So you’re at a point in life where you have enough money to start thinking about adding investment properties to your portfolio. But you don’t necessarily have any knowledge of how the real estate market works and don’t want to lose money on it. Let this post be a brief introduction to real estate and a place to kick off the learning curve.
The do’s of real estate
Talk to a pro
You don’t have to pay tens of thousands of dollars to book a consultation with a real estate mogul, not at the beginning of your path, at least. But if you are seriously thinking about buying an investment property or two, the odds are, you already know a person who’s making bank being a landlord.
Ask them out for a lunch together and see what they have to share. Their experience can be immensely useful to you, especially if you’re considering buying in the nearest proximity where they can have a lot of knowledge in.
Diversify locations
Investment is all about diversification. If one asset fails, having others makes sure you’re not in the red. This principle works with the stock market, and it works with real estate. If you’re planning on purchasing multiple properties, it’s best that you do not purchase in the same area.
This way, if a flood strikes or a major employer moves out bringing uncertainty to the market, your cash flow won’t suffer as huge an impact.
Inspect local infrastructure and business
A decent floor plan, sturdy construction, and a spacious backyard are very important factors for choosing an investment property. However, what’s even more important is the neighborhood this property is in.
Even an amazing-looking house won’t be bringing you any profit if the industry in the town is going down and unemployment is increasing. If the closest school is separated from your property by a highway, you won’t be able to charge as high a rent as properties within a walking distance.
So if you’re thinking of purchasing in a location you’re not familiar with, take your time to walk around to see what’s happening and pull up statistics on the area.
Look for the best deal
With everything else out of the way, all you need to do is to shop around for a deal that optimizes cash on cash return. You’re looking for anything above 8%, a 20% return is a bargain.
Homes in the same area have very similar resale values and rent, but you can increase your ROI on the investment by snatching a home that’s being sold at a price lower than the market. People who are moving fast and need to sell their homes or those who are in need of liquid cash may be willing to bargain.
If you find a deal like this, it’s time to dust off your sales skills and negotiate a lower price.
The don’ts of real estate
Invest with little cash reserves or cash flow
Investing in real estate is very different from the stock market. The biggest difference is that houses are unsurprisingly illiquid. And they tend to have hidden costs that need to be handled fast. For instance, a pipe may burst or a roof starts leaking unexpectedly. You may say that those can be avoided if you do your research right before purchasing, but these things may happen to anyone.
If your property needs maintenance, it needs to be done fast, otherwise, you may be losing money, especially if you already have tenants living there. This is why you should only consider investing if you have either a solid buffer or a stable cash flow to handle these sorts of situations. Going all-in without any backup may leave you one major repair away from seeing a forclosure notice hammered on your doors.
Even if nothing unexpected happens, you may struggle to fill the property with tenants and you still need to pay property taxes so having some money to spare is crucial.
Pay upfront
If you have enough money to buy your first investment property with an up-front payment, it’s not the best idea. Sure, you will end up paying interest to the bank, but with a financed property, you can cover the mortgage with your rental income, and have a lot of liquid cash free to pursue other ventures.
Better save it to cover a couple of months of mortgage payments when you fail to find tenants.
Underestimate the work you have to put in
Unlike what you may imagine having no experience in the market, being a landlord is not about sitting around and counting money. If you are a small landlord with up to five properties, being a landlord may become your part-time job. With all the paperwork, sales, and repairs you need to do, you’ll be a proper businessman and a handyman.
For investors who are fully engaged in growing their business or serving as a CEO, hiring a property manager would be the best way to go about it. Employing someone can be a great expense, but if your income from the investment properties allows it, such a partnership can save a lot of time and effort.
At the very least, you will not be thinking about a leaking pipe that needs to be fixed in the evening while having a business meeting at lunch.
Expect instant profit
Most investments in real estate are long-term. Unless you’re planning on house flipping, you’ll have to think in decades, not years. Ask yourself, when you own the rental in 20 or 30 years, will it depreciate or increase in value? The answer will often be connected to the neighborhood you’re in, the infrastructure, and the development plan.
If that answer is yes, you’ve got even more reasons to buy.
Patience and knowledge is key
The best advice you can get when it comes to rental properties is this. Be patient and never jump into a deal that looks lucrative if you don’t know every little thing about a particular property and a couple of alternatives. It can save you a lot of time and money in the long run.
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