It’s easy to understand how you can make money when you buy real estate. You find undervalued properties, motivated sellers, sweat equity or tenants from hell.
The real money, as well as the potential to lose it all, comes from what you do in the years after you buy. You can find 300%+ returns if you manage it right, or end up putting money in every month and selling for less than you bought it.
What you can get from a well managed hold is more than just good cash-flow. It’s a good looking property that’ll be on the leading edge of a market increase, first to benefit from an area in transition, will bring you more properties to buy and help attract new potential investors.
Like a VW Bungalow
I bought a 4-year old VW Golf TDI because it’s still better made, nicer looking and more reliable than the new North American cars (and VW is less likely to go bankrupt). When you buy a revenue property, you want the C-class building in a B-class neighborhood. Then you want to carefully bring it up to be one of the best B-class buildings around. You don’t want to make it shiny beyond reason (unless you have a very specific exit strategy), but you do want it to stand out in a good way.
I also invest in older townhouses. They’re simple, reliable, easy to fix and easy to fill up with tenants. They also have more exit possibilities than other types of investment real estate. There’s always a buyer: first time homeowners when prices are high (because they’re affordable) and investors when prices are low because they make sense. They’re easy to rent because they’re a natural step up from a walk-up apartment building; great for professional couples or new families. They’re never going to shine like a well renovated detached house, but they’ll be a reliable old Volkswagen.
Pay Now or Pay More Later
Every investor draws up a little budget before they buy a property. So much for mortgage payments, condo fees, utilities, property management, vacancy allowance, insurance and repairs.
Why do 80% investors fail to use their repair budget proactively? It’s good to know you have money to replace the hot water tank. But I’ve seen lots of investors go through a 5 year streak with no serious costs, and one day they discover that things are shabby looking and falling apart. Suddenly everything needs repair, renovation or replacement.
At least once a year, or hopefully once a quarter, you should do a quick walk-through and fix something little. This means painting before things peel, replacing fixtures before they completely stop working and spending money. However you’ll be shocked at how a new light fixture and painting a door every few months will silence the complaints over a $200 rent increase.
It’s also about managing cash-flow effectively. It might look good on a statement for the first two years if there aren’t any major expenses, but there’s likely to be twice as many repairs in the third and fourth years. That’s not good management. Putting a little effort in now will save a lot of headaches later.
How Much Does $18,000 Weigh?
Just over 300 pounds. That’s what two adult tenants weigh, and $18,000 is what they’ll pay in rent at $1,500 per month. Particularly if you’re a new investor, get to know your tenants. It’ll help you in the future as you develop a profile of what your preferred tenant is like. There’s a good reason well run multi-family apartment buildings have a live-in caretaker who helps lease suites. It’s because they get really good at telling which people will fit in and be good tenants.
I have a two week break between jobs and I’m spending it doing some consulting for a property management firm, helping to train resident managers. It’s such a great way to help improve a business and I know it’ll have a real impact on owners.
Managing well will bring much higher returns than buying $20,000 under market. Failing to manage well could cost you the $20k and a whole lot more. Take the time to be a good landlord, improve your property and find good tenants.