Most “guru’s” are currently spouting about how good real estate investments can be. This article won’t seek to reinforce their sales pitch, nor will it argue with it. Real Estate can be a great investment, but if you not careful it can also be a financial disaster.

IMPORTANT LESSONS

1) Good Insurance:
Number one is not an option – its a necessity. Ensure your asset is fully insure both normal house insurance and extras like tenant damage and loss of rental income. Given a disastrous tenant this can lessen the pain. Be WARN! Don’t under insure your house, if it burns down, particularly if there is any suspicion of arson the insurance company will do their own independent investigation and here is the real kicker ” THEY WILL CHARGE YOU FOR THE PRIVILEGE ” that’s right, read the fine print, the insurance company before paying you out will minus their costs – i.e. $100,000 policy – $20,000 investigation means only $80,000 to you. Read the fine print, the insurance despite their ads is not your friend if a million dollar house and therefore a million dollars on the line, don’t expect the insurance company to be happy to pay out, if they can find a way to slime out of the policy they probably will. An insurance policy is a contact make sure you read it. Make sure you chose an insurance policy not just on price but also on good reputation and on company strength..

2) A bargain isn’t always a bargain:
When purchasing a house remember to be very careful. Don’t buy on emotion. Never buy without visiting it several times on different days and times. I know of a nice suburb that has nice houses with big yards, but the smell of the local slaughter house is enough to make you want to vomit.. Remember you only become aware of such things by visiting the house personally. Go at least one time without the real estate agent, speak to the neighbors and ask if they like living there. When buying a fix it upper check how easy it is to fix up. Does it contain asbestos, lead paint or like harmful products that are going to cost you a fortune to remove? Would you like to live there? If you don’t then don’t expect others to. Remember whilst more expensive houses may cost more they tend to attract better class of tenants and less maintenance costs as well as higher rental returns. Remember there are always more houses out there it the buyer is stuck on a price thats no good for you, don’t be afraid to walk away. Never buy a house on emotion!

3) Do it yourself:
Unless you have a huge portfolio of real estate under your control try to do it yourself and you will save a lot more. If you engage a real estate agent to rent your house they will charge between 10%-15% of the rental income, in return you get very little. They will rent out the house, may inspect once or twice a year (some agents will charge extra for this privilege) and you don’t have the choice of the tenants. Do it yourself and save the money.. Pay a small fee to join online real estate black list – (this is a list that blacklists bad tenants) and you are in the same position as them. A real estate first goal is not to please you but to ensure they get their cut – this may mean they make decisions that are not in your best interest, but in theirs (e.g. they may get kick backs from their tradesman and other relationships – in my case they repaired a hot water cylinder without my permission – the cylinder was less than a year old and still under warranty – thus I could of got it repaired for free, was I angry – you bet). Don’t forget with agents its your house, if they are not keeping you satisfied, change agents. In regards to maintenance tradesman are hugely expensive, whatever you can do yourself, do. For example, changing a tap washer is an easy thing to do, some plumbers charge $100 just to pay a visit..

4) There is more than Rent:
Remember to factor in the rise in real estate prices. You may be able to buy a cheap house in a country town, but if that town has shown no growth and is unlikely to grow then you will not be able to resell the house at the later stage for a much increased price. What creates regularly increasing house prices is even increasing demand. Be careful buying in places like a mining town or a town with one industry, mine resources are limited and one industry towns can turn into ghost towns overnight if the main factory closes. Play it safe buy in towns and cities where growth has been and will continue to be good. Therefore don’t just consider the rate of return on investment in terms of rent, but also factor in capital growth. If there is likely to be little or no capital growth the rental returns need to be higher – if they aren’t, forget it and keep looking. When a place is vacant charging too high a rent will ensure it takes weeks to fine a new tenant – every week it is unrented is costing you between $5-$10 a week in rent – (e.g. which is better renting a house for a year at $400 a week or $380 a week – if the fails to rent for four weeks at $400 even if you finally rent it at $400 you have lost out ($20 extra rent X 48 weeks – ($960) (4x$380= 1520)- if you’d rented it straight away at $380 a week – you would have been $560 better off for the year)

5) Good tenants are worth keeping:
If you have good tenants who are looking after the house, you don’t always have to keeping raising the rent every year with the general market increase – reward good tenants and increase your likelihood of retaining them by giving them a discount on the market rate. If the tenant puts in a garden and trees and other landscaping, the capital value they are adding to your property may mean you should not hit them with the highest possible rent. tenants who damage a house or fail to pay rent can cost a fortune. It normally takes 6 weeks or more to evict a non-paying tenant, that can mean a big loss, doubly so if you are paying the mortgage.

CTTO Article Source: www.biggerpockets.com