Investing Tips in Real Estate

At some point in time, almost every investor considers putting money into real estate. Real estate is attractive from a number of investment perspectives: it offers predictable cash flows, tends to appreciate more consistently than stocks, and is easily leveraged via mortgages to maximize potential returns.

However, investing in real estate is not as simple as opening a discount brokerage account and starting to trade stocks. Real estate is a more time-consuming process, from finding the right assets, to managing them properly, to keeping good financial records. Success in real estate depends on a few critical factors, and this is the first one: you must have the time and interest to find good properties and then keep your properties on track.

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If you're committed to trying your hand at real estate, then you need to make sure you have the right team of people around you. This team should start with your informal network of friends and acquaintances, some of whom probably own investment property themselves. Ask around, and once you've found a couple of people with property experience, quiz them on everything from legal technicalities in your city to tenant issues they've experienced.

From there, you must build your real estate investment team to include real estate professionals, including a real estate agent, a mortgage broker, an appraiser, and potentially a lawyer or accountant that you can call on. Almost everyone already knows a real estate professional or two. After all, you either own your place, in which case a real estate agent probably introduced it to you, or you rent, in which case your landlord should be the first person you chat with.

Fortunately, one real estate professional knows another, and it is more than likely that your real estate agent or landlord will be able to recommend other real estate professionals you should talk to. Be sure to check a professional's real estate credentials. Is your appraiser an expert in the neighborhood you're interested in? Has your accountant filed tax forms for individual real estate investors before?

The second critical factor for success in real estate is much more property-specific: cash flows. Crunch the numbers, and think of everything. On the plus side, will you be able to raise rent when you buy the property or soon thereafter? And on the expense side, make sure you've calculated your mortgage payments, insurance and utilities, and included a reserve for repairs and maintenance.

For carefully evaluating the numbers side of the equation, your appraiser is your best friend. A formal appraisal of a property is almost always required by your financing source (mortgage broker). Get your hands on this appraisal. It will include details of comparable rental properties in your neighborhood - sales prices, rental rates charged, and cost to build from scratch. It may also include a cash flow analysis, showing monthly revenues and expenses, which will crunch the numbers for you. An appraisal is invaluable, and you should carefully study yours.

After you're satisfied with your potential cash flows from the property, your main concern should be avoiding headaches that will eat up your time and sap your energy for the real estate business. And that means you simply must avoid problem tenants.

Many landlords advise that about one tenant in ten is a problem tenant. There are a couple of ideas you can use to get this proportion down considerably. After all, you have better things to spend your money on than broken windows and replacement carpet; and better things to spend your time on than answering midnight phone calls.

Neighborhood selection can help you avoid problem tenants, but suppose you've already got a place, and it's in the middle of fraternity row at your local college. The first step is to background check your applicants carefully. Perform a credit check, and give extra points to potential tenants whose applications appear clearly organized and complete. Once you've decided on a tenant, be sure you clearly explain the terms of the lease to them, and make sure you obtain an adequate security deposit. And if you find a good one, by all means keep them happy and in place, by offering a few extras like fresh paint.

Armed with these tips for building a real estate network, understanding cash flows, and getting good tenants, you're well on your way to starting or improving your returns - in terms of both money and peace of mind - on your ownership of rental real estate.