SHOULD YOU INVEST IN REAL ESTATE NOW? (Part 1)

By on Jun 8, 2012 in Debt, Make Money, Real Estate | 20 comments

25 Steps to Buying and Managing Rental Real Estate

Everywhere I turn there is someone snapping up a foreclosure. Turn on the television and HGTV is populated with renovation ideas for the abundance of below market real estate. Sandy at Yes I am Cheap just raided her 401(K) to purchase a two family property. Although we just traded our home for a condo, that was due to a cross country move.

My Real Estate Back Story

I was raised in the real estate world. My dad started a company the year I was born where he purchased cheap run down homes, renovated them, and resold the newly remodeled homes. As a child, our Sunday’s were spent driving around the city looking for property to buy. In elementary school, my mom got in the business and became an awesome agent. In today’s vernacular, dad was a real estate flipper. I saw him work his tail off, go to sheriff sales to buy foreclosures, and deal with oodles of bad tenants. When I got older I spent a few years in the business, delivering eviction notices, bidding on property at sheriff sales and buying and selling real estate for my own account and others. Today I am a portfolio manager for a real estate holding company. I learned about capital expenses and tax write offs shortly after I learned to read.

Owning Rental Real Estate Is Not a Get Rich Quick Scheme

With interest rates and real estate prices lower than they’ve been in years, now is a good time to invest in real estate if you are financially, temporally, and emotionally able to handle it. Buying and managing real estate is a lot of work. It is a way to boost your net worth, slowly.

Before calling an agent and signing a purchase agreement to buy a rental property, check out this real estate “to do” list.

Rental Real Estate Step by Step

  1. Search through many real estate listings and visit potential properties.
  2. Meticulously analyze the potential income and expenses of each property, making sure to allow plenty of cash for unexpected repairs and vacancies.
  3. Complete reams of paperwork when applying for a loan.
  4. Analyze records of current owner before purchase. Have the judgment and experience to recognize whether the owner’s records are accurate or not. Call utility companies and verify utility costs. Check with assessor for tax rates.
  5. Make an offer on a prospective property and negotiate until either you land and acceptance of rejection.
  6. If you can’t come to an agreement on price and terms, move on and start the process over.
  7. After initial offer is accepted, follow up on all property inspections to make sure the property is in expected condition.
  8. If all goes as planned, sit through an hour settlement, sign all the papers for mortgage and purchase and get the keys to your real estate.
  9. Clean, repair and remodel the property so it’s ready to be occupied.
  10. Obtain lease agreements, arrange for service to check credit ratings of potential tenants, and set up a bookkeeping system for the property.
  11. Advertise the property for rent.
  12. Vet potential tenants on the phone.
  13. Meet with the tenants to show the property.
  14. Review rental application, credit report, and phone references.
  15. Waste a lot of time with potential tenants who don’t show up or are not financially stable.
  16. Select a tenant for the rental.
  17. Meet with the tenant to sign the lease, receive the deposit and rent payment. Walk through the unit with the tenant and note the condition of the property. Make sure to record existing flaws in the home. This is important at move out so that you can appropriately decide whether the property is in proper condition to receive the deposit.
  18.  Field phone calls at inopportune times when there is a problem, a clogged drain, a broken window, a broken stove, etc.
  19. Arrange with a repair person to make the needed fixes and pay the bill.
  20. Call the tenant when the rent is late.
  21. Evict the tenant when they fall months behind in the rent.
  22. Go to court to handle the eviction or hire an attorney.
  23. When the tenant moves out and leaves the property a mess, you need to go through the entire process again.
  24. Pay the monthly bills and maintain the financial records.
  25. If you hire a property manager it’s not always much better. Then you have to pay the property manager and oversee him/her to ensure they are doing a good job. You also have to comb over their records to verify the accuracy.

If you’re considering rental real estate ownership, go in with your eyes open. Make sure you have some cash for a down payment, spare time to invest in this project, and the endurance to oversee the ongoing management of the rental real estate.

Stop back for Part 2 of this series for Quick and Easy Ways to Invest in Real Estate.

