New investors face seemingly endless questions.
7 Questions New Investors Don’t Know to Ask (But Definitely Should)
1. “How can the deal lose money?”
You think you’ve found a great deal. And maybe it is.
But before you invest thousands of dollars on it, set aside your excitement and assume for the moment that the deal has risks.
Because every deal has risks, even if they’re ultimately risks worth taking.
What are those risks? What protections do you have in place to mitigate them?
For example, one risk in any renovation deal is that the contractors will take your cash then disappear. What precautions are you taking to prevent them from running off to the Caribbean with your money?
List out all the risks, and brainstorm ways you can minimize them.
2. “What contingency plans can I implement if my exit strategy fails?”
Similarly, what’s your exit strategy? Is it simple and straightforward?
Nearly as importantly, what happens if it fails?
Say you buy a property to fix up for your niece to move into. You trust that she’ll be a good tenant, because she’s family, and you know her well. (Although renting to family members comes with its own risks.)
Then your niece walks into the property upon completion and says, “Ew, I don’t like the color scheme in here. Way too ‘90s. I’m not moving in.”
Will the property cash flow well with a market renter? Could you sell it as a flip instead? Maybe it would make a good Airbnb short-term rental?
Run the numbers on several contingency plans, and make sure you won’t lose your shirt if the deal takes a hard left turn.
3. “What’s the vacancy rate in this neighborhood?”
I’ve owned more than my fair share of rental properties in low-demand markets. It’s not pretty.
Before investing a cent in a neighborhood, get a strong sense of the vacancy rate there. Talk to local landlords, local Realtors, local property managers. Walk the streets. Look up the homes for rent on Zillow.
Do you see any boarded up properties or other indications of long-term vacancy?
Beware of low-demand markets. And make sure you always include vacancy rate when calculating cash flow for a rental property.
4. “What direction are prices trending? Are they accelerating or decelerating? Why?”
Yeah, OK, that was three questions. But one premise.
How are prices moving? If they’re declining, why is that? Did a recent bubble burst? Are there fundamental problems with supply and demand in the area (e.g. a shrinking population)?
As a general rule of thumb, new investors should not invest in any market with shrinking prices. Leave tricky markets to the veterans.
Understand how your local housing market is moving. This bigger-picture perspective will serve you well, and help you become a better investor faster.
5. “What direction are rents trending? Are they accelerating or decelerating? Why?”
Similarly, you need to understand how rents are moving.
Because they don’t always move in concert with home prices.
Low prices and high rents is a good combination on paper. But be careful about the 2% Rule and investing in any neighborhoods that are too low-end.
Also remember that when rents (or prices, for that matter) skyrocket upward too fast, they have a tendency to come falling back down.
There are no hard and fast rules about what conditions you “should” buy in, but again, the better your know your market, its trends, what drives the local economy, etc., the more likely you are to make money on your real estate deals.
While not a rule per se, slow and steady growth in rents and home prices is a good sign.
6. “What are two reliable sources of funding beyond my first choice for funding?”
You probably have a lender in mind for your next deal. (If you don’t, you better get cracking!)
But what are your backup plans if that lender turns down your deal, once it’s under contract?
Notice I said “plans.” Plural. You should have at least two backup sources of funding lined up, in case your first choice for financing falls through.
Start building relationships with lenders, because you’re going to need them. The good news is that the more history and trust you build with a single lender, the less likely they are to turn down your deals moving forward.
7. “What are my competitive advantages in this market?”
Do you have at least one? If not, you better put your brainstorming cap back on and get back to that drawing board.
Perhaps you live in the neighborhood and know it better than anyone else. Perhaps you’re a cash buyer. Or maybe you’re a contractor and can do the repairs yourself.
Or a hundred other potential advantages, but you need at least one or two. Know what they are, and work those advantages for everything they’re worth.
The corollary is also true: know your weaknesses. As an inexperienced investor, experience is an obvious disadvantage. But what are your other disadvantages? If there are too many, you may need to find ways to shore them up. For example, if you don’t know a market very well, get far better acquainted with it before investing.
Asking Questions Makes You a Better Investor
Don’t assume you know all the answers. As a new investor, you don’t know what you don’t know, which means you may not be asking the right questions.
Whether you take a real estate investing course, partner with a more experienced investor, join a real estate investing club, or hire a coach, make sure you gain exposure to more experienced investors.
And ask them plenty of questions, because that’s how you’ll discover risks you didn’t notice before – and how you can find ways to mitigate those risks.