Going through the process of buying an investment property – especially your first investment property – is a total roller coaster ride. You’ll experience a ton of anxiety, excitement, confusion, and joy.
It can be addicting.
It can also go horribly wrong if you don’t know what you’re getting yourself into.
So before you pull the lever on your first investment property purchase (and we’re talking buy & hold here), make sure you know these 10 important realities of real estate investing:
It is a LONG TERM Investment
When I tell you real estate investing is a long term investment, I am talking looooong. Like, decades. Not years. Not months. Decades. This means quite a few things:
- You need to be prepared to be patient. Patient for your investment property to make money. Patient for the right tenant to come along. Patient to find the right property.
- You need to be confident enough to make it through tough times. I honestly don’t know if I could invest in real estate without my husband – and vice versa. When times are tough, it can be really hard to stick it through, so it really helps to have someone else reminding you that there’s a prize at the end. There will be low times, but there will also be high times.
- You need to be financially stable enough to support the early years. You won’t make money right away (at least not cash), which means you need to have even more money than your original investment to help you get through the early years. And by early years, I mean early decades.
You Will Not See Cash for a While
Real estate is not a liquid investment. So unless you are able to purchase a house in cash, find amazing tenants right away, and avoid extensive repairs, you are not going to see cash for a very long time.
This doesn’t mean you’ve made a bad investment. One of the biggest profit potentials in real estate is the equity in your property and the value that it will hopefully accrue. So even if your rent is just barely covering your monthly expenses, you are still building equity every time you send in a mortgage payment.
You may also find yourself sitting pretty with a massive tax return each year. All of that depreciation will shield the little income you’re drawing from your property, which comes back to you during tax season.
You Need a Big Cushion for Surprise Expenses
Just like with your own home, your rental property will need sudden, unexpected repairs. These repairs will inevitably almost always occur when you least expect it – early Sunday morning, Christmas day, the birth of your first child – which will make them even more expensive than normal.
In addition to the big repairs like a leaky roof, new hot water heater, or broken refrigerator, you will find yourself paying for repairs that your own home doesn’t even get to experience. You’re required to provide a certain standard of living for your tenants, so you can’t ask them to plunge the toilet every week or learn to live in a chilly home all winter.
For these reasons, you’re going to need a pretty big emergency fund for each investment property that you have.
A Good Tenant is Worth Losing a Little Money Over
You’ve surely heard “location, location, location” before, but what you really need to be on the hunt for are amazing tenants. And once you’ve found them, you need to try and keep them.
This means that you need to fix anything they want, offer a discount on the rent if they need it, or find ways to help with utility expenses. Good tenants will take care of your property, they will pay rent reliably, and the neighbors will love them. This is worth far more than an extra $50 a month or 1-2 months of extra vacancy, so don’t settle for the first couple that comes along just because you want to fill your property.
You Should Hire a Management Company
Management companies are bitter sweet. They often feel like they’re draining you of your money and they’re not always advocating for you. But that is precisely why you need them.
Management companies will act as the middleman so that you don’t have to work with your tenants. This keeps things much more professional and prevents emotions from getting involved. Sometimes you do just have to suck it up and pay for an upgrade. Better for the management company to hear you grumble about that than the tenants.
It also solves your Christmas morning emergency scenario – they are on the hook for that call.
Finally, and possibly most importantly, this will enable you to scale your real estate investments. Once your management company takes over the property you can shift your focus towards acquiring the next investment. If you’re constantly managing your own properties, you will burn out quickly and may never reach the level of investment you hoped for.
There are a Lot of Legal Implications
Renting out a property can’t be done on a whim. There are a lot of legal implications that need to be accounted for, both in renting the investment property and in acquiring it.
When you’re purchasing an investment property, you need to make sure that you are in fact able to rent it out. Check with HOA rules and any city or town ordinances. You will most likely need to register your property as a rental as well, which means you will need to get additional inspections.
Once you’ve got tenants in your property, you are then bound by more laws that protect the tenant. You need to make sure everything stays up to code and your tenants’ needs are met.
Aside from researching and learning as much as you can, hiring professionals to look out for you is the best investment you can make in these cases. A good realtor will help with questions during the purchase process and a management company will help with legal obligations during occupancy. And of course, having a lawyer on retainer if you need them is always a smart bet.
You Don’t Know What You Don’t Know
I can not emphasize this enough – You don’t know what you don’t know. Part of the excitement of real estate investing is the unknown, so hopefully you’re prepared for this. If you go into it thinking you’ve got everything figured out, you will be very disappointed.
Laws are always changing, towns are always changing, loan rates go up and down, and unexpected emergencies happen without warning. There will always be things that occur that you weren’t prepared for, so be ready to jump into gear when that happens.
Managing Your Investment Property Is Mostly Un-Exciting
In the beginning, when you’re purchasing your property and finding tenants, things are always going on. You’re negotiating, running numbers, filling out paperwork, interviewing contractors and tenants. You’re constantly on the move.
Then things die down. Once tenants are comfortably moved into your property you may not hear from them for months – if not a year! And even then, a simple lease renewal may be the extent of your interaction.
This is a GOOD thing. This is the way it’s supposed to be. But if you love the action of acquiring a property, getting it ready, and finding tenants, then you’re going to be sorely disappointed.
Don’t obsess over the property and please, please don’t bother your tenants. Focus your energy elsewhere (maybe on getting a second property??) and let time pass so that your investment can grow.
You Should Set Up an LLC for Your Investment Property
Even if you own the investment property in your own name, it’s smart to start an LLC to provide protection for you in case something happens to the property. A good real estate lawyer can assist you in the entire process. This is also a great opportunity to treat your investment like a business. You will want a separate bank account, insurance policies, and a PO Box (or business address).
As you build your expert team around you (your realtor, management company, lawyer etc), this will be a perfect time to find a great accountant that can advise you on the tax implications of your investment.
You Need to Know Exactly Who to Call
When something goes wrong at your rental property, you need to know who to call right away. This doesn’t mean that you need to be able to distinguish between an electrical repair and a plumbing fix or have a subscription to Angie’s List. This means that you need to personally know the name and number of a good contractor, plumber, electrician, and handyman. They need to be familiar with the property, trustworthy enough to be there without you, and reliable when it comes to pricing and timing.
This can be really hard to have right from the start, so you may waste a lot of time and money in the beginning, but know that this needs to be your ultimate goal and it needs to happen quickly. This will save you thousands of dollars and make your good tenants happy.
What You Want in a Home is Not What You Want in a Rental
While you do want your investment property to be appealing and comfortable, you don’t want it to include some of the high-maintenance upgrades that your own home may have. Tenants for the most part will not take care of your property the way they would their own home, so you want to make it easy for them. Avoid anything that requires a lot of maintenance.
Knowing as much as you can before you jump into real estate investing will save you thousands of dollars and a lot of heartache, but you still need to be ready to learn! That’s one of the greatest aspects of investing in real estate, so try to appreciate it when you can. Good luck on your first investment!
Other posts from MBAsahm you may be interested in:
How We Bought Our First Investment Property
10 Things You Should Be Doing to Pay Off Your Mortgage Early (& 1 Thing You Shouldn’t Do)
6 Things You Need to Stop Paying For
How I Cut $500 Off My Monthly Grocery Bill