Part of our website includes a section on tips for new investors. I have put all the tips that I could think of. If anyone has tips to help new investors, it would be greatly appreciated. Below is an example of a tip that is on the website:
A Property Management company can serve as your best friend. A lot of people who invest in Real Estate are working professionals with other responsibilities. Adding tenant emergencies, rent collection, and contractor management can be an impossible overhead. A good Property Management company alleviates the overhead and ensures that your rental income is forwarded to you.
Here’s a better tip:
A Property Management Company can be your worst nightmare. A lot of people who invest in real estate are newbies who have absolutely no idea of the costs involved. In fact, hiring a property management company typically costs 10% of gross rents which often can rob the newbie of more than 30% of their profit. When that is combined with the expensive maintenance typically used by propertymanagers and the extra charges for finding tenants, evictions, etc, a Property Management Company can take every penny of the profit that the new investor could have made.
I see your point, but you can say the same about all Real Estate resources, including realtors, mortgage brokers, title agents, insurance brokers, etc. If you deal with unscrupulous individuals you will mostly likely get burnt. That is just life. I am just looking for advice that can be shared with new investors. Please keep it positive.
Let me try again (and I’ll keep it positive):
I’m positive that a Property Management Company (even the best and most professional property management company) can be your worst nightmare. A lot of people who invest in real estate are newbies who have absolutely no idea of the costs involved. In fact, hiring a property management company typically costs 10% of gross rents which often can rob the newbie of more than 30% of their profit. When that is combined with the expensive maintenance typically used by propertymanagers and the extra charges for finding tenants, evictions, etc, a Property Management Company can take every penny of the profit that the new investor could have made. Therefore, it is usually best for new investors to buy properties close to home and manage the property themselves.
(Was that better?)
Ok, so lets say that you are a newbie investor with a pretty demanding career. So instead of the average 40hr week, you are doing 50 - 60 hours a week. You get home at 9pm and you are now returning calls to your tenants from messages they have been leaving throughout the day. This now becomes your daily job along with your demanding career. Alot of these newbie investors want to own real estate without going through the daily tasks of tenant management. So if 30% of your profits are spent on property management, it might still be worth it. Please remember that a lot of first time investors are working professionals in careers outside of real estate. So they may not even have sufficient contacts to get problems solved in an expedient manner. They are not full time landlords.
Does anyone have anything else to add besides property management advice? Looking for general tips for new investors.
Here is an example of one of my rentals …
Tenant moved in mid-July 2005 on a 6-month lease. Once the term was up, the lease moved month-to-month. The reason being is because they were in the process of looking for a place to build their own house, but knew it would take a while to find land and then build.
It is now mid/late-August of 2006. During those 13 months, I have gotten probably a total of about 12 calls from them. Most of their calls have been regarding mail they received addressed to me (mostly all junk, but early on my insurance company was sending their stuff to that address instead of my personal address). A couple of the calls were regarding the HOA and infractions they committed (leaving their garbage can out a day past the permitted time, leaving their basketball goal in the driveway). I have yet to get any calls “in the middle of the night” from a busted pipe or broken water heater or whatever.
In the meantime, the tenants have not only paid me every month on time, but ALWAYS a few days to a week before it is due.
Maybe I’ve been lucky???
Luck is not the word. Think about it. You have ideal tenants. They are looking to build a new home from the ground up. That means they have finances, rent is not an issue. They probably rented your home because it suits the living style they are use to. Meaning your place is low maintenance and somewhat issue free. There are a million stories, I was just looking for tips from seasoned investors to help new investors.
I am not a seasoned investor by any means, but I do see your point as well as Mike’s. The problem with new investors is that they do not factor in every cost, whether they are renting or selling. You should factor in property management fees, even if you are doing the managemnt yourself, I don’t know about you but I don’t work for free If the numbers do not work out, then pass. As far as working 60 hrs a week, there are still 108 hrs left in the week. Get ready to work every spare minute after work and weekends. If a person is not willing to make sacrifices then they should not invest in real estate. No one said that REI was easy, that is why so many people fail at it. I would love for someone to manage all of my properties, but the truth of the matter is, that until I build up my business and learn how everything works, I will probably manage them myself.
