Getting Started in Real Estate Investing

Posted by Madison on March 12, 2009

We had a great meeting with our potential real estate investing business partner. I wasn’t sure what to expect, but I was pleased with the outcome.

We had a very open and honest discussion about finances, and we have a lot of the same goals and expectations. And because we’re both finance people, we also have a common understanding of how we want to approach valuation and decisions on the properties.

In fact, we even went and saw a property nearby… although, we’ll just say that “needs some work” was an understatement! (We don’t plan to do fixer uppers, rather buy a property that’s ready to rent.)

Real Estate Investing

We’re always working on diversifying our income, and this will be a good complement to our current income sources, which have shifted significantly over the past year.

Readers had a lot great tips and suggestions to consider before taking on the landlord duties:

  • You need to make sure you’re financially secure, and that you’re ready to deal with the hassles, even as a secondary owner. – Pete
  • Be very careful and understand what you are getting in to. You will get phone calls from your renters to fix things in the evenings and on weekends. Also, you can have problems with how renters treat your property. – Stella
  • I’m a landlord. If I had it to do over again, I still would have bought a rental property, but I would have made sure the math worked better. Make sure that the mortgage is no greater than 60% of the expected rent. – MITBeta
  • Investing in real estate can be scary, particularly at first. But if you don’t over-extend yourself and take it slow, it’s actually a lot of fun and, over time, very profitable. – Rob
  • I had people coming out of the woodwork to discourage me. “Do you really wanna fix toilets?” was the most often posed question. My response was…”No. I don’t want to fix toilets but if I fix one a month and get paid $650 to do it that would be fine by me.” I consider this a part time job/ small business that will naturally require some of my time. By doing this, I was able to create some expectations on the time and money I have to commit personally to this investment. Furthermore, I put in a best case scenario and worst case scenario of owning the property and even a time line with an exit plan in place if I hated it. – Eric

Real Estate Resources

In addition to the helpful suggestions from readers, I’ve found some sites and forums with lots of knowledgeable real estate investors sharing their experiences:

Evaluating Properties

We’re on the MLS mailing list for the rental properties in our area. In addition, we’re keeping our eye on FSBO and Craigslist.

To determine if the property will provide a positive cash flow and decent rate of return, we’re using various spreadsheets, with number obtained from the MLS listing, our electric company, and the seller’s Schedule E. Here are some that I’ve found, in addition to the homegrown one my partner created:

If it passes our initial review, has a positive cash flow, and a decent rate of return, we’ll set up an appointment to view the property. We have plans to see a handful more soon.

Financing

We found a bank (Bank of America) that’s willing to look at one year of self employment income (with at least 2 years in the industry), so we should be able to secure financing for the residential (1-4 unit) properties through them, with 25% down.

I’m also tentatively planning to apply for the loans in Scott’s name only to keep my credit card arbitrage running smoothly in my name. I usually try to avoid any joint financing when possible, to keep both of our credit reports looking better.

We’re also exploring the possibility of using seller financing, or land contracts, too.

Partnership

Everything I read, says don’t have a partner. However, I think that there are pros and cons to any situation. I’m not saying it’s going to work out perfectly, but in this situation, it’s worth a shot. We’ve had a professional business relationship for about 6 years, so we know each others strengths and weaknesses.

We’ll have our lawyer draft the partnership agreement with a predetermined exit strategy in the contract. That way, if it all goes downhill, there’s a way out.

Management

This is actually one of the reasons that we’re exploring the partnership. The other party plans to do all the management for a fixed percentage of income. This was the single reason that kept us out of real estate investing in the past… no interest in having to manage it. He’s putting together his outline of duties for us to check out.

Action Plan

We’ll be viewing some of the properties in the next few weeks that passed our analysis. I’ll keep you posted on how it goes…





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Comments to Getting Started in Real Estate Investing

  1. My husband and I haven’t started purchasing property yet, but I am very interested in this topic because we are preparing to turn the property that we have lived in for the past two years into a rental property. I have actually started a series on my own blog called Rental Property Conversion that addresses some the issues that I am facing with converting our property.

    I am currently going through the refinancing phase to reduce our mortgage so that we can get the most out of the rents we receive. I thought it was particularly helpful to hear from one of your readers that the mortgage should be no more than 60% of the rent. That is alot stronger than previous advice we had received that mortgage could be as much as 75% of the rent. This will help me when I consider where to set the rent. It may be a good idea for us to consider the 60% equation considering that we will also have management fees.

    Thanks for your post!

    Su Prieta

  2. Real estate investing is something that has always intrigued me, too, but I’ve never taken the plunge. This is probably a good time to buy with rates low, a lot of houses on the market, and many people looking to rent while they lick their wounds coming off a foreclosure.

    Frugal Dad

  3. Good luck with this. I’ve been interested in real estate investing for a while now, but where we live real estate is through the roof, still! We live in Sonoma, CA. It would be very hard to buy something (with our means) that would make it worth it. And we aren’t really interested in the hassle of buying something farther away that is cheaper.
    Maybe it will become more feasible in the near future though, hopefully.

    Kendra @ Shopping for Two

  4. I reside in the US, but am not an US citizen, over the past few years I have been gobbling up land/vacant plots in my home country (developing nation) and man o man the premium associated with these purchases have been SPECTACULAR. I need to dig deeper into the rental real estate market over here, wondering what kind of returns you are expecting?

    waren’s buffet

  5. On the preperty analyzer spreadsheet, the tax rate used is for a single filer in 2001. Depending on what happens to the sunset provision of the 2001 tax relief act in 2010, this could be a good thing in that it predicts the near term change or a bad thing in that it underestimates the profitability if the tax rates are kept where they are now..

    Andy

  6. Please make sure that you take someone along who has the ability to checkout any property from a physical standpoint.

    If you know finance, as I did, that is one part of the equation down.

    But, the property MOST likely will need repairs/upgrades (If it has been a rental before.)

    When I got started, I lost about $5,000 from my evaluation due to roof and misc problems.

    This caused me to barely break even on the property versus earning $100 profit per month. (before any tax benefits.)

    Quinton

  7. A lot of the common themes I’ve seen throughout the post see to stem from people problems (landlords having issues with tenants). That’s not a problem if you accept the right tenent.

    Best of luck with you real estate investing!
    -Dustin

    HIB

  8. There is very little risk in investing in real estate when you use creative real estate investing strategies such as lease options, wholesaling, seller financing and short sales.

    These type of real estate investing strategies require very little cash but the key to doing them is your ability to find motivated sellers.

    Motivated Sellers

  9. Charging higher-than-market rent on a lease option is a good business decision and is legally and ethically justified (subject to some local variations) if the excess money is credited as option money. Some sellers opt to charge just the fair rental value so that only the initial option money is credited toward the purchase. Still another variation is to charge fair rental value and credit a portion of this toward the option. This is a great deal for the buyer, but can lead to complications with financing later, so you should check with your real estate agent or loan officer for details.

    Eric

  10. Real estate investing or any other investing for that matter is not scary or risky if you know what you are doing. The bottom line, is before you do any investing you should learn about what you are investing in before you invest in it.

    Mark

  11. Thank you for this great insight into real estate investing. Regardless of how you plan to use the property, it is important to understand your overall goals, finances, management plans, and partnership possibilities. I think there is a lot to consider when it comes to choosing which property to purchase – location, purchase price, surrounding market, and more. Though there is a lot that goes into real estate investing, it can done with a little hard work and knowledge. Thanks again for sharing!

    Patrick Freeze

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