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There seem to be two major hurdles for the would-be real estate investor who can’t quite get started. One is a lack of education — there are a lot of new terms and a bunch of mistakes to avoid. The second is a strange obsession with clogged toilets in the wee hours of the morning.
I can’t help you with number 2 (see what I did there?) but number one is easy. Dr. Peter Kim, the author of today’s post, has a site chock full of education and this is just one of dozens of posts designed to make you a better real estate investor.
I can also recommend a free course from my pal Coach Carson. How to Get Started with Real Estate Investing.
This post was originally published on Passive Income MD.
6 Rules for Owning Rental Properties Without The Headaches
There’s a lot to know about real estate investing, from finding the right market to taxes. It seems like there’s always a new subject to dive into. No matter whether you’re brand new to real estate or you’ve been in the game for years, there’s no denying that at times it can all feel a little overwhelming.
Most of us are still working clinically, and for those working full-time, it can definitely feel like you don’t have enough bandwidth to learn it all. It also might feel like there are so many other obstacles we face when learning how to invest.
However, I’ve found these obstacles are often larger in our minds than in reality. Having spent a ton of time in the real estate investing community, I’ve gotten to know so many different busy physicians that have taken action and become quite successful at it.
I find the ones who have difficulty getting caught up in the minutiae of investing. In that case, I believe it can actually be helpful to step back and focus on the simple things.
Success leaves clues, so here are six simple rules that I’ve found successful real estate investors follow.
Perform Thorough Due Diligence
Obviously, doing the proper due diligence is the most important part of the investing process–nobody wants to get stuck with a bad investment.
I know I use the words “passive income” and “real estate” in the same sentence quite often, but I don’t want anyone to get the wrong idea. It doesn’t take ZERO work. It takes some work up front, and then you can continue to reap ongoing rewards.
So this is where you have to roll up your sleeves and get to work. If you find a certain deal, whether it’s a single-family home or an apartment complex, you’ll need to research the market, the sponsor, and understand the most important metric: cash flow.
You might’ve heard the often-used phrase, “You make money when you buy.” I think it’s mostly true. Strategy, while you hold the property, is important. But making sure you absolutely make a smart decision BEFORE you invest will set you up for success.
By tallying up all the potential expenses, like repairs, maintenance, property management, and insurance, you can subtract those expenses from the potential rental income. This gives you a good idea of how much income the property will generate.
All of this might seem basic, and it is, but the key is always to keep that “cash flow” mindset. When you’re scoping out a certain property, always think about how it can contribute to your passive income goals.
For a bit more in-depth information on calculating cash flow, be sure to check out this post.
Diversify in Different Markets
When it comes to stocks, we all know how important it is to diversify. If there’s one thing you never want to do, it’s to put all your eggs in one basket.
The same is true of real estate investing. While purchasing a rental property or two in your own market isn’t a bad idea, once you start looking to add some additional properties, it’s best to seek other markets.
Ideally, you’d diversify in different states. That way, if one state’s market takes a hit, the others can take up the slack. This is probably the best way to mitigate risk across the board.
Of course, buying a property out of state can be intimidating. It’s a lot easier to purchase when you’re within driving distance, after all. But thanks to modern technology and services like turnkey investing, it’s a lot easier than you might think.
In fact, I made my first out-of-state investment from my call room, which you can read about here. And be sure to check out how you can invest in another state’s turnkey properties here.
Get Good Property Management
“I would invest in real estate, but I don’t want to unclog a tenant’s toilet at 3 am.”
This is an objection I hear quite often, and I completely understand. For some people, this is what life as a rental property owner looks like.
But when you’re investing in real estate as a means to achieve passive income and, ultimately, passive income, there’s one great way around those late-night maintenance calls: hire a good property manager.
Sure, paying a property manager cuts into your profits, but in my opinion, it’s more than worth it. I treat them like an investment. Thanks to my property managers, all I have to do is respond to the occasional email and watch the rent checks come in.
Remember, your time is worth way more than what you’d pay someone to manage your investment.
