As a real estate agent, it’s likely you’ve entertained the idea of investing in real estate. I know I certainly have.
Well, a few years back I decided to take the plunge, and I purchased my first rental property; it was a cute two-bedroom house.
That purchase got me hooked, and two years later, I had 35 properties in my real estate portfolio. Those two years were filled with ups and downs, to say the least.
In this post I’m going to share five major lessons I learned from this experience.
Lesson 1: Working with a partner is better
If you just want to purchase a single investment property and be done, then you probably don’t need a business partner. However, if you’re looking to scale up and buy multiple properties over time, having a business partner is beneficial for two main reasons:
- Banks are more willing to finance your deals if there is more than one person guaranteeing the loan
- You have someone else to share the responsibilities that come along with real estate investing
Lesson 2: Work with portfolio lenders instead of big banks
As an agent, you work with banks all the time, so you know who I’m referring when I say “big banks,” but, in case you’ve never heard the term portfolio lenders, let me shed some light.
To understand the benefit of portfolio lenders, you need to know a bit about Fannie Mae. Fannie Mae is a government-sponsored enterprise, and the largest buyer of mortgages on the secondary market.
Typically, when you do a mortgage with a large national lender, it sells your mortgage on the secondary market, and as a result, it must adhere to the underwriting guidelines of the purchasing entity.
Although there are a number of buyers on the secondary market, Fannie Mae is the largest.
So when banks sell their loans on the secondary market, there is additional underwriting red tape, but the biggest restriction, for real estate investors, imposed by Fannie Mae, is a maximum number of loans an individual can have.
According to Fannie Mae, “If the borrower is financing a second home or investment property that is underwritten through DU, the maximum number of financed properties the borrower can have is ten.”
To make things even more restricting, even though the Fannie Mae cap is 10, most lenders impose a cap of four, likely due to the added work on their end.
Portfolio lenders, however, don’t sell their loans on the secondary market. Rather, they keep the loans in-house in their own loan portfolio; hence the name. This gives portfolio lenders a lot more flexibility, and it makes them much more investor-friendly.
Portfolio lenders tend to be your smaller community banks.
Lesson 3: Don’t hire a general contractor
If your strategy involves renovating properties, I strongly encourage you be your own general contractor. Serving as your own general contractor will give you maximum control over the operation, save you money and help ensure your project stays within budget.
Now, I realize there may be situations where you really need to lean on a general contractor, but I recommend avoiding it all costs.
Lesson 4: Screen well
Screen your tenants and your workers well. I did not do this early on, and I’ve paid dearly for it. When it comes to tenants, I recommend using a tenant screening software such as Buildium or Cozy, which will allow you to pull eviction, criminal and credit checks.
Look for patterns. We all make mistakes, but if an applicant is notorious for getting arrested, fired, evicted and not paying his or her bills, what kind of a tenant do you think he or she will be for you?
Furthermore, look at employment and rental history. Go back at least five years, only consider people who can provide previous verifiable landlords, and get those landlords to give you feedback.
Only consider applicants who have stable employment, and demand that they provide pay stubs.
When it comes to screening workers, never hire someone on the spot. Take your time, and make them fill out an application. Subscribe to a pre-employment screening software such as BackgroundReport.com or GoodHire.
Similar to tenants, look into their criminal background, and call and verify past employers. Make sure they have a valid driver’s license and reliable transportation.
Additionally, drug test your employees. A safe and sober work environment is absolutely critical to the health and wellbeing of your crew and the long-term success of your business. Check with your state to find out if a drug testing consent form needs to be signed to drug test your workers.
Lesson 5: Take it slow
Possibly the biggest lesson I learned from acquiring 35 investment properties is it’s better to take it slow. Learn hard lessons on a small scale.
As an agent, you understand that real estate investing is a huge time and financial commitment. If you’re like me, you’ll want to take the bull by the horns and go as fast as you can.
Trust me — don’t do that.
Take it slow, learn as you go, and you’ll have a much more enjoyable experience as a real estate investor.
Brandon Jones is a licensed Realtor, real estate investor, and the founder of RealEstateHacks.net. He resides near Springfield, Missouri, with his wife and two sons.