8 Things to Know Before Investing in Real Estate

Sharon Tseung 0:02
This is the digital nomad quest podcast with Sharon Tseung. teaching people how to build passive income become financially free and design their best lives. Back in 2012, I started getting intrigued by real estate and learning more about it and the idea of owning properties around the world and having passive income without the daily nine to five grind really caught my attention. Fast forward 11 years and now my husband and I have 34 units under our belts, but I’ll be honest, the journey wasn’t all smooth. We’ve had our ups and downs there were times we hired the wrong contractors paid more for renovations than we would have wanted investing in properties in which we couldn’t make them into Airbnbs because of city laws and more. That’s why in today’s episode, I wanted to share eight things you want to know before diving into real estate so you can reduce your chances of making mistakes. So let’s just get right into it. First off, you don’t want to invest without understanding the kind of investor that you are. So before diving headfirst into real estate take a moment to reflect on what kind of investor you want to be because each investing strategy demands a unique set of skills, personality traits and commitment. For example, flipping a home might sound exciting with its potentially quick returns, but it requires a good design eye a comprehensive understanding of the local market and the ability to manage renovations. Effectively, it’s more hands on and can be extremely high pressure especially if the market takes an unexpected turn, there have been plenty of stories of failed flips because of properties not selling. On the other hand, there’s the long term buy and hold strategy, which we generally do. And this approach is for people who prefer to play the long game banking on property appreciation over time and enjoying steady rental income. We love the long term steady gains and many flippers actually say that if they held on to their properties, they would have made even more which is why we like to hold on to what we can then there’s a world of Airbnb and vacation rentals, which is lucrative especially in tourist hotspots, but it does require more property management you’re gonna be dealing with many guests, ensuring the property is always in top shape and navigating the constantly changing world of short term rental regulations. So before you take the plunge just sit down assess your strengths, your appetite for risk, your capital and your long term gains. There are tons of different asset types to invest in and many different strategies you can pursue next. Tip number two don’t invest without knowing the local laws and regulations. Every area has its own set of rules when it comes to properties. Now we’re talking short term rental laws, landlord tenant laws and so much more. So for example, one of our furnished rentals that we invested in we plan to go short term and check the city site to see if we were in the clear, we found that the rules were that you can’t have another Airbnb within 500 feet of another on the site, it seemed fine. But when we called in after having purchased the property, we found out that another property was in the process of registering in our vicinity, we were on that outer circle the radius two of that 500 feet, which is really frustrating. So you definitely need to check if you’re able to do a short term rental in your city. Another thing you should consider is landlord tenant laws. If you’re planning to rent out your property, you need to know your rights and responsibilities as a landlord as well as those of your tenants. Now another crucial aspect of real estate is location. So you guys have probably heard this many times. So don’t invest without checking the location. You don’t want to invest in the middle of nowhere. Even a perfect property can turn into a flop if it’s in the wrong place, you want to make sure it’s not in a high crime area and has the potential to appreciate. So check the statistics of the city’s job growth, population growth, crime rates and the neighborhoods next you also want to consider the rent to value ratio. Ideally, you want this to be at least 1%. So if you’re looking at a $100,000 house, you’d want the rents to be at least $1,000 websites like Zillow and Redfin can help you check on this and then you can also check out runtime or.com to know about the average rents in that specific area. So I definitely recommend checking multiple sites but be careful a higher rent to value ratio can sometimes mean a higher crime rate. So remember that the goal is to find a city with high cash flow potential and appreciation potential with less crime so you have less headaches, location specifics matter to so being close to downtown schools, airports, job opportunities can make a property more desirable. Next tip is you don’t want to invest without considering property management. So owning a rental property isn’t just about collecting rent checks, there’s maintenance to consider tenant issues to resolve and a whole host of other responsibilities. You can choose to manage the property yourself which can save you money, but it’s gonna require a significant time commitment. It’s actually a lot of work and stress. So that’s where property management comes in. As you expand your real estate portfolio. Having a reliable team can save you significant time and expenses. property management companies can take care of things like tenant screening, evictions, rent collection, maintenance and repairs, handling tenant issues and more. Of course, this service comes at a cost usually at eight to 10% of the monthly rent but for many investors, including myself that convenience and peace of mind are well worth it. We don’t have to be physically present to deal with issues and it makes our investments more passive since there are other people handling our property. So before you invest, consider if you’re going to do it yourself or how hire a property management company. It’s an important decision that can significantly impact your profits and overall investing journey. Next tip you don’t want to invest without understanding the risks with any investment there are going to be risks involved. After all, everyone would be a millionaire if real estate investing were 100% risk free. In my years of investing, I realized there are many issues that can pop up like repairs that contractors vacancies and more Airbnb, for example, it can be great to generate income, but it’s not all sunshine and rainbows. You’ve got guests to deal with reviews to manage the list goes on. And on months ago, we actually had to fire our Airbnb cleaner because of their poor