Preparing for Your First Real Estate Investment

Condos in Toronto are commonly bought and rented out as part of a popular real estate investment strategy. (The Canadian Press/Pawel Dwulit)

Most people have heard of real estate investing as a profitable investment strategy, especially these days with the current state of the stock market. People are still shy about any long-term hope for their stocks, and the interest rates on bonds are near an all-time low.

The first most common strategy for real estate investors is the “buy, rent, and hold” model, where an investor buys a property and rents it out to tenants to make a profit from the rent.

The other most common strategy is the “buy, fix, and flip.” Here, the investor buys a property that’s run down or needs some maintenance. The house is then repaired and eventually sold for a profit.

We will look at the buy, rent, and hold strategy in this article.

Most people have heard about all the problems associated with buy, rent, and hold real estate investments: late night calls from tenants to fix something, ongoing maintenance and repairs, tenants not paying their rent on time, and tenants trashing the property.

We call it “tenants, toilets, and trash.” Some of my best clients are first-time investors whose investments went bad. They experienced too many bad tenants, too many repairs, and too many months of having to pay the property expenses themselves.

But real estate investing can be very profitable if done properly. The problem is that most people have no clue what to do, but they think they can do it themselves.

Some of the most common problems new real estate investors face are as follows: 1) under-estimating the cost of maintenance and repairs; 2) not allowing any money for property management because they want to do it themselves; 3) renting to the wrong tenants; and 4) not having any reserves set aside for major improvements.

So what are some of the things that first-time investors can do to make sure their investment is a success?

1. Learn as much as you can about real estate investing. Read about real estate investing and property management. Join a local real estate investment club. Take courses on real estate investing. But, be careful when looking for education. There are lots of books and courses out there and there are good courses and bad courses. The good courses are well worth it. I figure I have spent over $200,000 for books and courses.

2. Enter into a joint venture with an experienced real estate investor. An experienced investor will show you things that you can’t learn from books and courses. But, a joint venture partner will want to participate in the profits from the investment, so your profits will be reduced. Once you have done a couple of joint-venture investments, you can try it on your own.

3. Hire a mentor/coach. This is a person who will guide you through every step of the process, from finding a property, purchasing and financing it, to managing the property. This is expensive, but it is well worth the money. Again, once you have done a couple of investments with a mentor, you can go off on your own. But a good mentor will charge you a consulting fee, which also eats into your profits.

4. Hire a property manager. Unless you have experience as a property manager, you should hire one to find your tenant and manage the property for you. Good property managers will usually charge one month of rent for finding a tenant and 2 percent to 5 percent per month to manage the property.

So before you go into real estate investing, make sure you take the necessary steps and do the necessary homework to ensure your investment is a success.

Jim Pellerin has been investing in real estate for over 25 years. He is the author of 7 Steps to Real Estate Riches. Check out his blog at www.jimpellerin.com