Real estate investing has attracted a lot of interest in recent years.  Low returns on CD’s and T-bills have caused some investors to take a hard look at real estate for higher returns.   But real estate investing is not for the faint of heart.  It requires more upfront research and more ongoing attention as an owner compared to many other investments.  But the rewards can be significant if handled correctly. 

One of the principles that applies with real estate investing, as well as all investing, is to be just as concerned with the return of your money as the return on your money.  In other words, should you need to sell the investment at some point in the future, you want to get your money out of it in a reasonable period of time.  This requires some serious due diligence up front to get a home at the right price in a stable neighborhood.  It also requires a disciplined maintenance program after the purchase to keep it in a marketable condition.

After finding a property with potential, one of the first steps is to calculate an estimated return on investment so you can compare it to other investment opportunities.  The upfront investment should include all purchase costs, closing costs, and initial fix-up expenses.   The return should include rent income netted against all expenses including real estate taxes, insurance, interest and maintenance.  When the result is compared to the returns on other investment opportunities, the differences must then be evaluated based on the investor’s perception of the risk associated with each.  Consulting a financial advisor would be recommended for the first-time real estate investor.

Once you’ve acquired a property, more due diligence is required to get a tenant who can demonstrate a responsible history in timely payment of their bills, in taking care of homes, and with sufficient income to pay the rent.  This requires a credit report, references from past landlords, and payroll records.  Patience is needed at this point, as there might be a tendency to get a tenant quickly in order to get some income flowing.  But it usually pays off in the long run to be patient until the right tenant comes along.

After the tenant moves in, the investor now becomes a landlord.  Many investors want to avoid this part so they hire an investment management company to deal with the tenants.  But that can be expensive and will lower the overall return on the investment.  If the investor manages the property alone, having financial discipline will serve the landlord well.  A separate bank account should be used to segregate income and expenses from the property.  An amount should be reserved for yearly taxes, HOA fees and insurance premiums.  And an amount should be set aside from each rent payment for ongoing and unexpected maintenance requirements.   Writing out large checks is much less stressful if those expenditures are planned for and money is set aside.

A final bit of advice for landlords is to have reasonable expectations of tenants.  There needs to be balance between protecting your investment and allowing the tenants to enjoy the home.  Achieving that balance can enhance your overall return as tenants are more likely to stay longer and take more pride in taking care of the home.  This will also increase the odds that the investor will maximize value on the property when it comes time to sell.

An experienced Realtor can help a real estate investor find the right property and can help with the search for tenants.  Real estate investing is not for everyone, but for some, it can be a rewarding experience in more ways than one.