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| Property market (Photo credit: Alan Cleaver) |
I'd like to put the knowledge that I've gained out there for any prospective investors so hopefully you can avoid the mistakes I've made. There are three cardinal rules to a good rental experience: Cash flow, good tenants, and buying with selling in mind.
The first rule of investment properties is Cash Flow is King! DO NOT accept a negative cash flow in the hopes that the property value will increase. Always invest for cash flow. You'll have to know the rental market quite well and don't count on getting maximum rent either. You should be able to make money every month even with a lower rent than you expect. If you intend to hire a professional Property Manager then make them a part of the purchasing process; don't rely on a Realtor to tell you how much rent to expect. I won't accept a Debt Service Coverage Ratio (DSCR) of less than 1.2. If you don't know what a DSCR is and how to calculate it then you're not done studying.
The second rule of rental properties is A Good Tenant is Worth their Weight in Gold. Buy a property in a neighborhood or near a major employer that will attract the type of tenant you want. I love nurses. They make good money and are professional and that comes with a certain level of responsibility. There's really only two things you want from a tenant: pay rent on time and maintain the value of your asset. Take your time to find a good one, do your credit and reference checks and trust your gut; it'll be worth the effort.
The third rule is Buy with Selling in Mind. You need to have an exit strategy (preferably several) from the beginning. Even if your plan is to keep it until your kids retire you still want to have back up plans. If you buy a property that is discounted and well below the neighborhoods price ceiling then you could fix it up and refinance, or flip it, or do a rent to own to a tenant buyer who wants to put in some sweat equity in lieu of a down payment. You have options!
If you respect these three rules you're far more likely to have a great landlording experience. There are many other things you'll need including a good lease, a good lawyer, an exceptional mortgage broker, and enough cash to keep things moving.
Some other things to keep in mind are: real estate is all about location, location, location. Don't ever purchase in a bad location no matter how good a deal it seems to be. You don't want to buy someone else's problem.
Keep mainstream; I only buy two bedroom apartments and three bedroom, two bath houses or townhouses. I avoid condominiums as I like to have total control and hate paying condo fees.
Never buy anything you haven't seen yourself (yes, I've done that and it's a bad idea). You get a different perspective on a property when you're standing inside it yourself.
Trust only your own judgement. Allow others to advise you but not make decisions for you.
Keep enough cash on hand to deal with at least two major maintenance issues at once including loss of revenues during the repair time. Smart investors don't over-leverage themselves. They know they can handle their investment for the long term and so will never become the desperate seller.
And last but certainly not least, stick close to home. Invest where you can get in your car and deal with a problem yourself. It's convenient and you know the market better. You'll also learn a lot by doing the property management yourself to start.
If you're interested in purchasing an investment property and would like coaching or a second opinion on a deal, I'm always happy to help.
