If you are looking to invest your money outside the stock market, investing in real estate can be a great venture. With the right purchase, two great things can happen. First, you can build equity in the property by applying rental income towards the mortgage. Second, a substantial income stream can start to generate via any extra monthly cash flow from the investment.
Do real estate investments sound like something you want to invest in? Property investing can be a great way to build your investment portfolio, but beware, buying an investment property is hardly passive income (if you really want passive real estate income, you’ll need to hire a property management company, but they can be costly) and is far more work than most side hustles.
As a new real estate owner, I quickly found there is a lot of work (and challenges) involved in both the purchase process, as well as the continuous upkeep. These are the lessons I learned from my experience owning and recently selling my first investment property and can help you become a successful real estate investor.
Finding the Right Property Is Hard
When I first started looking for real estate opportunities for my first property, I didn’t realize how hard it would be just to get started. Since it was my initial purchase, my available funds for a down payment were about $30k (low for real estate), so I need a low purchase price in order to keep the mortgage payment low. On top of that, I wanted to buy a property close by. And living in northern New Jersey(where property taxes are relatively high as well) made it difficult to check both boxes.
I eventually decided to look more south, near my alma mater. The neighborhood was cheaper, but it was an hour away. The reason for this decision was driven by three main factors. Cheaper purchase prices, familiarity with the area, and the potential ease of finding tenants due to its proximity to two universities (more on that later).
At first, this seemed like a no-brainer in terms of increasing my purchasing power.
After doing my due diligence, it didn’t pan out as anticipated. Even with the overall cheaper neighborhood, many of the investment properties I viewed were far from turnkey and were relatively distressed. Most were in pretty dire condition and required tens of thousands in renovation cost – no thanks, I was not interested in starting a rehab project right off the bat. I became frustrated. Not only was it difficult to find an investment property in my price range, but the ones that were didn’t exactly project the ability to generate a decent positive cash flow.
While we’re on the topic of decent cash flow – it was a vital part of my plan for two reasons. First, just like with regular finances, an emergency fund is needed for maintenance and repairs. Second, there needs to be a safety net for possible vacancy periods. I wanted to make sure I was covered for both.
When you have a larger down payment, mortgages get cheaper. If I had waited to get a larger down payment ready, my mortgage would have been lower, allowing the rental income to provide me with a higher cash flow. So another lesson learned was next time, save up until I have more to put down.
In the end, I got lucky on my first property. A friend of mine who owned a single-family investment property in the area I was looking in was ready to sell (he also happened to be a realtor saving me on closing costs). He’d had been renting it out for over 14 years, and fun fact, I myself lived in that very house for four of them (and they were glorious). I knew the house was in good condition, and the details of the sale were worked out with little issue since he was also a real estate agent and handled the sale himself. Within a few months of our initial discussion, the house was mine. Purchased at a reasonable price, and already occupied with tenants.
When all was said and done, it took a stroke of luck for me to find a good real estate opportunity. Odds are, most potential real estate investors won’t be so fortunate with their first rental property. Keep in mind, you may not find the perfect property but wait for one that’s suitable for you. The search can be long and hard. Don’t buy something in haste just because you want in the game – have a plan. Determine the important factors that will help guide your decision and their priority levels in advance. Once you find an investment property that checks enough boxes, only then is it time to move forward.
Location, Location, Location
The number one factor for real estate tends to be the location. And that goes double for real estate investing. Owning a property in one of the neighborhoods within close proximity to me was more important than I initially realized. Mine was more than an hour away, and the trip down there (for any reason) took up most of my day. Not only would my back be killing me from the drive, but the round trip was costly. Especially if I had to make multiple trips in a single month.
In addition to proximity, location is important because it will determine the “desirability factor” of your rental. A more coveted area will likely increase the ability to quickly find tenants. If you find a “good deal” in a less desirable area, congrats on the bargain, but it may lead to periods of vacancy. Which means you won’t be making much.
Pay attention to how established the neighborhood is too. If you’re brave enough to take a leap of faith with an up-and-coming neighborhood, it may very well eventually pay off. However, some beginner investors aren’t willing to take that kind of risk and prefer to buy in an area that is already on the map.
Finding Tenants Is Stressful
As previously mentioned, my investment property was near two universities. This may come as a shock, but I wasn’t the only landlord in town. My house was in good shape, but not necessarily the most impressive on the block. Let’s just say renters weren’t exactly banging down the doors to live there. The reality was, there was a TON of competition. And I’ll tell you what – the students knew it and immediately try to negotiate a lower rent.
When I purchased the house, it was already being rented by tenants with a lease that ended in May. This meant I needed to start advertising the house as early as the November before. The process consisted of emails with aloof students, and endless attempts to wrangle multiple groups to view the house on the same day, in hopes that one of them would commit (remember my hour-long trip?).
You might not have to deal with college kids (and their parents), but depending on the market, most tenants look for the best deal possible. This means you’ll have to advertise, follow up, and really put in the elbow grease to secure new tenants in time to avoid any occupancy gaps. Take it from me this can all be very stressful.
Because of all the competition, instead of raising rent each year (as initially planned), in the end, I lowered the rent just to get anyone in there. This was always a painful choice because it ultimately meant a lower cash flow. It really made me question whether or not the investment was even worthwhile. If I could go back and do it again, I’d find a location less saturated by other real estate investors.
