Key rules for first-time homebuyers and investors in real estate

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I believe real estate is a phenomenal opportunity for investors and a great opportunity for the first-time homebuyer right now.

For first-time buyers, you have low interest rates, depressed prices on homes and the benefit of not having a house that you have to sell first. That’s a win/win/win all around. But you have to lock in and stay put in that house for 7 or more years to make it fully work to your benefit. Seven years in a house is a key metric to long-term financial security and wealth at this time.

For the investors, it’s my belief there are amazing opportunities for investor-owned real estate where you can buy, hold and own for maybe the rest of your life. With prices being so depressed, you can buy a property that is suitable for rental. You may have to fix it up, but your costs moving forward will be so low. Rents are rising, occupancies are rising in traditional properties and you offer an alternative with your rental property.

Expect to pay cash upfront as an investor. If you’re in a buying group, my rule is everybody puts up cash to buy and everybody puts up reserve money. Have a written partnership agreement. You may consider an LLC or an LLP depending on your state, but the basic idea is to have a written agreement to govern ownership and management and who has each responsibility in the partnership.

Historically, I would say when somebody was buying to be a landlord that you wanted initially to be able to cover 90% of your carry — including your taxes, insurance and mortgage. Today, you don’t have to think that way. So often you can get a property where you’re cash flow positive from the first day.

Be careful when you’re buying, be sure to budget for repairs and don’t focus solely on foreclosures. Look at all distressed sales.

My last key rule is never get involved unless you can run it like a businessperson. You are not running a charity. If a tenant can’t pay rent, they can’t stay. Careful screening, requiring all necessary security deposits and making it clear as can be that rent is due on the first of the month can help you avoid a problem.  

Editor’s note: This segment originally aired in April 2011.




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