Real Estate Investing Life Lessons
When I was a teenager with a summer job in our family real estate investing business I was a “painter”. I actually loved this job because I could use a roller and I could do the ceilings and walls in a one-bedroom apartment in two days. I knew how to “cut-in” very well, even free-hand. I also became the “tap repair guy”, fixing leaky taps all over the place. As you can tell from my story, we didn’t have the money to hire painters or plumbers — we did the work ourselves! Even today when I talk to a contractor or a painter about a job we have — there is no way they can “fool” me. I’ve been there and done that!
Below are lessons I have learned as a life-long real estate investor. I hope these lessons help you navigate the waters of real estate investing.
- See 100 properties before you even think of buying a real estate investment property. Don’t forget that no realtor will want to show you 100, so you’ll have to figure out a solution to that.
- Set your rents 3 to 5% below market. Why? You will be amazed at how it cuts your vacancy rate, reduces the wear and tear on your property from “churn”, and reduces the one month gap in turning over a property.
- Learn how a lease works, especially the process of evicting a tenant for good and just reasons. If you are doing a month to month arrangement, learn how the precision language of a “one month notice” period works. If you are a tenant you must give your notice to move out on August 31st, for example, on July 30th, not August 1st. The usual language is one full month’s notice.
- Learn the secret of good relationships with your tenants. Respond to their service requests (repairs, leaks, damage) fast. Even if you can’t fix something immediately, talk to the tenant right away.
- It’s true that location is the big thing. As part of your due diligence, research the best and worst locations. The greatest contribution to the value of your property is not revenue or cost control. It’s location!
- When you are thinking about buying an older property to renovate it, learn how to spot the hidden potential. A well thought out renovation, the strategic removal of a wall, the strategic addition of a feature (a brick front, a front door upgrade, etc.), can be a great move.
- Flips are good. But you have to track the market in your area. Don’t buy a property at market value and then do a bunch of work to it and expect to make a capital gain. You have to buy a property at 25% or more below market value!
- Fix it yourself. Yes. Figure out a way to free up some time and do some of the repairs or renovations yourself. Obviously if you have more than a few properties you will have to hire people or consider entering your business full-time. If you hire a plumber or electrician every time, you will not have the right return on your investment.
- Work carefully on a spreadsheet analysis so that you can trace the effects of costs and revenue out over the next 10, 20, or 30 years until you pay off the mortgage. Try ours. It’s easy and comprehensive.
- Figure out how a mortgage works. Get a mortgage calculation tool (software, calculator, etc.) and carefully note that the interest portion of a 25 or 30 year mortgage is heavily skewed to the first 7 to 10 years of the mortgage. The banks have you because if you sell in the first five years you will have very little equity. Real estate is mainly a long haul investment.
- Save every penny of your revenue from your first revenue property. Don’t pay yourself. Don’t take the money out. Keep it in a separate account until you can save enough to buy a new roof, a new furnace, a new HVAC system, or whatever.
- Check applicable legislation in your area. Do you have rent control? Do you have some kind of residential tenancies legislation? Can you do rent increases when you need it or when the government says you can? Study the legislation point by point, clause by clause.
- Understand the concept of depreciation in your financial statements. Depreciation is a non-cash charge that you can use to reduce income for tax purposes. It’s a kind of gift from the tax man, believe it or not. Some areas have accelerated depreciation rules. Some are more strict than others.
- Learn how the income tax system treats property income. For the most part it’s called “non-active” income. This type of income is different from that of a manufacturing business, for example, which is considered “active business income”. Tax systems may treat this type of income in a different way.
- Should you buy a rental property in your own name (sole proprietorship) or in the name of a company (a limited liability corporation)? The risk of buying a property in your own name is a high risk proposition. Think lawsuits from a disaster perhaps, like a fire, or an injury from a fall on your slippery sidewalk. You don’t want your personal home, income, and family at risk.
- Where do you get a down-payment? Do you save it up? Do you borrow it? Do you get it from partners or family members? This is the most fundamental part of doing a property deal. Don’t borrow it! It will put too much pressure on you. Be patient and get it together either from your savings program or from friends and family in an “off the books” financing. If the bank sees that you have borrowed 100% of the down payment, you will not get the mortgage approval!
- To be a smart real estate investor you must learn how to do the financial analysis of a property. Most novice investors forget that there will always be emergency, unplanned, surprise expenditures. Understand the financials of the property itself and also the way the tax system will treat your income and capital gain.
- Understand how the tax system will treat your capital gain when you sell your property. Some states/provinces force you to “recapture” depreciation back into income when you sell a property. Some have a “capital gains tax” that is very high. You can end up selling a property and not having enough money to pay the tax. You must learn the rules and know what you are talking about when you buy and, eventually, sell.
Remember, you can be Catholic and successful in business - and real estate investing. Believe it!