Tenants Are Frustrating
This shouldn’t come as a surprise, but most tenants aren’t willing to spend their own money on your property. Sure – there will be a lot of suggestions in terms of repairs and upgrades but on your dime. I had a clause in my lease that stated anything under $50 was the renter’s responsibility. But, it was mostly ignored.
As an added bonus, college kids tend to be partiers. Believe me, this leads to a lot of repairs that amount to over $50. Ideally, any damage done to the property is the renter’s responsibility to fix, but unfortunately, there is no clause that they have to fix it right. More often than not, I’d find some pretty pathetic patchwork or temporary “fixes” from a party that I would later have to correct. This cost me both money and time (did I mention my hour-long trip yet?!) And yes, I always had the option to deduct these expenses from the security deposit, but I could have done without the extra trips (and headaches).
While some tenants can easily spend your money, they are not willing to part with theirs. I set up rent payments through Venmo (how much easier can you get??), yet the collection was still an ordeal every..single..month. Without fail, I always got a text a day or two before with the latest lame excuse as to why one or two of the tenants wouldn’t be able to pay the rent on time.
In the end, the money would miraculously appear the day before the late fees kicked in (yeah – they knew what they were doing). Another good reason to have some cash in reserve – my mortgage company really liked it when I paid on time and didn’t care what baloney my tenants were feeding me that month. I had college kids, but no matter who you rent to, you’re bound to run into issues like this.
Townships Are Even More Frustrating
Remember – my investment property was in a college neighborhood, so a whole slew of other houses in the area needed the same inspections. This made it that much more difficult to get mine done. The best was when I would get all the way to my property just to have the inspector let me know they couldn’t make it (BS), and I’d have to schedule all over again….fun times.
Selling Isn’t Easy
The original investment strategy I had going into my first real estate investment was buying and hold, but I recently decided it was time to sell the property. I had built some equity, and thanks to a global pandemic, the real estate market was on fire. The market value was significantly higher than what I paid for it, so I decided it was time to sell it. With such high demand, you’d think selling would be easy – it was anything but.
Again, it was a neighborhood that attracted a lot of property investors, so buyers were looking for great real estate opportunities, aka, the cheapest deal they could. There was a lot of competition from other landlords trying to take advantage of the seller’s market too. Potential new real estate investors definitely had a lot of inventory to choose from. Don’t forget to have a cut-off price in mind as you’ll be paying the selling real estate agent so of your profit as well, selling your property needs to be worth it to you.
Not wanting to miss out, I showed the house as much as possible (which didn’t sit well with my current tenants). To smooth things over, I knocked a bit more off the (already low) monthly rent. Truth be told, even if I hadn’t sold, I doubt they would have signed for another year.
Lesson learned? When attempting to sell a house, it may be better to have the house vacant so you’re not constantly asking tenants to leave the property they pay to live in so strangers can walk through it. Or try to identify days/times that would work best for tenants to have prospective buyers come to view.
You Will Make Money
Even with all the frustrations, my first venture into real estate investing was an overall success. I learned a lot and was able to make back my initial investment (plus an additional $20k).
For only owning rental property for only a few years, it was relatively profitable. The original plan was to hold on to it for much longer, but due to the sudden rise in house prices, it was a rare opportunity to make almost three years’ worth of rental profit without the headaches.
You might not get the same chance to pounce on a sudden spike, but the longer you own the property, the more equity you’ll build, and up the odds of making a sizable profit when you go to sell.
I hope you’ve enjoyed my Real Estate Investing Tips for Beginners: My Lessons Learned guide. With so many ways to invest out there, owning investment properties has always been a great form of diversification and an alternative way to build wealth – for good reason. When buying rental property is done properly, cash flow can start to generate right away, and the return can be quite lucrative.
The trade-off here is that although you’re not subject to the same ups and downs as the stock market, there is a lot of responsibility and hard work involved when buying a house. To be a successful real estate investor, you’ll need to have patience and be willing to commit to the work. If you can do both, investing in properties will be a great avenue to create another income stream and move you closer to your financial goals.
If not, there are still other viable options. Sites like roofstock.com online real estate options, but you’ll likely need to pay property managers. Fundrise.com, an online REIT, offers real estate crowdfunding with tons of real estate projects to choose from. Many of which you’ll earn dividends, but be aware REITs and similar services like this are typically illiquid meaning it can take time to get your money out. There are a few other sites, but they are only open to accredited investors. You can take any of these real estate strategies to become a real estate investor. The trick is finding the right real estate option for you and learning from me!
Using my new knowledge, I know I’ve already moved on from my first property and started looking for my next investment in real estate. Next, I hope to score either multiple condos, possibly a multi-family property or if I’m really daring a vacation rental property, I’ll let you know how my next real estate deal goes. I’m by no means finished with owning real estate.
Do you have investments in residential real estate or in the real estate industry? I would love to hear from other real estate investors. Tell me about your rental properties, flipping houses, one of your favorites flips, your real estate business, investment strategies, or anything else real estate investing related. Shoot me an email or leave some comments below!
Jeff is a fan of all things finance. When he's not out there changing the world with his blog, you can find him on a run, a Mets game, or just playing around with his kids