Are you looking for a way to generate passive income and achieve financial freedom? Perhaps you want a stream of income to support you and future generations. If so, investing in real estate can be an effective way to achieve this goal.
However, it’s helpful to know real estate investing tips before you get started.
Do you know the median national rent increased by over 11% in the US in 2021? Also, the rates for homeownership have been plunging, raising demand for rental properties. With these statistics, investing in real estate can be an appealing investment approach.
While investing in real estate can offer handsome returns, this is not always the case. Similar to any other investment, there are risks associated with real estate investment. Before you jump into property investing, you will need to learn to think strategically.
Whether you’re investing in residential, commercial, or industrial properties, it is critical to evaluate market trends. To help you make sound decisions, here’s a detailed real estate investing guide to assist.
1. Choose Your Investment Strategy and Niche
There are various ways you can invest when it comes to real estate investing. For instance, you can choose to buy and hold, fix and flip, wholesale, or even buy real estate investment trusts (REITS). Like other investments, each strategy has its own benefits and drawback.
Before investing, carry out detailed research to pick a strategy that will work for you. After choosing the perfect strategy for you, you also need to choose a niche. A niche will help you narrow down the types of properties you’ll be investing in.
For instance, if you opt for buy and hold strategy, you may choose to deal with apartment buildings or single-family homes.
2. Perform a Market Analysis
One of the main determinants of how successful your real estate investment will be is your choice of location. Picking an area with a high or projected increase in demand means you’ll reap big from the investment. However, the wrong choice of location can negatively affect your investment and result in huge losses.
For instance, if you opt to invest in vacation and holiday homes, you need to pick a location with high tourist traffic. This should be near a beach or other popular tourist destination site. If you own a property in the remote countryside, chances are you’ll bring in little to no income whatsoever.
In identifying a successful real estate market, market analysis is key. First, you’ll want to check on your preferred location’s demand and supply forces. This includes the average number of days that a property stays on the market before a purchase contract is signed and the total number of homes for sale.
After you have an idea of a market you’d like to target, identify potential neighborhoods to find one matching your investment strategy. For instance, if you go for a fix and flip strategy, then up-and-coming neighborhoods can be the ideal option for you.
3. Work With the Right Professionals
In real estate investment, you’ve got so much on the line. Also, the sector is complicated, and working with a qualified team of professionals can set you up for success. You’ll need to identify experts with incredible knowledge of your preferred location, strategy, and niche.
These will include real estate agents, lenders, property management contractors, and contractors. Be thoughtful when choosing these professionals as they may determine the success or failure of your investment.
4. Be Prepared for Showings
When buying investment properties, keep in mind the showings will be very disparate compared to when you bought your primary residence. Rather than thinking of how much you like the property, you’ll want to focus on the condition and structural soundness of the property. Remember buying a home in good condition means you’ll spend less to make it habitable and start receiving tenants.
When going to a showing, don’t forget a moisture meter and laser measuring tool. Sometimes it can also be worth bringing an experienced contractor or home inspector along for their professional opinion. Find out more about properties worth investing in.
5. Find the Right Deal
After you have several properties you are interested in, run the numbers. As a potential investor, the decision to purchase an investment property ought to be a business one and not a personal one. There are several metrics to check on to make the right financial decision.
- Capitalization rate (Cap Rate)
- Net operating income (NOI)
- Cash on cash return
- Internal rate of return (IRR)
- Debt service coverage ratio (DSCR)
These metrics are key to help determine the risk of your investment and expected returns. Also, you can evaluate whether the ROI meets your financial goals.
6. Consider Carrying Costs
If you are satisfied with the metrics, you can now purchase the property. However, when budgeting for the cost of the property, don’t forget to factor in carrying costs associated with buying the property. This helps you to determine the total upfront costs of purchasing a property sans closing costs and down payment.
Carrying costs may include renovating, repairing water heaters, property insurance, utilities, and more. These include the costs of restoring the property to a habitable condition.
7. Determine the Value or Price
After you have successfully purchased the property, it’s time to think about how you’ll start earning. Here, you’ll need to use a comparative market analysis (CMA) to determine the market value or price. This mainly applies to fix and flip properties.
The aim is to know the right value of a property after you’ve made all the necessary upgrades. Hire a real estate agent to help you determine the value of your property based on similar properties in the neighborhood.
If you’re going to rent your property out to tenants, then compare it against other rentals in the neighborhood to know how to price it at fair market value (or just above, if you’ve professionally renovated it).
Real Estate Investing Tips You Need to Know
Investing in real estate is usually a sound financial decision. Nonetheless, it’s important to be well informed and assess every risk involved before your deploy your capital. Above are some of the key real estate investing tips that will keep you on the right path.