Investing in real estate can be a little scary at times, especially for beginners. But please don’t let your fears hold you back from jumping into the very best real estate market we have seen in decades.
Instead, use these 9 steps to minimize your risk and feel good about your real estate investments.
1. Buy the right house
The good news is that real estate is on sale and distressed property is readily available at fantastic prices. You make money on real estate when you buy it, so it’s critical to buy the right house.
Everyone knows that real estate is all about location, location, location. While it’s true that the best neighborhoods, schools, and nearby amenities are important, so are many other factors.
When buying investment real estate, you need to know:
- What the house is worth in “as is” condition?
- How much will it cost to be fixed?
- What is it worth once it’s fixed?
- What will the house rent for?
With those four numbers, you can make wise investment decisions. The bottom line is: You want to leverage the purchase with other people’s money and be able to create a nice positive monthly cash flow and have your tenants pay down the debt service (your mortgage).
2. Use the right financing
Often, it’s better to rehab your financing rather then rehab the house! To reduce risk, you should buy houses without involving banks.
How does that reduce risk? Most people don’t read their closing documents that include giving the bank a full-recourse loan through a personal guarantee, handing over future rents with rent assignments, and ultimately putting all your other assets at risk if something goes wrong.
3. Know your house
Distressed real estate is frequently sold as is. This means that “buyer beware” is part of the deal and you accept everything that is wrong with the house.
The list of nasty things that could be wrong include structural damage, mold, lead-based paint, termites, underground oil tanks, bad roofs, faulty wiring, and a long list of other defects.
It’s fairly easy to minimize your risk when buying distressed houses. Get a home inspection from a certified home inspector or bring a licensed contractor to carefully review the home with you. Being prepared on your purchase will help you sleep better at night.
4. Know your boundaries
The yard can sometimes be deceiving. It can be tricky to know the boundaries of the property, and you don’t want a future surprise (like the back corner of your garage is on your neighbors lot).
The way to reduce the boundaries risk is to have a licensed surveyor provide you with a survey before closing. They’ll put stakes in the ground and ensure you have no encroachments into your neighbor’s property.
5. Use a professional team
Cutting costs on your real estate team could lead to failure. Build your team to help you invest in real estate for the long-term.
Your team should include a good attorney, Realtor, contractor, and property manager. Your team will be able to provide you with the advice you need from acquisition through renovations–and long-term with property management.
Investing in real estate can be complicated and having a great team can make the process manageable, so that you succeed long-term.
6. Protection from history
Buying foreclosures can provide tremendous upside opportunities for equity and long-term cash flow. The downside is that the investor must be very diligent in ensuring that the title is clear and insurable.
Sometimes title can be insurable, and sellers will try hard to get buyers to close on a house with less than perfect title. Buyer beware and be very certain that title is both clear and insurable, so that there are no surprises that end up threatening your equity position in a house. Your title company can help you with this.
7. Protection from the future
Do not forget your homeowner’s insurance. If you are buying houses with bank mortgages, it is highly unlikely you will ever forget your insurance. However, just recently, I know of a cash buyer who forgot to get insurance. Two days after they purchased the home they remembered and scrambled to get the house insured.
What would have happened if the house had burned down in those two days without insurance? They would have lost their entire investment. To reduce your risk in real estate investing, always have proper homeowners insurance and additional liability coverage, in case a tenant gets hurt and tries to sue the landlord. Avoid these risks by getting homeowner’s and additional liability insurance.
8. Avoid the copper bandits
What is a copper bandit? They are thieves that love to prey on vacant homes. They crawl beneath homes and cut out all the copper pipes and vandalize the condenser to get even more copper to sell at the local recycling plant.
To help protect your investment, lock your crawl space access panel and consider concealing your outdoor condenser with a fence or locking it right to the ground.
9. Avoid the thieves
When you buy a house that is vacant, you can become a target to common thieves who want to break in.
To reduce this risk, be sure to install new locks, including a solid deadbolt. Door knob locks are easily broken into with a credit card, but it is much harder to break into a door with a deadbolt.
Leave an interior light on inside. I like to leave a light upstairs in the hallway on. It’s just enough light to make someone think there is activity inside the house. If you are buying a house in a very rough area, you may also want to leave a radio playing inside the house. Be sure it is talk radio and it plays loud enough to make potential thieves think there is activity inside the house.
Now you know how to eliminate most of the risk in real estate investing
Real estate investing does not need to be risky in order to provide tremendous returns. Take these 9 simple steps, and you can rest comfortably knowing that your investment is protected. I invite you to comment and add to the list and provide your own thoughts on the items highlighted. I look forward to hearing from you!
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