Hello and welcome to my blog on great financial investments. This series coming up is going to discuss real estate as a financial investment, and great one at that. But first a little background. I am a small time real estate investor… for now. I have 3 residential rental properties with partners around where I live in suburban Chicago area. Two of them are townhomes and one is a single family home. I’ve had great results from all three in the 5 years that I’ve owned them.
In all honesty, they started out as fix n flips (where you buy a property, fix it up and re-sell it for a profit) but we couldn’t get the price we wanted in selling so we rented them out (nice to have options). We sold one for a healthy profit and bought another one and held that one. They have all been rented out since with 2 of them having the same tenant for the last 5 years. That consistency is great as it is less time you have to spend getting a new tenant.
Now I manage them but they take very little effort. This will happen if you find a good tenant. A good tenant is defined as one who pays in full and on time each month, takes good care of the property and requires little to no attention from you. If you find one, hold on to them because they are going to make you some great money over time.
A few keys to making real estate work as an investment:
- Management – This is so critical because management makes the decisions that make or break your investment. I manage my own right now because I know how to make them work. Listen up: No-one, I repeat no-one, cares as much about your investment as you do. Remember that! If you hire out management, make sure you do your research and keep a very close eye on them until you’re comfortable with their level of care and competency in managing your investment.
- The numbers – You have to run your numbers before you buy to make sure that all your expenses total less than the rent you’ll be bringing in. Some financial advisors recommend running at a loss as a tax advantage but why would you do that if you can be cash-flow positive? Be smart and know your numbers before you buy or else you may wind up losing money every month.
- Tenants – This factor is critical as I’ve said. But how do you get good tenants? Follow this: If you buy a D (think grades) property, in D condition in a D location, you’ll attract D tenants. If you buy an A property, in A condition in an A location, you’ll attract A tenants. I learned this the hard way as my first investments were 100 year old houses in disrepair in poorer neighborhoods. Bad tenants, tons of repairs and negative cash flow. A hard lesson for sure but now I know and I’m telling you. Think about it this way: Would I feel comfortable moving my mother into this house in this neighborhood? If not, it’s probably how your prospective tenants feel.
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