Investing in real estate is an amazing way to diversify your portfolio and ironically it is much easier than most people think. In this day and age it can be nearly impossible to build wealth from a paycheck alone, so most of us need to think outside of the (career) box if we really want to live the comfortable lifestyle that we all dream of.
My husband and I purchased our first investment property 3 years ago and it was one of the best decisions we ever made. We rarely even think about it nowadays, yet it is still making money for us behind the scenes. We aren’t handy-types or real estate experts, yet it still was a great investment choice. It is honestly something that anyone can do, as long as you make smart decisions in the beginning.
So here’s what we did to buy our first investment property:
First and foremost, we saved.
Savvy real estate investors will tell you that you don’t need a ton of money for down payments or expenses, that you can acquire loans and funding that will cover almost everything. And this is true. BUT most of us are not savvy real estate investors and most of us don’t want to take the risk that some of those loans come with. So my husband and I worked our butts off to save enough money for a 20% down payment and a little extra to cover unexpected expenses once the house was purchased. By saving 20%, it was much easier to get a standard loan from a standard bank, which made it easier to qualify (not to mention sleep at night).
We planned on renting out the property, not flipping it.
I know how unglamorous this decision sounds and trust me, it was really, really hard not to join the masses and purchase a fixer-upper. We were addicted to HGTV and all of the shows that show just how “easy” it is to make a quick buck flipping homes. But we also knew that the reality was that we didn’t have the time nor the expertise to pull something like that off. Plus, if we could find the right property, we would be creating an investment that would bring in cash every single month. Not only was that great for the cash alone, but it also meant that the purchase price of the house wasn’t the be-all-end-all – we would be giving ourselves time to let the house grow in value.
We found a great realtor.
I’ve already said this a few times and I’m going to keep saying it again and again and again – we weren’t (and still aren’t) real estate experts. So once we were ready to start looking for homes, we searched around and found a really amazing realtor. One who was experienced in purchasing rental properties and really understood the nuts and bolts of a home. We told him what we wanted and he helped us run the numbers to find out how much we should spend, where we should look, and what features we should (and shouldn’t) have. When we looked at the homes, he paid attention to the age of appliances, the type of tile in the bathrooms, and other tiny details that could have a huge impact on our investment. He really knew his stuff and it helped us out tremendously.
We limited our search to ready-to-rent properties.
Since we were already planning on putting 20% down and had committed to finding a long-term rental property, we wanted to make sure that we could – 1. not spend too much more making the property “rentable”, and 2. find tenants and rent the property out as soon as possible. So we basically only looked at places that were nice enough to move into right away. This would save us money with fix-up costs as well as monthly mortgage payments.
We set up an LLC and a business bank account.
We really wanted this property to be treated as an investment, so we knew we needed to be hands-off and really keep our emotions out of it. To keep things as separate and “clean” as possible we set up an LLC and business bank account. We put a few thousand dollars into the bank account to start, but then committed to not touching it again (other than monitoring it, of course). All of the rent payments would flow directly into the account and all of the expenses would pull directly out – basically, it would never touch our personal accounts (this also means that we never spend any of the profits – we’re letting the account grow on it’s own). The LLC was also important because it added protection for us in the event that something would happen.
We hired a management company.
This decision is something that a lot of people would disagree with, but I’m telling you it was the best thing we ever did. The management company handles everything having to do with the house – literally everything. We’ve never even met the tenants. In fact, in the 3 years that we’ve owned the property, we’ve only been in the house once (when we handed it over to the management company). Now, this obviously comes at a cost. But it is sooooo worth it. We both already have full plates, so the last thing we need is to be answering calls in the middle of the night for clogged toilets or thermostats that aren’t working. More importantly, this gives us the opportunity to “forget” about our investment so that we can focus on new investments (or anything else we may want).
We rented out the property for more than all associated costs.
This is investment property 101, but it’s so important that I can’t overlook it. We added up the costs of the mortgage, the management company, and any other costs (like utilities, Home Owners’ Association fees, and upkeep) and made sure that the rent was way more than that. Obviously this is important since the whole point is to make money, but it is also essential so that we can remain completely hands-off and the investment can sustain itself. And so far, it’s working.
So here we are, 3 years later, telling ourselves what a great decision it was. In hindsight, I don’t think I would have done a single thing differently. If you’re considering doing this yourself, my best advice is to go for it! Your future self will thank you for it. 🙂
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