Ok, so lets say that you are a newbie investor with a pretty demanding career. So instead of the average 40hr week, you are doing 50 - 60 hours a week. You get home at 9pm and you are now returning calls to your tenants from messages they have been leaving throughout the day. This now becomes your daily job along with your demanding career.
I never get calls from my tenants. They are not model tenants it is how I treat them. First I get money during the purchase from the bank to purchase and rehab the houses. Part of the rehab is to make every thing as good as new. The appliances are always new. Everyone has a clause in their leases (at least they should) that says how much repair the landlord will do. I have seen people put $50 in that space. I put $350 in mine. Any repair over $350 I will do. Amounts below $350 the tenant will do. Repairs that large usually involve systems or appliances. Since the appliances are new, they are under warranty and I just call GE. If it is a system (plumbing, A/C, roofing etc) I want to fix it anyway. That way if they put too much toilet paper in the toilet and want me to come over and plunge it, I tell them where they can go and buy a cheap plunger. But the rehab is the key. Stuff just doesn’t break because it is new. The repairs that need to be made are abuse and they pay for that at any cost.
I own only a handful of long term properties so I am no property management expert but I found it best to start my own project management company. It’s a very small company with 8 employees. This way by overseeing my property management company (which takes about 2 hours a week), essentially I am managing all of my properties. Also much more cost effective.
Thanks everyone, especially Bluemoon06 on that $350 and under tip. That is excellent, just what I am looking for. I think that $350 is a little high, but I get the general idea. Good stuff
Tip of the day …NEVER PAY TAXES ON ANY OF YOUR REALESTATE DEALS …EVEN CAPITAL GAINS !!! How you ask? I will share it with you. Second tip
…TRUST NO ONE TO SEE THAT YOU GET PAID.
I would like this last tip explained a bit more if you could. I know it might be one of
those"wink wink" comments, but i thought I would make a stab at it. Please elaborate…
Set up a Roth Ira and 1031 exchange your pants off;D Yes it takes a little while to get the money in there to be able to do it but its a goal every investor should strive for as part of their deversification.
My tip which has been said time and time again is when you are starting out, manage your properties yourself. It is the only way to learn. If you don’t it will be much harder down the road.
Themover, I understand where you are coming from. I too have a day job in corporate america. I often put in 50+ hours not including travel time. During the day I sell annuities but my real estate investing career starts around 7:00pm every night after work and through out the weekend. I would say take the above advice and manage the properties yourself at first. You will save management expenses and learn a ton along the way. That learning will save you much more money down the road.
HOW DOES SETTING UP AN IRA AND 1031 EXCHANGING SAVE A PERSON FROM NEVER PAYING TAXES? WHAT DOES ONE HAVE TO DO WITH THE OTHER?
I will take a shot at this one. someone correct me if I am wrong. 1031 exchanges will provide a tax shelter on equity cap gains since the owner is not taking constructive receipt of the gains but rather “re-investing” them. If the properties are an investment vehicle under a Roth IRA then like Cambellgroup said…1031 all the way until its time to take the Roth distributions. As long as you are over 59 1/2 years old and the Roth is 5 years old or more then ALL earnings are tax free upon distribution.
How about setting up a Roth IRA containing an LLC w/ the properties under the LLC. Would someone care to elaborate on this one and turn it into a TIP??
50-60 hrs a week sounds like vacation… ;D I work 6 days a week, leave home at 8am and get back at 11:15pm. Travel time and work combined I am up around 80-85 hrs a week. Hoping to cut time on the clock some when I get myself into REI and spend more of that time working for myself not someone else. Nothing grates me more than lining my boss’s pockets.
The Roth IRA and the 1031 Exchange are mutually exclusive.
If you own an investment property inside of your Roth IRA the profits are all tax free at retirement and the transactions within the Roth IRA are not taxed. There is no need to complete a 1031 exchange.
If you own property outside of a retirement account, then any time you sell a property you will be subject to depreciation recapture and capital gain income taxes, and a 1031 exchange may be appropriate.
I was not really clear on exactly what CampbellGroup was getting at.