A quote on real estate investing from one the industry’s most distinguished experts:
“You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.1”
~ Warren Buffett, Annual Shareholder Letter
In his annual shareholder letter, released in February 2014, Warren Buffett discussed the lessons he learned from real estate investing, specifically those related to his purchase of a 400-acre farm in 1986 and a New York City retail property in 1993. And of the many insights he shared, the quote we listed above is the one we think is most important to share with you. Why? Because not having experience is one of the biggest reasons individuals miss out on promising real estate opportunities—and it’s also the easiest challenge to overcome.
In both instances he cites (the farm and the retail space), Mr. Buffett had no experience operating and managing such properties. However, having run the numbers and seen the investing potential, he knew he couldn’t pass these two opportunities. So he did what smart investors do—what he categorizes in his letter as one of the fundamentals of investing—and trusted experts to operate and manage the properties for him.
Now for some people, accepting that you have limitations can be difficult. But, as Mr. Buffett wonderfully illustrates, relying on experts to perform the roles you’re unfamiliar with opens up real estate investing doors that may have initially seemed too challenging to pursue. This includes pursuing opportunities in the residential rental market with assistance from a property management business. And while the services vary from company to company, there are some general benefits from working with a rental property expert that you can expect. That being said, the level of these services can vary greatly from firm to firm so it’s critical that you find a property management firm that values transparency and expresses to what extent those services go. That way you can feel comfortable that your needs will be addressed.
· Prescreening tenants: This can include everything from credit screenings to landlord reference checks as a way to not only ensure quality tenants but also peace of mind.
· Showing and leasing units: This ensure you don’t have to worry about taking time out of your busy schedule to do it yourself. Some firms, like ours, even schedule appointments for evening or weekends, which is often more convenient for prospects.
· Rent collection: This can be one of the most challenging things for new property owners to try and handle on their own. Thankfully, firms will take care of this for you so you can avoid the hassle and stress.
· Detailed accounting and reporting: The level of detail will vary depending on the firm and its accounting team, but generally you can expect monthly reports on each of your properties that cover account totals, cash flow, and expense distribution.
· Online portals: Some firms, like ours, have created portals that allow owners to access information about their properties, such as all of the invoices from vendors, as well as allow our tenants to pay their rent or submit maintenance requests.
· 24-hour emergency service: This ensures that your tenants have access to help anytime an emergency occurs, without you having to worry about finding a repairman on short notice or at odd hours.
Of course, there is a lot to consider when choosing a property management business to work with (more on that in a later post), but the important thing to understand is that you should never discount investing in real estate because you lack experience. With the right people around you, you can turn one or a number of residential rental properties into a strong, long-term asset that can generate income for years to come.
1. “Buffett's annual letter: What you can learn from my real estate investments,” Fortune Magazine, posted February 24, 2014. http://fortune.com/2014/02/24/buffetts-annual-letter-what-you-can-learn-from-my-real-estate-investments/