Maybe you've heard of Sam Zell. He's the chairman of Equity International, one of the world's largest investment firms. He's also well-known as the billionaire owner of the Los Angeles Times and Chicago Tribune.
Zell's huge portfolio is full of diversified investments now, but he made his first fortune in real estate. He bought one rental property while he was in college, and kept reinvesting his profits, buying more and more. He's worth an estimated $5 billion these days, but it all started with one investment property, a single-family home that he bought and rented to other college students.
Not everyone can become the next Sam Zell, but just about anyone can start investing in real estate the same way: with one investment property. If you've given thought to taking the first step toward real estate investing, here are some helpful tips for buying your first investment property:
Scout neighborhoods—not just houses.
We've all heard horror stories about midnight emergency repairs, long periods of vacancy and more. Nothing is more difficult for a real estate investor than managing the wrong investment property. Investing wisely starts with selecting the right home… in the right area. You'll want to make sure:
1. The house is in good condition (or priced so you can make it so).
2. The neighborhood is safe and desirable.
3. The schools are good.
4. There are nearby amenities (parks, restaurants, stores, etc.)
An inexpensive property you get a "deal" on—might not be a deal at all. Especially if the home requires considerable repairs, or is in an area where nobody wants to live. Make sure you get a home inspection, but also study the neighborhood.
Run the numbers.
Home buying is often an emotional experience, but it can't be about emotion for real estate investors. After you've found a potential investment property, it's time to make it about numbers.
Have a real estate agent give you a market comparison, to make sure the home is worth what the seller is asking. Look up historical price information in the area, to get some insight into how it might appreciate. Most importantly, get market rental rates, property taxes, and insurance costs so that you can calculate your monthly cash flow. This cash flow is what will determine your annual rate of return on your investment, no matter what the property might sell for down the road.
It's imperative to know your cash flow number. You would not take a new job without knowing your salary, would you? So why would you invest without having an idea of what you'll get paid?
Get your paperwork in order.
If you're financing the property, having all your relevant documents (pay stubs, bank statements, tax returns, etc.) in order will help your lender and the title company close the purchase quickly. And the faster it closes, the sooner you can collect rent. A good real estate investor does not slow down deals because they are unprepared on the document side.
Also, while waiting for the closing date, you must get rental application forms and leases ready. You can find these on the internet, but you might want to consult an attorney for help drawing up a contract that (within the law) puts as much responsibility on the tenant as possible.
Real estate investing is not as complicated as it sounds. Buying your first rental property is truly about the three things mentioned in this article…the right house (in the right area); the numbers; and having your financial and legal documents ready to go.
If you can manage that, you will begin the way every other real estate investor has: with that first investment property.
If you have questions regarding investment properties or real estate in general contact Justin Pinnell BRE- 02045095, M&M Real Estate at (916) 812.0576 www.jpsellscalifornia.com