this agreement to cover you as the landlord in case anything happens so you can rely on the document.  

In terms of the landlord-tenant relationship, the lease is your opportunity to set expectations up front.  This will eliminate any confusion should problems arise. 

Here’s a brief list of items to find in any existing lease:

• Lease length – When does the lease end and does it turn into month-to-month?
• Rent – Is the current rate at, above or below market? (potential revenue opportunity)?
• Utilities – What are you and the tenant each responsible for? If you’re responsible for variable utility expenses it could eat into your profit
• Pets – Are pets allowed and is there an additional monthly fee? (potential revenue opportunity)

How to get started in real estate investing

Analysis paralysis is synonymous with real estate investing. You’ll never feel ready to purchase a property. I would advise educating yourself for three to six months by reading and listening to podcasts. There are hundreds of case studies to learn about other investor stories for motivation.

If you are not a licensed real estate agent, get in touch with an investor-friendly agent in your area and start the conversation. Start analyzing deals and look at properties to understand your market pricing and rental rates. 

FAQs

Is real estate investing a good idea?

Yes. Real estate investing can help you learn about running a business and is one way to build long term wealth.

How do you properly screen tenants?

Individual investors can use software to send via email to potential tenants. This will allow them to fill out a short application and submit a background check. This will show you credit and eviction history. 

In addition, you can call their current employer to verify job history and call past landlords to verify payment history. All these, combined with meeting the tenant in person will provide a solid due diligence screening plan for tenant selection.