Looking to Earn More? Real Estate Investments Offer a Nice Salary Supplement

While it’s still unclear where the housing market will end up after its meteoric rise and recent cooling, the fundamental principles of real estate investment strategy remain relatively unchanged. For those new to the game, the approach to real estate investing is essentially the same as it was during the boom – assuming your strategy was sound at that time. It should first be noted that real estate investment is not for everyone. As with most investment strategies, real estate investment comes with certain inherent risks. And while there are several different approaches to real estate investing, this article will focus primarily on investments in long-term rental properties, both small commercial and residential.

As you will learn from reading this article, I am far from an expert in real estate investing. I’ve owned parts of a few investment properties over the years and have done reasonably well with them. I have a real estate license in the state of Maryland, although I use it almost exclusively as a means to explore new real estate investment opportunities without requiring the assistance of an outside real estate agent.

To start with, it is a good idea to thoroughly know a potential property, as well as the area where you are purchasing the property. It is always best to have detailed knowledge of the area in which you are purchasing an investment property well before making the commitment to buy. This is important because every area has unique attributes that will ultimately help determine the overall health of your investment. During the recent housing boom, it didn’t matter too much where you purchased real estate – some appreciation was virtually guaranteed.

But investors that purchased in solid areas have not experienced the same level of market decline that exists in areas that were more artificially inflated because of prevailing market trends. If you’re new to real estate investing, I would recommend starting with properties that are within comfortable driving distance of your principal residence. Even if you should choose to have a property management company handle your properties, all but the most minor of incidents will require at least a single visit to the property.

It is important to note here that a good real estate agent can be helpful in getting detailed information about properties of interest, but it is imperative that you do your own research. Even the most qualified agent will typically be handling multiple deals at once and simply will not have the resources to generate the kind of detailed analysis that an investment purchase requires. And frankly, real estate agents are concerned first and foremost with selling properties. Their secondary interest is you.

Almost all of the information required to assess a property can be found in the public record for specific properties, including all applicable zoning and tax information, as well as previous owners, purchase prices, and any improvements that were made to the property. To supplement that type of information, have your agent generate reports of comparable properties in the area and their sale prices and rental rates over 6-month, 1-year, and 2-year intervals. This should help to confirm your independent assessment of the strength of the market in that particular area.

In most instances, a first-time real estate investor will require financing to make a deal happen. Most financing packages for investment or rental properties require that at least 20% of the purchase price be included in the down payment for a given property. While this cash-in-hand is often the largest hurdle for new investors to overcome, once they have done so, the process is not overly complex. Shopping aggressively for the best rate and loan packages available is always advised. It is shocking how flexible lenders can become when they have legitimate competition for a loan and a mortgage broker’s “best rate” is often above what they are actually willing to offer you.

The estimated rents an investor can charge minus the monthly mortgage payment, property taxes, and insurance typically yields a pretty accurate picture of what kind of cash flow situation a property offers. Not every rental property needs to be cash flow positive, but if you are new to the game and your goal is to grow your investment portfolio, being cash flow positive is almost always the best approach.

In my opinion, it is a huge advantage to a real estate investor if they possess or have easy access to home improvement and repair skills. Again, even when utilizing a property management firm, reliable and affordable contractors or home repair specialists are extremely difficult to come by. When self-managing investment properties, some home improvement knowledge and/or accessible resources can save thousands of dollars per incident and mean the difference between a good or bad overall investment experience. And as much effort as you may put toward preventing it, things will break down and require repair at some point in a long-term real estate investment. Whether it’s a faulty appliance, leaky roof, or damage caused by tenant negligence, every issue must be resolved immediately and effectively if an investor is going to maintain a healthy landlord/tenant relationship.

From experience I can tell you that tenants do not care about the details of what is required to fix a given problem or how much effort you are putting forth to resolve an issue. Residential tenants are an impatient lot and understandably so – they are paying to live in a property that they do not own and from which they will gain nothing financially. Having been both tenant and landlord in residential rental agreements, I understand the frustration that exists on both sides of the equation. This scenario, however, manifests itself far less frequently with commercial tenants, as many will contribute greatly to the upkeep and maintenance of a storefront or office space that may reflect the ideals and professionalism of their company.

Unlike securities investing, real estate investing is something that is accessible to most people from a knowledge standpoint. The concepts involved are fairly straightforward relative to some of the more complex financial knowledge and theories that must be understood to consistently beat the stock market. And through diligence and effort, many of the typical pitfalls of real estate investing can be overcome or avoided altogether. Perhaps more so than with any other personal wealth management strategy, real estate investing demands a willingness on the part of the investor to do their homework prior to a purchase and stay vigilant and prudent in managing properties after they have been acquired. With the help of a trustworthy accountant and a sound overall approach, real estate can be a solid long-term investment strategy for almost anyone and in almost any market climate.

Tags: investment property, property management, real estate investment, real estate jobs, supplemental income

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