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The Do's and Don'ts of Real Estate Investing

Drew Derisi May 28, 2015

1. Do get your finances in order.


It is important to take stock of your personal finances before making an investment in real estate. Have a clear picture of your current income, expenses and outstanding liabilities. If you don’t already, track your spending – there might be places to save that would free up cash for investment purposes.


2. Don´t forget to write down your real estate goals.


Clarify what you wish to achieve from a real estate investment (property type, cash flow, rate of return, return over time, tax strategy, capital appreciation, etc.) You should have a clear idea of your budget, how long you want your money tied up for and what type of risk you are most comfortable with.


3. Do spend time on due diligence.


Use common sense and spend the time reviewing the investment due diligence material. If you apply common sense when researching a deal, then it is unlikely that you will make an expensive mistake. Most of the time, when people lose money on real estate investment, it is because they haven’t done their homework.


4. Don´t rely solely on the information you find on the Internet.


There is no substitute for the facts. Roll up your sleeves and get your hands dirty. Align yourself with market experts and trusted advisors to obtain the correct information and ask their expert opinion when analyzing a deal. It never hurts to hear multiple opinions from professionals. In most cases their experience and knowledge will provide you with invaluable insight, this will save loads of cash in the end.


5. Don’t rush into a deal.


If you find a property that looks like an amazing investment, take your time and and figure out what you may or may not be seeing. More often than not, other investors will have seen the property before you and will have already passed on it for various reasons. The best deals are usually the deals that may have some “hair”, not the perfect shiny ones. Although never underestimate a boring reliable deal.


6. Do research and learn the neighborhoods you wish to invest in.


Use available data on the Internet to research local demographics and household incomes. Also, research crime data and housing and business information. Most importantly, use either a broker or an online service to check local rental and sales comparisons.


7. Don´t buy if you feel something is wrong with the deal.


There are many opportunities out there. If you feel this one is not the right deal for you, then pass on it. There is always another one right around the corner. You need to start developing a “gut instinct” for the properties and locations. This comes by looking at multiple deals in the neighborhoods you are comfortable with.


8. Do understand that the bottom line is all that matters.


Just because a property may be generating a significant amount of cash flow it doesn´t necessarily mean it´s a great deal. You need to know and keep track of every expense associated with it. This includes insurance, property tax, property management, repairs and maintenance, utilities, fuel, water and sewer expenses, vacancies and income tax.


9. Don´t underestimate the value of a great location and a stable tenant base.


When buying for investment, the future upside of a neighborhood is one of the most important factors. Understand what makes people want to live there? Good schools, new restaurants, proximity to highways are all contributing factors. These factors will attract a renter and a future buyer when it's re-sale time.

Renting to professionals and establish businesses is the best way to ensure a continuous and hassle free income. People and businesses outside of these categories tend to be less reliable and take less care of property over time, adding to your maintenance expenses.


10. Do make sure the numbers work.


For an investment property, you should be more focused on the balance sheet versus how pretty the kitchen cabinetry is. So, run the numbers carefully and always assume a worst-case scenario, such as a period of vacancy and deferred maintenance issues (stress test the numbers).


11. Don’t assume the numbers are correct.


Don't purchase unless you have verified the trailing 12-months of income and expenses, tenant history, leases, tax returns and any other pertinent information for the property.


12. Do stay on top of things.


Many landlords switch off after they’ve bought and/or rented a property only to find huge problems building up while a sleep at the wheel. Do not let this happen to you! Keep a close eye on money coming in and out of your investment at all times and make sure you continue to have an open dialog with your tenants, property managers, maintenance staff and sales and lease brokers. Make sure to file your tax returns every year (or get a good CPA to do it).


13. Don´t be afraid to pull the trigger once a deal stacks up.


It is not uncommon to suffer from “analysis paralysis” – having so much information that you don’t know what to do. You can get through it by making sure you’ve covered all the most important angles and checking all the numbers and underwriting at least twice.

Once you have spent time figuring out what your investment criteria is and have researched all the opportunities that match your criteria, my advice is to pull the trigger and don’t look back!

Good luck and happy investing.