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Common Pitfalls of Real Estate Investing Winston Rowe & Associates
Becoming successful in real estate investing takes time, patience, dedication and the right plan, Winston Rowe & Associates
By: Winston Rowe & Associates
Too many people get frustrated very easily and give up, and this is not only the case with real estate.
Study and learn as much as you can about the process, the industry and the areas in which you're interested in investing.
Here are six concepts you're encouraged to consider when investing in rental properties:
1. Have a master rental property analysis spreadsheet.
Create an Excel spreadsheet to analyze any and all possible deals.
You're not going to buy the first rental property you see this year. Start with the Fair Market Value (FMV), money down, improvements and mortgage/carrying cost, then move it through rental income, expenses and wrap it up with a cash-on-cash ROI figure.
2. Remember, you're buying cash flow.
Too many investors get emotional about their purchase and even envision themselves living in the rental property they're analyzing.
This is a terrible mistake. In these situations, the investor often over-improves the property, investing far too much time or capital and blowing their ROI out of the water.
Don't think your rental property needs granite countertops;
3. Do your research.
To begin the analysis of income and expenses is to focus in the following areas.
Gross Scheduled Income is the total annual rent value of all units in the property. This amount includes the actual rent generated by occupied units, as well as the potential rent from vacant units.
Vacancy Allowance is usually expressed as a percentage of the gross scheduled income. As its name suggests, it is an estimate of the amount of potential income that will be lost due to vacancy. Some investors prefer to call this "vacancy and credit loss" so that it also accounts for uncollectible rent.
Gross Operating Income (GOI) is the gross scheduled income less the vacancy allowance. It is also known as effective gross income. In short, it is the amount you actually collect.
Operating Expenses are items such as property insurance and taxes, repairs, utilities, and management fees. Operating expenses include any costs that are necessary to keep the revenue stream flowing. Mortgage payments and depreciation are not considered operating expenses, or are capital improvements.
Net Operating Income (NOI) is the gross operating income less the operating expenses. In other words, it is what is left of your total potential income after all vacancy and expense have been subtracted.
Make the numbers prove it to you. Don't assume you're going to buy it unless you find something wrong with it.
4. Buy local if you can.
The words "if you can" are the key. Don't get hyperfocused on buying local so you can check on the property. It's far more important to buy quality rental properties (good bones, reputable location, ease of upkeep, etc.) rather than local. But, if you're living in an area where there's a strong rental market with legitimate returns on investment (that aren't dependent on putting down a fortune), consider yourself lucky.
5. Learn to manage your property manager.
If you don't have the temperament to be tough and start eviction proceedings three days after a tenant is late, have a personal intervention with yourself.
You may not be cut out to be a property manager even if the property is local. You may not have the time, skills or system to be your own property manager.
Be a realist. Your time could be better spent looking for other rentals, doing the books or running your business.
6. Investing strategy.
Whether you aim to do a quick flip or you'd prefer to generate passive income over time, here are the details and resources needed to execute on each strategy.
Although buying and holding is the most common and traditional strategy used for real estate investing, there is actually a variety of different strategies used.
The Fix and Flip the first impression of a house is incredibly important. The flip involves buying a house that can be easily improved, and then making minimal cosmetic improvements and repairs to sell for a better price.
Buy and Hold this is one of the oldest strategies in the book, and it's designed for long-term passive income.
By purchasing a property and leasing it to tenants, it creates a stream of monthly cash flows, and even offers potential tax benefits for the owner.
Wholesale this has similarities to flipping, but involves finding a buyer for a seller and taking a percentage off the sale. If done right, this can be done quickly and with minimal risk.
Buy, Renovate, Rent, Refinance, and Repeat likely the most complex strategy in real estate investing for beginners to follow, this can ultimately be used to provide benefits in both the short and long term.
This article was prepared by Winston Rowe & Associates.
You can contact them at 248-246-2243 or visit them online at http://www.winstonrowe.com