How do you choose a good property manager? I’m glad you asked. I wrote a whole post on it, which you can find right here!
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Think Long-Term
Somewhere in between starting the journey to financial freedom and reaching the end, there’s a stretch of time (sometimes more than one) where you’re hustling to make things happen. In the middle of that, it’s easy to lose sight of your ultimate goal.
The key to keeping up your motivation is to always keep your ideal life first and foremost in your life. Every goal that you set, whether short-term or long-term, should be seen as a stepping stone to the life you want for yourself.
This makes it easy to keep working toward those goals and helps you weed out distractions. If there’s something in your life taking up extra time, ask yourself, “how will this help me reach my goals?” If it doesn’t, it’s much easier to cut it out.
Of course, there is a balance to be had there, but ultimately, the best way to be successful in the short-term is to always think about the long-term.
Embrace Lifelong Learning
I’ve said this many times before, but I can’t stress enough how important it is to seek knowledge continually. We all know that knowledge is power–the power to achieve your goals, to make things happen, and to ignore your inner doubts.
But as far as I’m concerned, constant learning has the most direct impact on your success of anything we’ve talked about so far.
Listen to podcasts, read books, attend conferences (online or in-person), talk to like-minded people–whatever method you prefer, keep your mind always engaged with the topics that will help you achieve your goals. Even if you already know the ins and outs of a subject, there’s always something new!
Accept That You Can’t Control Everything
We’ve discussed some excellent steps you can take to be successful in real estate investing ultimately. But when it comes right down to it, between researching, learning, hiring–you can only do so much. At a certain point, what will happen will happen.
Take some stress off of yourself. Realize that there are always going to be things out of your control–and that’s okay. Instead, protect your peace of mind by focusing on the things you can control. Don’t carry the weight of the world all by yourself!
Life is all about course-correcting and being resourceful enough to get back on track.
The journey to financial freedom will have its ups and downs, and there will be external factors that you can’t account for. Accept it, learn from it, and move on. I can’t tell you how much easier it is.
Conclusion
Real estate investing isn’t always the easiest thing. It takes some up-front work, especially to set up the systems that will eventually automate just about everything.
But by breaking your investments down into a few small steps and focusing on some core ideas, it becomes much easier to stay on track. If you’re already investing: keep up the great work! And if you haven’t started yet: what are you waiting for? Don’t wait– make it happen!
What steps have you taken to avoid rental-induced sleepless nights? Leave a comment below!
7 thoughts on “6 Rules for Owning Rental Properties Without The Headaches”
I write in the lease that tenants are responsible for toilet clogs and plugged drains.
I furnish a clear working drain when they move in and it is their duty to keep it that way. Why should I be responsible for someone’s toddler who tries flushing toys down the toilet?
Excellent point and smart rule.
It was great article, but I will like to see in Spanish? Too
Use Google Translate and you can read the article in Spanish or dozens of other languages.
Cheers!
-PoF
A contrary thought is to only buy in an area you know, close to where you live. This strategy makes it easier to oversee properties. Even with a manager, you want to see that your properties are being maintained. You want to see that yards are kept up, for example. No owner wants citations or fines. Put simply, you want to make sure the manager is really managing, because if and when you decide to cash out, you want capital gains, not losses. A perfect idea for physicians is to buy rental properties near a growing medical center or teaching hospital. Interns, residents, visiting professors, etc., are credit worthy, and drug tested as part of their employment, thereby avoiding two classes of problem tenants.
Good property management is the hardest part of the whole puzzle in my view. Yes, it’s great advice to get it, but it’s harder to get than it looks. And when your return depends at least as much on that as the price you pay for the property, it shouldn’t be an afterthought. In fact, you’re probably better off finding a manager first!
The issue that I have seen with hiring a property manager is that it eats into your profits quite a bit. At least in my area the cap rates and cash on cash returns are not quite high enough that hiring a property manager makes a lot of sense on paper.
I considered running a vacation rental but decided against it due to the fact that it would not be passive even though the cash flow would have been solid.
So anyways I’m still sitting on the real estate sidelines for now but eventually will hop in if/when the market cools down.