As most real estate investors know, becoming a real estate investor is not an easy feat to accomplish. Along the way, real estate investors will encounter a number of obstacles that might hinder their growth and can even sometimes end their career altogether.
To help other real estate investors avoid making these mistakes and risk losing their money, Brandon Jones, a licensed realtor, an active real estate investor, and an avid blogger for inman.com reached out to us and wanted to share his expertise in the business of real estate investing so that other real estate investors can learn from his mistakes.
So, without further ado, here are 5 things that Brandon wished he knew before becoming a real estate investor.
Brandon’s Words
As someone who has been an entrepreneur most of his adult life, I thought I was prepared for another entrepreneurial pursuit in real estate investing.
I quickly learned that real estate investing is in a league of it’s own. I’m now in my 4th year, and I’ve acquired nearly 40 investment properties. I’ve experienced some victories and also learned some very hard lessons. In this post, I’m going to share 5 things I wish I knew before investing in real estate.
Lesson #1: Slow Growth Is Better
I’m the kind of person who goes all in with everything I do, so when I decided to invest in real estate, I hit the ground running. My business partner and I were buying a property every couple weeks, and by the end of our 2nd year, we had close to 40 investment properties in our portfolio.
Looking back, it’s clear that taking our time and moving slower would have been a much better strategy. The main reason is because the mistakes you make in real estate – especially when you’re just starting out – can be very costly. It’s much better to make these mistakes, and learn from them, on a small scale.
Lesson #2: Location Is More Important Than You Might Think
We all know that real estate is all about location, location, location. However, this becomes especially true when you are renting property. It may be tempting to buy that $15,000 3-bedroom fixer-upper in the worst part of town because it’s so cheap, but it might be next to impossible to rent it out to decent tenants or find interested buyers.
Tenants, just like homeowners, want to live in clean, safe neighborhoods where they can be close to good schools for their children. More than likely, owning a rental property in a rough neighborhood will only attract rough tenants.
Lesson #3: Take Your Time and Screen Tenants Well
A big mistake I made early on was being too lenient with my tenant screening. Bad tenants can quickly destroy any short-term profit. Take your time and screen every applicant well. I recommend charging an application fee, and pulling a credit, eviction and criminal background check on all applicants.
Go with a reputable property management software like Buildium or Appfolio which have tenant screening software built in.
Look for patterns. If an applicant can’t seem to hold a steady job, has been evicted, and is notorious for getting in trouble with the law, what kind of experience do you think you will have with them?
Additionally, make sure they have real, stable w2 employment, and ask them to provide recent paystubs. I now require my applicants to prove that their gross monthly household income is at least 4x the monthly rent. I would advise you do the same.
Lesson #4: You Don’t Need a General Contractor
Possibly one of the biggest misconceptions I had during my first year investing in real estate was that I needed a general contractor. Save your money.
Instead of hiring a general contractor, do this instead: line up a reputable plumber, electrician, HVAC technician, and roofer and have these guys provide a list of recommended repairs along with estimates.
Additionally, find an experienced, reliable carpenter who can quote you on what needs to be done cosmetically. This is essentially what a general contractor would do anyway. I realize there may be times when leaning on a general contractor may be necessary, but, if at all possible, I recommend being your own general contractor. This will save you money and give you the control you need to better ensure the project stays on schedule and within budget.
Lesson #5: Hold Yourself Accountable to a Budget
I learned quickly that renovations cost more than you think – sometimes way more. Over time, you’ll develop a better “feel” for this, but do all you can to get an estimate on costs before you buy.
Get a thorough renovation budget spreadsheet, and spend a few hours at a property you’re considering buying, and go through each repair item one-by-one. There will always be unknowns, but taking your time and doing your due diligence will definitely help you to make more informed buying decisions.
Once your renovations start, hold yourself accountable to your budget. You may end up with a few surprises that leave you unable to put in that new hardwood flooring you were hoping for. Hold yourself accountable. Without monitoring your spending and holding yourself to a budget, you have a much greater chance of going over-budget and ending up in financial trouble.
Final Notes
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