cleans. There’s a lot that can go wrong, and you have to be ready to handle it again, property management companies can make your life a whole lot easier. But just don’t forget that things can always happen. So keep educating yourself with research around your market, city laws, home and rent prices, real estate strategies and more and keep learning through experience. Our knowledge around how to solve different issues has significantly increased. I never thought I would know so much about homes. But I have a much better understanding now that we’ve worked with so many contractors My next tip is do not invest without a contingency plan. In the world of real estate investing things don’t always go according to plan like I had mentioned, you might buy a property expecting it to be a quick flip only to discover it needs major repairs. But then it becomes harder to sell than you thought or maybe you purchased a rental property but then struggled to find tenants. So that’s where contingency plan comes in. This is your plan B your safety net for what to do when things go wrong. It’s all about anticipating potential problems and then having a strategy in place to deal with them. For example, if you’re planning to rent a property out your contingency plan might include setting aside funds to cover any periods of vacancy. That’s why we always recommend having a six month emergency fund in case anything happens. Another instance is if you’re flipping a house, you might want to budget for unexpected repair costs in our numbers we like to allot around 10% for vacancy and repairs. Having a contingency plan not only allows you to navigate challenges, but also gives you peace of mind. So before you invest, take that time to think about what could go wrong and how you’d handle it

because your future self will definitely thank you. The next tip is you don’t want to invest without knowing your financing options. So one of the biggest barriers to investing in real estate is obviously the lack of funds. It’s true that you can invest in real estate without using your own money, but you still need to have that money from somewhere you also don’t want to over leveraged and then there are different ways of financing like private money loans, hard money, loans and more. But for a newbie investor, your main financing option is usually taking out a loan by borrowing money through banks. But in reality, not all banks are created equal. Some have stricter qualifications for loans, while others are a bit more lenient. But no matter where you go, there are a few things that they’ll want to know like what’s your credit score? What’s your debt to income ratio? Can you pay the loan back? Do you have two years of job income proof? Yes, getting a loan will be a bit of a process, you’re gonna need to provide bank statements, pay stubs, they’ll do a credit check, there’s gonna be a lot involved. One thing you can do to really help you out is get a pre approval letter. So before you buy this is something you should do because it shows how much the bank is willing to lend to you which can help you figure out which properties you can afford. And then remember, you’ve got options when it comes to financing. There are traditional mortgages FHA loans, hard money loans, like I mentioned, and more. The best one for you will depend on your financial situation and your investment goals and then also consider the length of the loan. So for example, a 15 year mortgage can mean faster repayment, lower rates and less interest but a 30 year mortgage offers lower monthly payments because of the extended period of time, which could allow you to borrow more, although it will come with higher interest rates and overall costs. But I personally do like a 30 year mortgage over a 15 year one because it does give you more flexibility in case there are market downturns and you are also allowed to pay down the principal early if you wish to learn about your financing options before you invest. Now last but not least, do not invest without understanding the tax implications when you’re crunching the numbers for potential investment property taxes are a big factor, they can significantly impact your cash flow and your cash on cash return. Many investors forget that property taxes can actually change. For example, in Texas where I’m currently living, it gets reassessed every year so they’ll generally get higher as your property becomes worth more. So always check with your property manager about this. Knowing these numbers is crucial and make sure you’re still getting good cash flow. So websites like Zillow and Redfin, you can check their property tax features but always double check for accuracy. And then also don’t forget about other taxes there are capital gains taxes, which can be long term or short term depending on how long you hold on to the property. So for example, if you’re flipping a property short term, meaning less than one year’s time, you’ll be paying more in short term capital gains taxes. But aside from all this, there are actually great tax benefits with real estate investing as well like depreciation so even though houses typically increase in value, the government lets you write off the bill brings value over a period of 27.5 years. So for example, if you purchase a house and the building’s value is $300,000 This means that every year you can write off $10,909 from your rental income. There are also several other tax benefits such as being able to deduct the interest from your mortgage payments. So make sure you know everything about tax advantages and implications before you start investing. Now I know real estate investing can seem extremely complicated but it can be very rewarding if you do it right. And it has allowed me to become financially free and retire from the nine to five which gives me so much more flexibility with my time if you guys are interested in buying your first property. We do have the how to buy your first property master class in the link in the description below. It’s a free class I encourage you to take it so that you can learn what to prepare when buying your first property and what to do and then most importantly, don’t be afraid to take that first step for me I took so many years before I started investing out of state and that was all based on fear but once I took action I started learning so much more from the process so start educating yourself with videos like mine on my YouTube channel check out the free masterclass in the link in the description and once you feel ready, your finances are in order and everything like that makes sure to take action as well. So I hope you guys enjoyed this episode. Please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.