First and foremost, TAKE YOUR TIME! I know it's very easy to get excited about buying your first investment property. Believe me, I've been there and remember it very well! There are always going to be plenty of fish in the sea. Just take your time as you begin, as most of the bigger mistakes you can make tend occur early-on when you don't know any better.
Second, I believe it's very important that you have a long-term outlook on your real estate investing. In other words, look at each of your investments as piggy banks that you can put money into, but NOT take money out of for at least 10 years. Your base goal is to actually have someone else (your tenants), put the money in those piggy banks. You want to have the income you receive from your tenant base, cover all expenses associated with your properties. Anything above that would be considered gravy.
Your ultimate goal should be to have some number of your rentals totally free and clear of any debt. Now think about this for a minute. If you were able to simply have 5 single-family homes totally free and clear, do you know how much income that would produce for you? I'll tell you. My three bedroom single-family homes all generally rent for at least $615 a month. Most are actually $625 or better. These are homes with market values in the $60's. Let's even round down and assume you're only getting $600/month in rent on these homes. With 5 free and clear, that comes to $3,000/month gross income. Not too shabby. What if you want to just sell them off? Let's say you only get $50,000 a piece for them. What a nice chunk of change! $250,000! What I'm trying to get at - just focus on using your investments as a retirement vehicle down the road. Look at it as if they were a 401(k). You can put money in, but not take it out. You'll be so far ahead of other investors if you work this way. Obviously, if you have an emergency situation down the road, then look to tap into the wealth you've created.
I mentioned that you'd be way ahead of other investors...Look at how many investors were lulled into the idea of taking money out at closing. It was any and all equity they had in the homes they were purchasing. Look where those very people are at today. They're having a hell of a time keeping their investments afloat if they haven't already cooked and gone under. They can't even try and sell their investments, as they'd have to get top dollar for them to pay off their debt. It can't be done because property values have dropped signficantly in many geographic areas. Greed has gotten the better of them!
Try and expedite the pay down of your holding debt. Try and target to have your loans paid off free and clear within 15 years. Now that doesn't mean go out and get 15-year mortgages on your investment property. Go with the longer-term amortizations if you can - 25 or 30 years, and simply apply any extra monies you have toward those loan balances. Want to see an example of how easy this can be done and the huge affect it can have on your overall loan balances? Let's use an example. (You can click here and play around with the amortization calculator to try out your own scenarios, or go to the Bloomberg link for a whole slew of mortgage calculators).
Let's say you have a mortgage loan balance of $50,000, amortized over 30 years, with an interest rate of 8.75% fixed. Excluding any insurance and property taxes, your monthly loan payment comes to just over $393. Now let's say you pay an extra $50/month toward that mortgage, meaning you're paying $443/month. Do you realize you'll have shaved off 10 years and 2 months from the time it would take you to pay off your mortgage had you not paid anything additional? Here's the eye-popping number: You also save yourself $36,164 in interest!!! Instead of making extra monthly payments, you can also make extra "chunk" payments at any time and apply those monies to your principal balance. What you're doing here is simply putting money into your piggy bank and quickening the time that you'll be able to tap in and take it back out.
Focus on specific neighborhoods to grow your portfolio. Why? The reasons are many:
- you'll gain a solid understanding of the "fabric" of that neighborhood
- it'll be a convenience factor in making service or maintenance calls
- you'll quickly learn real values of homes, and rental rates in the neighborhood
- easier to sell your entire portfolio to one person. Huge benefit to being able to own a portfolio of homes that you can simply walk to in one neighborhood instead of driving all over town.
I look at a number of various elements of a neighborhood before deciding to ultimately purchase an investment there. You'll want to do the same thing before deciding where to buy. Become active in the neighborhood associations where you are investing. It'll give you an extra pulse on what's happening and those living in the neighborhood will appreciate the fact that you're not just some absentee landlord.
Focus on homes that have market values in the $60,000-$80,000 range. It's a segment that a large percentage of the general population would have an interest in either renting or buying. You should be able to secure a mortgage on a property in this range such that you'll be able to offer a rental rate that'll compete with rates that apartment dwellers are paying. In essence, you'll have a pretty large segment of the population that is looking for rental property in this price range.
Think in terms of stocks for a moment. A portfolio of homes in this price range would be the equivalent of owning stocks priced in the $20-$40 range. You're not buying something akin to a penny stock (extreme risk), nor are you buying something like a Google stock, priced so high that the normal individual can't afford even one share.
Maintain your current professional position, or whatever full-time job you're currently holding down. Build your rental portfolio on the side. I was a market research professional in the financial industry and was able to build a very significant portfolio on the side, consisting of over 50 single-family homes. Now I wasn't married nor had any kids at the time, so I had plenty of time outside of the normal course of my business hours with which to devote to my rental portfolio. If you have that outside time, it's not that hard to own as many as 10 single-family homes and not have it chew up your every waking hour. As long as you have a strong group of tradesmen to help aid in taking care of service calls on your property, you should be able to manage your property relatively easily.
Make sure you have a good paper filing system in place. If you plan on building a signficant rental portfolio, go out right now and buy yourself a good filing cabinet if you don't already have one. Along with the filing cabinet, pick up some of those hanging file holders, and a box of manila files. I've found it easiest to use one file to maintain all paperwork for each property. This includes closing paperwork and all income and expense paperwork associated with the property.
If you don't already use some sort of online banking product, I highly recommend you look into that. It'll significantly cut down your time in writing checks, and can provide additional reporting and tracking of your expenses as they relate to your investment property portfolio.
I can go on, but I've hit on many of the bigger areas to focus. Areas that will ensure you succeed as an investor. I've missed several others and will eventually add them here in the future. I will continue adding good information here as well as others areas of this site, so check back often and as always, good luck on your endeavors.
ROSEWOOD HOLDINGS, LLC
This page was last updated: January 13, 2008
Call us now: 614-865-0807
Rosewood Holdings, LLC
1237 Three Forks Dr. S.
Westerville, OH 43081
614-865-0807
Email: Rosewood Holdings
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