This article will give you real-life tips, from an actual investor, on how to manage your real estate investing to generate wealth. I am an actual investor and have been doing this for 15 years. I am not an author writing about a subject I’ve researched. I am not a large conglomerate with a team of advisors managing thousands of units. I am a mid-size real estate investor with 69 rental houses, and I flip a few houses each year. This is your chance to learn from my experience, and here are my top real estate investing tips.
1. Always pay less than market value
Of all the real estate investing tips, the number one is: never pay too much for investment real estate. You must know the market value of the property you buy and never pay market value for an investment property. Understanding how to determine market value is a crucial skill to cultivate and don’t let a slick salesperson talk you into raising that value to make a deal work.
A real estate investor is not a gambler. A real estate investor is not looking for speculative deals that may appreciate given the right conditions. A real estate investor assesses current value and then buys property at a discount to that value. It’s not easy finding properties under market value, so you won’t be able to buy any property you see. You must hold out and only purchase great deals; a great deal is a house you can buy significantly below the market value.
If you stick to this rule, you will minimize many other problems you encounter on your real estate investing journey. You will likely become wealthy if you buy below market value and repeat this process, even slowly. In fact, if you properly buy just one property a year for 20 years, you will become a multimillionaire. To see how this works, read my article about what happens when you buy just one property a year.
Key Takeaway: You decide what you pay for a property. Don’t buy the property if you aren’t significantly below market value.
2. Cash Flow
No list of real estate investing tips would be complete without mentioning the cash flow. Cash flow is your money after paying all the costs to run your investment property. Even if you have outside funds to offset losses, sustaining a negative cash flow over many years is challenging. The property must cover all its expenses so that you can continue to purchase properties and build your real estate portfolio.
Running your real estate investment business efficiently is vital for sustaining a positive cash flow. Still, the primary tactic to ensure a positive cash flow is how much you pay for the property. If you spend too much on a real estate investment, you are stuck with that cost for decades. The property may appreciate and bail you out, but you have no control over market appreciation and must make your cash flow when you buy the property. Any appreciation is just a bonus, and you should never rely on it for your investment strategy to be successful. For more information and paying the right price, check out my article about how much you should pay for a rental house.
When your cash flow is negative, you have to feed money into your business to keep it going, which causes financial hardships in other areas and will undoubtedly slow down your real estate investing. When your real estate produces a positive cash flow, far in excess of what’s needed, this cash can be used to fund additional investments or pull the money out for something else. In all cases, it’s better to have a higher cash flow. I’ve never heard anyone say: “I wish that investment had made less money.”
Key Takeaway: You set your cash flow with the price you pay. Don’t buy the property if the price does not produce a positive cash flow.
3. Understand what it will really cost
Owning investment real estate, specifically rental houses, comes with many costs. Frequently investors will massively miscalculate what it costs to own and manage a property. They think they have gotten a good deal, but the operating expenses are higher than anticipated, and their cash flow suffers. Often, they believe they are unlucky, but these expenses are common to all properties, and it’s a real estate investor’s job to know what these are.
Some expenses are known, like taxes and insurance, while others will fluctuate, such as routine maintenance and additional repairs. Over time you will need to replace costly items such as the roof, the heating and air system, and eventually the pipes that run to the sewer system (most people forget about that one). On top of that, you may have debt service obligations if you purchase properties with a mortgage.
Studies have shown that the average operating expenses for rental properties are about 40% of the rent. This number is reasonably accurate over the long term for a single property, and for an extensive portfolio, it is surprisingly accurate each year. For the best results, assume your expenses will be about 40% of the rent and set this aside each month. For more details on how this 40% number is determined, please take a look at my article about calculating operating expenses on rental properties.
Key Takeaway: Expenses are significant and will have a major impact on your bottom line. Make sure you know how to predict what this will cost.
4. Know your market
Knowing the market where you are investing in real estate is extremely important. Both property values and rents differ between cities and from street to street in the same neighborhood. Estimating the market value of a property is much easier and more accurate when you have already studied the area. As mentioned in tip #1, you must know the market value of a property before you can buy it for significantly less.
Investors have massively overpaid for properties because they don’t know the market. An older house in a small city will often be worth a fraction of a similar place in a major metropolis. On many occasions, I have seen investors from a large city massively overpay for a home in a small city because it appeared to be a steal based on the values they were accustomed to. I have bought properties from these same investors when their business fails, proving the adage: Know your market.
Expenses are often higher in high-crime areas. You can mitigate this risk by avoiding that area or by paying less for the property. However, you must understand the market to know the high crime areas. In addition, crime trends tend to change over time, so staying abreast of emerging trends is the best way to adjust your real estate investing strategy.
A key component of success when investing in rental properties is setting the rent correctly. Setting rent appropriately reduces vacancies and guides you in determining the purchase price. It isn’t easy to know the nuances of market rent unless you know the area in which you are investing. For more about setting rent, please read my article that teaches you how to determine market rent.
Key Takeaway: Know everything about where you invest. Stay on top of property values, market rent, and crime rates.
5 Treat real estate investing like a business
This is a business, so you must treat it like a business. The real estate business is about numbers, not picking a paint color, redecorating, or being creative. If you enjoy those things, then have fun with them, but the numbers are what matters. Don’t pass on a property because it needs a lot of work; figure out what it costs to fix the problems and work with numbers. Don’t go overboard on renovations when it’s not going to add real value. And most importantly, value your own time and don’t do work for free to make a deal work.
The best deals are often houses that no one else wants because of some problem. It could be termite damage, mold, or a considerable renovation. This should never deter you. These properties are the type where you can often find the best deals. As a real estate investor, your job is determining the cost to remediate the problems and then trying to get the property for a price that makes that a workable deal. Turning down an ugly property in an emotional response is not how fortunes are made. Stick to the numbers.
Your business is investing in real estate, not swinging hammers and painting walls. Put your efforts into getting deals, and don’t do renovations or routine repairs yourself. You must treat real estate investing as a business, and as the CEO of this business, work on the big picture and leave the paintbrush to others. If you need to know more about why you should never do renovation work yourself, read my article about the importance of hiring contractors.
Key Takeaway: It’s all about numbers, so don’t make emotional decisions. Remember, work on your business and not for your business.
Wrap Up
I am a professional real estate investor, and I’ve made many mistakes over 15 years, but I don’t make those mistakes multiple times. I learn from my mistakes, and you should learn from my mistakes too. In this article, I shared the top real estate investing tips I’ve discovered and explained the reasoning behind the recommendations. Your goal should be to buy cash-flow-producing properties significantly below market value. Make sure you have an expert understanding of the market and know what expenses you will likely encounter. Throughout all of this, be sure to treat real estate investing as a business.
