Our initial investment journey was quite eventful, in a not-so-good term. We thought we knew what we were doing, but we made quite a number of mistakes, mainly because we didn’t know better or lacked the knowledge. These fumbles costed us time by having to restart some of the research and steps in the process. So, here are 4 major things we learned from our first property investment adventure we wish we knew when we started.
How to Calculate Returns?
As an investor, the goal is to make money. So, knowing how to calculate returns is a must. Not knowing how much money you put in and getting back will not make you a smart investor. We were aware of this important concept, but we didn’t know how complex the calculation could be. We heard about the 1% rule, which is finding homes that can be rented out for at least 1% of the purchase price of the home. But that was the only thing we based our numbers off of, which wasn’t enough. We initially looked at homes that were in the most desirable neighborhoods, with the fanciest landscaping and the most updated homes on the market. However, the potential repair costs can add up because we would be placing tenants in there who may or may not be taking good care of the property. We would have to pay a premium for them as well. If we punched in the numbers of how much rent we could get back versus the total costs of owning and maintaining the home, which is what “return” is defined as, it wouldn’t make sense from the investment perspective.
So, we now have a spreadsheet that we use to help us with our investment calculations. How did we come up with this spreadsheet? Actually, one of the realtors we worked with gave us his spreadsheet to help us determine whether it’s a good rental or not. How lucky we were! There were a number of calculations to factor in which we didn’t realize we needed to. From this point on, it completely changed our investment research strategy. Everyone should have such a model to guide by as a long-term rental property investor. To access the spreadsheet and see what were all the factors we considered in our calculation of returns, send us an email with the form below.
What is Location, Location, Location?
You must have heard about this all the time when it comes to property searches. Location! Location! Location! But does it mean where it is located on the street? Located on the hill? Or located in the right city? It is all of the above and more. Location in real estate really means how desirable it is based on the amenities that the home has access to, the convenience of transportation and highway access, whether it is against a railroad track, or how noisy the traffic is since it’s right next to the freeway. It’s goes on and on and some of these are subjective of course. However, location is essential for a property because it can either lower the value of the home or give a home the premium asking price. Although there are many good things to point out about a home, here are a few things we avoid when analyzing the location of a property as a long-term rental.
- When a home is backed up against a noisy or busy railroad track. If you have seen or heard a train pass through nearby enough, you know how loud it can be. The honking, especially, can be startling. This is not ideal for young families who have babies that need undisturbed sleep. So, for single family homes where targeted prospective tenants would be young families, we stay away from properties near railroads.
- When a home is too far away from a highway or freeway access. One of the things that renters often consider is commute time to and from work. If a property is very far away from freeway or highway access, the less desirable it is for working families. This would mean that the asking rent must be lower than those that have more convenient commuting options.
- When the front entry and driveway of a property face a busy road. Aside from having difficulty getting in and out of the drive way on a busy road, families with young kids also dislike it for other safety concerns. Especially for homes whose front yard are not fenced, young kids may carelessly run out into the road to catch a ball or a frisbee, etc. Homes, especially single-family properties, in such locations can be less appealing to young families and thus limiting the pool of prospective tenants.
What is HOA?
The first property we made an offer on (and was accepted) had HOA, which we thought was a great idea. HOA typically helps maintain the value of the home, and also the exterior up-keeping is not something we need to worry about when a tenant is placed. We were very excited thinking we have found our perfect investment home until our realtor then let us know that the HOA doesn’t allow homes in the community be rented out. What?! This is the first time we heard about HOA not allowing rentals in the community. As this was a shock, we also then just learned while HOA can be helpful for homeowners, not all are investor-friendly. For new property searches, we now make sure the HOA does not have any restrictions on investment or rentals.
How to Control Emotional Attachment?
I still remember shopping for our first primary home. Every home I walked into during tours or open houses, I could immediately envision what each area of the home would be used for or what furniture would fit perfectly in the spaces. Whose room would each room be for, and on and on. Mentally and emotionally, this builds an attachment to the properties that I just saw for the first time and during the very little time I was there. This is not a good habit to build during the process of home shopping as it will put a lot of stress on yourself if your offer wasn’t accepted or if there were any reasons for not being able to purchase the home. It can make sense to have some attachment to homes you are shopping for as your primary residence. However, for investment properties, attachments can build unnecessary stress. Emotional attachments can result in an investor overbidding on a property. Today, we see investment properties as a product that can help grow our wealth rather than a “home”. This is one of the most difficult thing to overcome, but it will change your mindset to become a real estate investor once this emotional attachment feeling is controlled.
Hope you enjoyed reading the things we should have known and had to learn from our investment property hunt. Let’s hope you won’t run into the same issues we did because you now know a little beter.
