Investing in an income-producing real estate is a great way to prepare for early retirement. If you locate the right property and use financing to leverage your purchase, this is the result. You may be able to produce a sizable income stream off of a single property. By repeating this process several times over, you may have enough regular monthly income in place to retire comfortably. When you prepare for investing in real estate so that you can retire by the age of 37, it is important to keep some valuable tips in mind.
What I Wish I Knew
Like many real estate investors, I started out investing in real estate by purchasing a small property first. Moreover, I learned the ropes as I went along. It would have saved me a considerable amount of time, stress, and money if someone had offered me advice to prepare for investing in real estate. There are a few specific things I wish I had known beforehand. As you prepare for investing in real estate for the first time, keep these points in mind.
Property Taxes Can Explode
You may be well aware of the importance of crunching numbers and analyzing potential profitability of different real estate investments before you make a purchase. What you may not realize, however, is that property taxes can skyrocket. This can throw your financial analysis for a loop.
When you prepare for investing in real estate, it is important to think through all worst-case scenarios. Property taxes are a fixed expense in your budget. You have little to no control over them. Sometimes property taxes increase. At the same time, you might be locked into a lease with a tenant at a certain amount. Therefore, you have no choice but to manage this higher expense in your budget until the lease renewal time comes.
At the time of lease renewal, you must then determine if the market conditions will support a higher rental rate. If not, you may have to keep your rental rate the same. Also, you must absorb the tax increase into your budget. Property taxes can increase quickly and substantially. Therefore, you should leave room in your budget to account for this possibility.
Renters Can Damage the Property
Many people who prepare for investing in real estate may be aware that renters can damage the property. However, they may not understand the severity of the damage that can be done.
For example, a renter may bring a cat into the home without permission or without paying the deposit. The cat may leave specific animal traces throughout the home. In turn, this can create the need to replace the carpet and even the tile and grout. You may also need to deodorize the space.
Some tenants may have water issues that they fail to tell you about. They do not want you to see other damage they have caused to the property. The water issue can cause mold growth. Some tenants may damage drywall, puncture holes in cabinets and more.
When you think about make-ready for a unit, you may think about painting the walls between each tenant as well as replacing the flooring every few years. However, you can see that some of the repair issues can be much more significant and costly. In some cases, the damage far exceeds the security deposit amount that you collected.
Try to Keep Good Tenants
Some tenants may be absolutely horrendous to deal with in terms of paying rent on time and keeping the property in good condition. However, other tenants are prompt with payments and may actually even make their own improvements to the property. They do so out of their own funds with your permission.
When you prepare for investing in real estate, you should plan to thoroughly review tenant applications. A vacant unit that is not producing income may entice you to make a bad decision. That means renting to a lower quality tenant. However, hold out for a good tenant with a great rental history and a solid credit rating. Having patience in this area can help you to improve the profitability of your property in the months to come.
In addition, when a good tenant’s lease is up for renewal, it is important to offer a competitive new rental rate. Perhaps even incentives to encourage renewal. Remember that if that tenant moves out, the unit may sit vacant for several weeks. This costs you money in the form of lost rental income as well as in make-ready and marketing expenses.
Put Money Aside for Repairs
It is common for real estate investors to pull as much money out of their real estate investments as possible. For example, you may use your rental income to save and invest in future real estate investments. This is a wonderful strategy that can help you achieve your goal of retiring by the age of 37.
However, damage can and will occur to your property over time. In addition, components like the water heater or HVAC unit will need replacement at some point. I always kept the security deposit from my tenants in a savings account. In this way, I could use it for make-ready repairs. However, it took me a while to learn how important it is to have additional funds available. I needed to use them to pay the deductible on the property insurance policy. I also needed them to pay for various other expensive repairs and replacements.
Remember to increase the amount of money you have available in your savings account each time you add a new property to your portfolio. After all, there may be times when you have multiple damaged properties that require repairs at the same time.
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Have a Set of Rules and Stick to Them
I went through several tenants before I learned to create a set of rules for myself as well as for the tenants.
Some of the rules I created for myself involve the following.
– the tenant screening process
– standard make-ready steps
– how to set the rental rate for vacant units
– how much money to collect as a security deposit and more.
A few of the property rules that I created for the tenants include.
– requirements for them to maintain the yard through mowing and watering
– when to call for maintenance issues
– when not to call the property manager
– rules regarding pets on the property
– occupancy rules and more.
In hindsight, establishing these rules up-front would have saved me a considerable amount of money, time and stress. It may be a good idea to ask your property manager for a suggested list of rules for you to use as you get started with the process. You can tweak the rules based on your needs and preferences as you gain experience.
It is wise to learn as much as you can about real estate as you prepare for investing in real estate soon. Talk to as many investors as possible to get first-hand advice and recommendations. Read a few investing books and real estate articles, and rely on professional advice from real estate agents and property managers. If you have any advice or thoughts you would like to share to help others prepare for investing in real estate, please leave your comments below.