My wife and I started investing in real estate when we first got married almost nine years ago. Through hard work and a little luck, we grew our net worth by over $1 million in five years and it's kept growing since then. We currently own six properties.
By no means have we done everything perfectly. There have been plenty of ups and downs in our investing journey: Once we lost $30,000 on a single deal.
Amid the pandemic, interest rates have decreased and many people have been looking to move from apartments to single family houses in search of more space, so prices have gone up a lot in the last year. During this time, we've still been able to find good deals, but we've had to be patient and willing to stick with our numbers rather than getting caught up in a buying frenzy.
Here are six of the biggest lessons we've learned as we've grown our real estate side hustle over the last several years.
I definitely learned this lesson the hard way. A few years ago we bought what I thought was a great deal. It was a half-duplex in a great area. Unfortunately, what both I and the title company missed was that it had been illegally subdivided and was on the city's records as a full duplex, which meant we would not legally be able to sell the property without addressing the title issues.
After many calls to the city, our lawyers, and the owner of the other side of the duplex, we couldn't figure out a way to fix the issue. We eventually sold the property at a $30,000 loss to another investor who was more experienced in untangling the relevant legal issues.
While that's a pretty extreme example, it's always a good idea to do your due diligence before buying a new property. Trust but verify any information an owner or real estate agent tells you. We've found plenty of surprises during inspections where we were able to go back to the seller and get a price reduction, or in some cases walk away from the deal.
Video by David Fang
Looking back, most of my regrets are about not buying a certain property because it didn't quite meet my criteria. While sticking to your buying criteria is important, such as following the 1% rule for rental income (which is a rule that says the monthly rent should be at least 1% of the purchase price in order to break even on cash flow), mine was probably a little too strict.
I was looking for a home run deal every time, when I could have just as easily bought a few base hits — properties that were not quite as discounted, or cash flowed just a little bit less — and built my portfolio faster.
There are so many advantages to owning real estate like leverage, appreciation, tax benefits, that just getting an "average" deal can make for a great long-term investment. The key thing to remember is that even if the monthly rent is less than 1% of the purchase price, you are likely losing money after paying the mortgage, taxes, insurance, repairs, and adding a vacancy factor.
A new investor might assume they are set if the rent is more than the mortgage payment. But there are many other expenses such as property management, home maintenance, and vacancy that are easy to overlook.
Video by Mariam Abdallah
One thing is for sure: Surprise expenses will always come up. In one particularly bad month, I had to redo almost all of the plumbing in one house, clean up the aftermath of a tree falling on another house during a storm, and replace an HVAC system that went out at another.
Luckily we set aside cash reserves every month in a separate account to plan for the unexpected and were able to cover the costs. We keep a completely separate account for our rental properties and all income, and expenses are paid from there. We set aside a certain amount of our rental income (usually around $200 per property per month) into an emergency fund and do not count that as money we can spend.
If you're just getting started building an emergency fund, one thing that worked for me was to put any "extra" money toward it, such as bonuses, a third monthly paycheck if you're paid biweekly, or earnings from another side hustle.
The majority of the wealth we built through real estate investing has come from appreciation, meaning the increase in value of our rental houses over time. But cash flow is key because it's a huge lever in reducing your risk. In my opinion, buying a rental property that loses money every month in hopes of a future increase in value is gambling.
You won't get rich off of cash flow alone. On our houses we aim for a cash flow of $200 to $300 per month from rent after deducting the mortgage and all expenses. But it sure helps me sleep better at night knowing that if I lost my day job or had other budget issues, our rental houses are earning their keep after accounting for all expenses.
Video by Stephen Parkhurst
Remember that your tenants are your customers. One of the biggest costs of owning a rental property is vacancy and turnover repairs when a tenant leaves.
So I always try to look for tenants who plan to stay for several years and will take good care of the property. While I certainly haven't been successful in screening out every tenant, I do everything possible to build positive relationships with and hold on to the good ones.
Rental real estate is often thought of as passive investing, and in some ways it can be. But it will never be as passive as investing in the stock market. You have to deal with collecting rent, answering tenant calls, and managing contractors. Even with a property manager, there is still some work on your end to make sure everything is running smoothly.
While we've made far more investing in real estate than in the stock market, and I believe it's one of the best ways to build wealth, it's important to realize that there is some time and effort required. By thinking of rental properties as more like a side hustle than a passive investment, you'll be more prepared for the work involved.
Looking back, I probably spent too much time reading books and blog articles before dipping my toes into real estate investing. While there is a lot to learn before buying your first house, some of the most important lessons I learned came from experience. There is only so much you can learn in a book about finding great tenants or managing contractors. If you've been in analysis paralysis mode for months or even years, maybe now is the time to get started.
Andrew Herrig is a personal finance and real estate investing geek. He is passionate about helping others achieve financial independence and documents his own family's journey at his blog, Wealthy Nickel. Andrew and his wife were able to grow their net worth by $1 million through real estate investing in five years. They live with their two young children in Dallas, Texas.
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