Real estate is a compelling option for investors. There are opportunities to profit on both the front end and back end of a deal, tax strategies to help maximize gains, and a steady revenue stream in the form of rents, dividends, or distributions while you own a property. Unlike other investments, real estate is a tangible asset that, ideally, appreciates over time.
It's easy to see why many investors are eager to enter the market. Especially for first-time real estate owners, however, a steep learning curve and unexpected expenses can quickly throw a property into the red. I'd like to think I've seen it all in the nearly 15 years I've been involved in real estate investment full time, but I'm not that naive. There are potential pitfalls at every step. Here are four critical considerations where investors should exercise caution.
1. Choose the right location.
Real estate can be risky, especially if you don't understand the market. You likely have a solid understanding of your home market and which neighborhoods present better opportunities than others, but every city in every state has its own nuances. If you're not familiar with the market or aren't working with someone who is, you could get burned. Doing your research and concentrating your search in areas where you have local knowledge, or working with a broker or partner who does, is well worth the investment.
2. Find a property at the right price.
Whether you're looking for a single-family home, small apartment building, or large multifamily community, every level is hyper-competitive. It's tempting to chase after a desirable property, even offering a higher price than you'd planned. But you risk compromising your investment from the start. It's better to remain disciplined and know the numbers you need to make a deal work. Cultivating relationships with local sellers and brokers is also helpful. It can be tough to break in, but brokers are more likely to give first dibs to their network of seasoned buyers before a property hits the market, and may offer additional information that's helpful in securing a deal.
3. Know when to call on qualified help.
It's tempting to try to do everything on your own, including doing light repair work, property maintenance, and showing units. After all, every expense diminishes the bottom line. But you may be surprised by the amount of work it takes to manage a piece of property, especially if renovations are required. It's easy to get in over your head with regard to time, effort, and expense. I've learned over time that an upfront investment in the right attorney, the right contractors, and the right property manager saves a ton of money in the long run.
4. Respond to challenges effectively.
Residents deserve a clean, well-maintained place to live, and in return, you hope that they treat it with respect and communicate any problems in a timely manner. Issues do arise, however, and occasionally a resident may cause damage to a unit and not report it, are habitually late with rent, or even refuse to pay rent at all. Owners should also keep up with routine maintenance and respond to maintenance requests in a timely manner. Hiring a reputable and seasoned property manager can help alleviate many of these concerns before a situation becomes critical. It's also important to clearly delineate which responsibilities fall on the owner and which ones fall on residents, and then spell out those expectations in a strong lease.