“You, the investor, pays for the mortgage, insurance, and property taxes. The tenant renting from you pays rent and utilities.”
Even then I knew there was more to the real estate investing basics than that.
Let’s cover some of it together. Good? Let’s get at it…
When starting out you want to pick an investment type that works for you and move you towards your real estate investing goals.
For example, single family home rental properties will work best in blue collar neighborhoods. By “work best” I mean that you’ll get more people calling you for this type of property than if you do a single family home rental property in a higher end area.
And the investor who gets the most calls wins. Almost everything is a marketing and numbers game.
This is one of the key real estate investing basics that I found out well after I started buying the properties. It’s worth repeating, the investor who gets the most calls wins.
Of course, you can still rent out properties in upper-class neighborhoods. I know people who successfully do it. Just understand that you’re appealing to a specific segment of the population so the number of people that call your ads will be less.
So as long as you’re prepared to carry the property yourself longer than you would a smaller starter home you’ll be fine.
The real estate investing basics around the returns you can expect to generate from your investment are as follows: regular single family home investment properties purchased in the right area can produce cash flow, equity build-up (from the tenant paying down your mortgage), tax benefits and appreciation.
ASIDE: Not many people discuss the real estate investing basics regarding appreciation so here it is. Appreciation can never be guaranteed. It is often discussed like appreciation is a sure thing. It’s not. You can pick the most perfect area in the world but if a large “event” happens appreciation may take much longer than anticipated. It may even go in reverse for a while. An event could be large and continuous interest rate hikes of the sort in the early 1990s, massive layoffs by a nearby employer, an oil crisis, national economic slowdown, etc.. You need to keep a long-term perspective (5-10 years) when residential real estate investing and anticipate going through at least one major down cycle. If you know how your property will perform during the bad times or at least plan for it, you’ll be in good shape.
Depending on who you speak with you’ll get different opinions on cash flow and other real estate investing basics. Some real estate investing pros will tell you that positive cash flow properties are the only way to invest.
Others will tell you that appreciation will make you more money than a few hundred dollars in monthly cash flow. So if the property is a negative cash flow property it’s well worth it because you’ll make thousands in appreciation.
There’s a place for both but I would lean to positive cash flow properties if I had the choice.
The last thing I want when investing in single family homes is a negative cash flow property that then goes on to lose value.
I’m then left with a property that I have to dump money into every month and may be worth less than the mortgage I have on it. Ouch. I’ve had family members go through situations like this before, not fun.
Here’s another one of the real estate investing basics. Each area, each property, and each strategy has so many variables that you really want to sit down with someone and go over your strategy and investment types in detail.
It’s almost impossible to give a blanket answer to cash flow questions without diving into the details.
Anyone that does probably doesn’t have much experience or is trying to win an argument for argument’s sake.
And there are ways to market homes to increase monthly cash flows and lock in higher than average appreciation.
That’s the beauty of residential real estate investing. You are an active investor that can directly control your returns. And your options are almost limitless.
And during your real estate investing career, you may purchase for different reasons at different times.
For example, would I buy a negative cash flow property knowing that a new subway line is being built that will bring thousands of people to my doorstep and will massively affect the property’s value? Yes.
Would I buy a positive cash flow property in a not so nice area that appreciates slowly and there is no obvious pride of ownership? No.
These are my personal decisions and some of the real estate investing basics that fit my temperament and goals.
The best advice I can give you when picking a strategy and type of investment and implementing it is to find a coach or mentor that can teach you a system for investing in a particular area.
Getting current rental demand, rental prices, trends, infrastructure developments etc. is always easiest from someone actively investing (successfully) in the area.
“Rental Properties With A Twist”
Here’s a little twist on some of the real estate investing basics.
You’re probably pretty familiar with the idea of leasing a car and then having the ability to buy that car at the end of the lease.
You can do the same thing with rental properties.
You can lease the house to someone and offer them the option to purchase it from you at the end of the lease.
This does some wonderful things.
The tenants get to move into a home that can ultimately become their own if they so choose.
They get the pride of home ownership.
You will be able to ask for and get higher than typical rent from residential real estate investing like this. The property will, more often than not, be taken care of very well if the tenants are planning to own it.
Because of all this, you will have fewer management headaches with the property. Fewer phone calls about small issues (because they will take care of that leaky faucet themselves) and more peace of mind.
When done properly this can work well for everyone involved.
This works best in areas where people are looking to settle down. Family oriented communities close to areas where people are renting are perfect. Your typical starter home is a property that you are looking for.
Every community has these areas. If you don’t live in one an area like this is likely within a 45-minute drive from you.
A question I often get is why we don’t see more of this type of residential real estate investing in Canada.
I can tell you from personal, first-hand experience that these are happening all the time. There’s just no national advertising campaign for it.
And there’s just no large builder that is doing it regularly so you don’t see them advertised in the home sections of the local papers.
Most realtors haven’t been exposed to any real estate investing basics so they don’t offer them as solutions.
And there’s no “dealership” network for them so it’s left to the individual investor.
Henry Ford came up with the concept of car dealerships and this idea of his was responsible for getting automobiles into the hands of the masses.
These same dealerships are the ones that today offer cars on leases.
There’s no such network setup to offer homes to people on these type of lease programs.
Basically, single family homes are too small for the big guys to get involved in.
Which is great news for your residential real estate investing career!
Word of caution…I’ve seen a lot of people try and do these the wrong way, use the wrong agreements, and charge the wrong amounts.
When using this strategy make sure you are dealing with a real estate mentor and lawyer who has some experience with it.
And there you have it, the real estate investing basics on single family properties.