Want to make your real estate investments more profitable?
Ok, that was a silly question. Of course you do. And you probably want to make the time you spend on real estate investing as productive as possible. While there are many, many ways to build wealth with real estate, there are some common techniques that can make investing in real estate easier, more productive, and most important, more profitable. So here are 20 real estate investing tips to help make your investments more profitable.
20 Real Estate Investing Tips
- There is always another investment property: Keep emotion out of the buying and selling decisions. However great a real estate investment deal may be, even if it gets by you, another one is always just around the corner. And one of the great things about real estate investing is that the next deal is often better than the property you just lost.
- Develop and nurture relationships: Relationships are the lifeblood of successful real estate investing. Whether it is a relationship with a bank, a plumber, or a real estate agent, good solid contacts can make your life easier and more profitable. And if you are looking for folks to help you with any aspect of your investments, start with a real estate agent with experience buying and selling investment properties. If they have been around for any length of time, they will have many contacts that can help you.
- Avoid rental vacancies like the plague: Vacancies can turn a profitable property into a money-loser faster than just about anything. We work hard to avoid to keep rental properties occupied, and you can check out some of our tips on how to avoid vacancies. But one key to remember when forecasting profits is to include an allowance for vacancies, because no matter how hard you try, at some point your property will be unoccupied for some period of time.
- Take advantage of free money (part I): Particularly during a rehab or when maintenance on a property is required, getting your hands on capital can be a challenge. While we do not charge up credit cards, we do take advantage of 0% balance transfer offers. They offer free money for up to 15 months, which is a great way to finance needed repairs or other expenses without paying interest.
- Take advantage of free money (part II): Another way to get “free” money is to buy Home Depot or Lowe’s store gift cards at a discount. On my money management blog, I wrote about how you can by store gift cards online at a discount of 10% or more: How to Turn Gift Cards into Cash.
- Respond to tenant calls quickly: When a tenant calls about a problem with the rental unit, responding quickly accomplishes several things. First, it reduces the risk that the problem will get worse, causing more damage and requiring more money to fix. Second, it can have a positive impact on the relationship with the tenant. And the problem is going to have to be dealt with anyway, so why not get it fixed immediately
- Understand portfolio lending: For most mortgage lending, the originating lender will sell the loan to an investment bankers who package mortgages to sell as investments. For this type of conventional loan, the loan terms must meet certain requirements in order for the originating lender to be able to sell the loan. For these types of loan, for example, a 20% down payment is almost always required for investment property. Portfolio lending describes those banks that do not plan to sell the loan. The benefit to the real estate investor is more flexible terms. Mike and I have a relationship with a portfolio lender that enables us to borrow 100% of the purchase price and rehab costs. If you can’t find a portfolio lender, ask a local real estate agent experienced with real estate investing. He or she should be able to recommend several.
- Overestimate rehab costs: Estimating rehab costs is as much an art as it is a science. It involves not only identifying everything that needs repair or replacement, but also estimating the cost of the work and materials. As with any estimate, the estimate of the cost of a rehab will come within some range. When forecasting your rehab, assume the high end of the range and include an allowance of 10-20% for unexpected costs. In almost all big projects, the unexpected should be expected.
- Include maintenance costs in your financial forecasts: Maintenance costs are a reality of real estate investing. And unlike mortgage or insurance, they don’t come in regular intervals. You may go a year or more without spending a dime on a property, and then its air conditioner and roof may need replaced at the same time. So put aside a monthly allowance for maintenance costs both in your financial forecasts and in your bank account.
- Include automatic rent escalation costs in rental agreements: On a $1,000 a month rental property, even a $25 rent increase can go a long way. Unless other costs have gone up, that $25 goes right to the bottom line, and we’ve found that tenants do not object to modest rent increases. By putting the increase in the initial lease agreement, you avoid having to negotiate this point every year.
- Aim for two or three year leases: As noted above, vacancies can kill your profit. A multi-year lease agreement can reduce vacancy rate. This can really increase your profit when you consider that a vacancy, in addition to lost rent, will cost you additional advertising expense and repairs to the property that are inevitable when no tenants come in.
- Have capital available, even if its credit, not cash: Because the unexpected should always be expected, you have to have available capital. The ideal situation is to have cash in the bank, but real estate investors’ affinity for leverage sometimes depletes the bank account as they move into more and more investments. So whether its credit cards, a home equity, or cash, you need to have capital at the ready.
- Invest in real estate located in good school districts: Homes in bad school districts are harder to rent and harder to sell. They also are worth less. At times we’ve been tempted to buy in questionable school districts because of the lower price, but the quality of tenants are also generally less.
- Advertise rental properties on the Internet: With our first rental property, we spent about $500 in advertising, mostly with newspaper ads. With the last until we rented, we spent just $39 in advertising cost using the Internet. Advertising can really eat into your profits, so take advantage of online real estate advertising options.
- Find a real estate investing mentor: An experienced mentor is critical when you begin your real estate investing journey. Mike is my mentor (God, help me!). And Mike’s dad, who has been in real estate forever, was his mentor. Learning from an experienced investor will save you time and money, and teach you things quickly that otherwise may take years to learn. If you do not know anybody in the business, reach out to real estate agents or attend a real estate investing club in your area.
- Understand tax depreciation: Depreciation offers a significant tax advantage for real estate investments. But getting depreciation right can be tricky. Neither Mike nor I are experts in the field, but we know the basics. If necessary, speak to an accountant or tax expert to understand how depreciation works, even if you do not do your own taxes. You can also check out some of our articles on depreciation:
- Do not make tax benefits the primary driver behind your your real estate investment decisions: I may take some heat for this one, but too many real estate investors let the tax consequences of their decisions lead around by the nose. Yes, the tax consequences of investments in real estate are important, should be understood, and advantage of tax breaks should be taken when they are consistent with sound real estate investing decisions. But I would never make a lousy investment in real estate just to take advantage of a 1031 exchange.
- Do not over-improve or under-improve a property: Rehabbing a property, whether it is a rental unit or you plan to flip the home, requires just the right level of improvements. If anything, Mike and I tend to over-improve our properties. While much of this comes with experience, it is important to assess whether the improvements will (1) increase the sales price or rent, (2) decrease the time it takes to rent or sell the property, or (3) reduce future maintenance costs. If the improvement does not satisfy at least one of those three criteria, ask yourself why you are making the improvement.
- Expect foreclosures to need new HVAC and a water heater: Time and again we buy a foreclosure thinking the HVAC and water heater look fine. Two months after our first tenants move in, the air conditioner goes. It’s happened repeatedly, to the point where we just expect to replace everything. If it turns out we don’t have to, we view it as a bonus. Foreclosures often sit unoccupied for months, and for whatever reason, this seems to take a toll on the mechanicals.
- Understand 1031 exchanges: Tax-deferred exchanges offer a great opportunity to shelter profits from the taxman. But like everything else related to our beloved tax code, it can be a bit convoluted. As with depreciation, it is important to at least understand the basics of 1031 exchanges, particularly when you are planning to sell a property.
If you have more real estate investing tips, please leave a comment with your idea.