 Have you ever considered investing in real estate? What are your real estate thoughts and experiences?

image credit; google images-all apartment buildings dot com

    20 Comments

  1. Great tips! Now is a great time to buy homes and rent them out. With home values and interest rates at historical lows, why not. Renting out property is not as scary as you think, but it is front end loaded. Screen the tenant as though they were going to live with you and you will be fine.

    krantcents

    June 10, 2012

  2. After the crash a couple of years ago, I was really excited about the prospects of picking up a rental property. Unfortunately, the prices are still too high in my area compared to rent. I’m not interested in eating the negative cash flow for a couple of years. If the prices drop some more, it will make a lot more sense.

    Bret @ Hope to Prosper

    June 10, 2012

  3. I really think buying real estate now is excellent if you can stick with it for 5+++ years. The rental yields are fantastic, and borrowing costs are low.

    It is UNBELIEVABLE thanks to Bernanke and the power of rental inflation how positive things have turned out for landlords 10 years later.

    Slow and steady indeed.

    Financial Samurai

    June 11, 2012

  4. @Krantc-I like the tip to screen the tenant as though they were going to live with you. Great advice!
    @Brent-I’m glad you brought up the idea of negative cashflow. It is important to realize that even with a large down payment, unless the purchase price and rents are right, you may need to put in some cash.
    @Financial-Obviously with such amazing low interest rates, dropping prices and steady rents, if you have the time and temperament, it is a great environment to invest in real estate.

    Barb

    June 11, 2012

  5. I love your points. People who think real estate is a quick way to riches need to read those. Maybe read them aloud! It’s a tough walk.

    AverageJoe

    June 11, 2012

  6. Great post on the reality of RE investing Barb. I just re-tweeted it. I’d love to post it on my blog with your permission and attribution, of course. Just Call 408-252-8900. Thanks.

    Michelle Carr Crowe

    June 11, 2012

  7. @Average-Sounds like you’ve had a walk on the rental real estate road. Lots of folks talk about the great buys and low interest rates. Don’t forget about the months between tenants where you have to pay the loan payment.
    @ Michelle, Great to see you here. Of course, I’ll be in touch.

    Barb

    June 11, 2012

  8. Do you find a difference in buying & renting homes suitable for lower wage earners vs. “middle class” earners? I’d add avoid section 8 to keep your sanity.

    Brent Pittman

    June 12, 2012

  9. Thanks for such a thorough post Barb. I have wanted to invest in real estate for a while now but we aren’t quite there financially yet. I will definitely rereference this article as we get close though,.

  10. @Commercial-Good neighborhoods command a premium. If you could get a bargain there, you’re lucky.
    @Brent-We’ve had some huge properties (hundreds of units) and section 8 in our company. You probably need a staff to handle section 8 properties.
    @Miss T-A nice alternative for a high yield is to check out peer to peer lending. Small investment and big returns. I’ve been investing at Prosper since October. (Check out link on sidebar)

    Barb

    June 12, 2012

  11. I am about to say something that will either sound cheesy or you will think that I am sucking up to you. I just copied and saved the points you make. When I am in position to buy rental properties the list comes out and I’ll be on the roll.

    Simply put: thanks.

    maria@moneyprinciple

    June 12, 2012

  12. @Marie, To the contrary, I am honored that you feel the information is that useful. Thank you.

    Barb

    June 12, 2012

  13. I did consider investing in real estate with my parents and even wrote a three post series about it. Ultimately we decided it wasn’t a good time for us but I see how it has the potential over a longer period of time to pay off. Lots of work for “passive” income though.

    Lance@MoneyLife&More

    June 12, 2012

  14. @Lance, It totally goes in waves. You can have months with no work and then boom… full time workload. Don’t underestimate the time and capital required.

    Barb

    June 13, 2012

  15. Good list.

    At some point probably around step 10.5 a landlord also ought to familiarize themselves with the local, state and national laws related to landlord and tenant dealings.

    jim

    June 13, 2012

  16. Jim, An often overlooked task is knowing real estate regulations. Thanks for bringing it up!!!

    Barb

    June 13, 2012

  17. Investing in anything, even real estate, should be taken with research and serious thought. Buying a house or a rental property is the biggest investment you can ever make in your life.

    Effective Thirroul Real Estate

    September 14, 2013

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