Real Estate: The Basics – Part 1

By Mr. FrugalEnginerds

Real estate isn’t for everyone!

The information below is boring unless you are interested in Real Estate!

There are a few ways to invest in real estate, residential, commercial, land, etc…Since we have experience with “buy and hold” single-family residential real estate, we will be focusing on that. Buy, clean, repair, upgrade, rent it out, collect money. It’s that easy!

Actually, it’s more work than that. We are not professional just a little Mom-and-Pop dynamic duo. Sorry…just watched Superman vs. Batman.

3d House (XXL)

Buy and Hold: Rules of thumb that we follow

  1. Your first investment property is your most important one. Do not rush into it!
  2. Look for deals. We might review 50-100 houses before we decide to buy THE ONE.
  3. For every $100,000 in purchase price aim to charge $1,000/month in gross rent. Adjustment is required due to property tax and home owner insurance.
  4. Expect to set aside 10% of the purchase price in cash to get the property “ready to rent”. Make necessary repair and renovation to attract quality renters.
  5. Account for a vacancy cost of 7% of gross rent.
  6. Account for maintenance cost 5% of gross rent.
  7. Property Management cost is 8%-10% of gross rent. Add the property management cost even if you will self-managed.
  8. At the very least, always Cash Flow positive. Add all your costs together make sure it’s less than your rental income.
  9. Never buy a small house or a huge house, below is 1200 sq ft is too small and above 2,500 sqft is huge to us.
  10. We love 3 beds/2 baths properties. These properties are ideal for small families and will be more marketable should you need to sell
  11. Always buy in blue-collar/working class neighborhoods with average to decent school districts.
  12. Avoid buying the best looking house on the block.
  13. Pay a little more for brick or stucco houses vs. houses with sliding. Brick and stucco houses cost less to maintain.
  14. Look for easy access to freeways and easy access to public transportation.
  15. Do not over improve/renovate your property.
  16. Do not add too much of your personal style to your rental property, keep everything at neutrality.
  17. Look for a reliable contractor/handy-man in the event of needing renovation/repair. Ask your real estate agents, friends, family for recommendations.
  18. Shop on Craigslist or at discount stores for used appliances, materials, etc…
  19. Always pay a third party to run credit and background checks to screen applicants.
  20. The applicant’s gross income needs to be at least 3x the rent amount.We never allow pets for our rental properties. Although we love pets, they are not ideal for our rental properties.
  21. Negotiate everything
  22. Ask yourself if you want to live at  your rental property. If the answer is “yes”, then renters will live there too.
  23. Networking. Get to know different real estate agents, contractors, property manangers, real estate investors, etc…
  24. Cash is king! The majority of the time you will get a better deal.

Cash Flow = Gross Rent – (Mortgage + Taxes + Insurances + Vacancy + Maintenance + Property Management)

Cash Flow = Positive = Good

Cash Flow = Negative = You Dun Goofed!

Conclusion

Like any investment, PLEASE take the time to perform the necessary due diligence. Real estate investment is less liquid or illiquid. Once all the documents are signed there is no going back. Your first real estate investment is your most important one, it will make or break you real estate investment side hustle if not planned carefully. Best of luck!

Book Recommendations

“The Millionaire Real Estate Investor” and “HOLD: How to Find, Buy, and Rent Houses for Wealth” These books contains a wealth of knowledge while keeping you entertain. You can also buy the audio version on Aubible.com and listen on your daily commute.

Disclosure: We are not getting any proceeds/monies/benefits from the recommended books above. We found the books above to be very helpful.

 

 

 

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