So, why do you want to invest? This is the first question you should ask yourself. Most people want financial independence, but that can look different to different people. Some people want their assets to grow. Some want an income stream. Some want tax advantages. The good news about Real Estate is you can have all three.

 

Many people save and invest their entire working lives so that they can retire with enough money to have whatever lifestyle they want when they stop working. The big question is “How many acorns do I need to squirrel away to support that lifestyle?” Well, if you want to have $100,000 a year to live on, you will need to have about 20 times that ($2,000,000) invested to meet that income need at retirement. Then, if you consider whatever annual dollar amount you need today, you will probably need double that every 15 years. That’s inflation at work. How long do you expect to live in retirement? What have you done to ensure that you don’t outlive your retirement? I don’t mean eating a lot of pork products. I am talking about a long retirement. It’s not all doom and gloom. Education is the key to financial independence.

 

The first thing you will need to understand is that it takes money to make money. That doesn’t necessarily mean that it has to take your money to make money. One of the best things about real estate is it can offer you leverage. Leverage can be your best friend. Think of it this way, if you have $10,000 invested in a stock or bond that returns 5%, you will earn a 5% return or $500. If you put $10,000 down on a $200,000 piece of property and it goes up 5%, you just doubled your money or $10,000. That’s 100% return! Then if you take into consideration that you could have received some cash flow, and your tenants are paying down your loan, and you get to write off depreciation and other expenses, 200% annual returns are not all that uncommon. A good indicator for buying cash flow properties is what’s called a “cash on cash” return. If it took $10,000 out of your pocket to buy a property that cash flows $250 a month ($3,000 a year), that’s a 30% return on your cash. When was the last time your money earned 30%? But we are getting ahead of ourselves.

 

The first thing that needs to be done is to find out what you qualify for. You need to talk to a lender that is familiar with investment real estate. A good lender can advise you as to what strategies you should employ based on your credit scores, savings and income. You may already have a lender that you are happy with. Once you know what you can qualify for, then you are ready to go on to the next step.

 

Determining which area is the right area to invest is the next step. If you are looking for appreciation, you will want to focus on rapidly expanding cities. Where are the new neighborhoods going in? Can I get in on the first phase? What are the economic forecasts saying about this city? What are the projected appreciation rates? If you are looking for cash flow you may want to look in more established areas. The property will probably not be new or in glamorous areas. However you can find properties that cash flow in areas that are appreciating well. You can have your cake and eat it too. It usually just takes patience and research, which brings us to our next topic: due diligence.

  There are no short cuts here. You have to do your due diligence. It’s very important to investigate what you intend to invest in. Inspect what you expect. Does that mean that you have to rack up the frequent flyer miles? Not necessarily. There is a lot of good information right at your keyboard. The web is a wonderful resource. Here are some of the things you will need to know.

  What is the property really worth?

1. You want to make sure that you don’t pay too much. This is where local agents can be of great benefit. I recommend you pay another agent besides the one you are buying from to run comps for you. $25 to $50 is cheap insurance so that you are not overpaying. Sometimes you can get it for free.

2. What are the vacancy rates?

   If you are buying a rental property, you want to know what the competition is like. The first thing you want to know is how many properties like yours are currently for rent. 3 to 5% vacancy of the total population is good. Anything over 10% you may want to reconsider.

3. What are the property tax rates?

   Some states have very low property taxes. Some have very high taxes. This needs to be considered before you make your offer. 1 to 2% is common.

4. What does the owner typically pay for?

   This can vary by area, even in the same state. In some areas the owner pays for utilities. In other areas the tenants pay all expenses. Usually it’s a combination. It can also change between single family homes and multi-tenant buildings. Also find out what appliances are typical for that area. You may be expected to provide a refrigerator and/or washer and dryer. What about the landscape maintenance? Who will pay for that?

5. Is there a Home Owners Association?

   There are goods and bads about HOA’s. I think they are great if you have a good tenant. The HOA usually ensures that the neighborhood stays nice and that your tenants aren’t trashing your property. The down side is that it costs to have a HOA. Some areas of the country have very high HOA’s, such as Hawaii. Sometimes HOA’s provide services at a price less than what you or your tenants could get on your own, like cable TV.

6. What about the Property Manager?

   Ah, yes. This area is critical. A good property manager can make your ownership experience delightful. A bad one can make it a nightmare. When you talk to a potential PM, ask how long they have been in business. Ask how many properties they manage and ask how many vacancies they currently have. Ask to review a copy of their contract. I recommend getting the help of a good attorney to review the document. If you find things you don’t like, ask to have them removed. Sometimes they won’t mind. What do they charge? Who handles the security deposits? If there are late fees, who gets to keep them? Do they charge to renew? What is the lease up cost? Who do they have doing maintenance and repairs? What do they usually charge? If you decide to sell, are you required to list with them? How long is the contract good? If you don’t like the job they are doing, what will it cost to get out of the contract? Do they have letters of recommendation?

Take the time to educate yourself, or find a coach. Even seasoned investors sometimes have others to bounce ideas and opportunities off. It is possible to create financial independence in a very short period of time. All you need to do is create an income that will support you. If you can achieve 25% cash on cash return on every property that you buy, then it only takes $400,000 to provide you with a $100,000 income a year. Not the $2 million in our previous example. If you can get a 50% cash on cash return….. There are no guarantees though. It takes commitment, thorough investigation and a little good luck. If you persist in your efforts, you will achieve a dream come true.