The Definitive Real Estate Investment Guide
Succeeding in real estate investing can be a challenge, especially for those just getting established in the industry. But if successful, real estate investments can be very lucrative. If you want to make sure your investments are as strong as possible, the more knowledge you have at your disposal, the better.
This definitive list of tools and tips can help you stack the deck for success, no matter where you live or how much you have to invest in your next property investment.
- Research Well Before Making an Investment
Research should be a given for every investment, from a single stock purchase to a multi-million-dollar real estate transaction. When it comes to money, there’s no such thing as too much due diligence.
When you stumble upon a property that looks like a good buy, it’s important to trust your resources, not just your instincts. What you use to research property will vary from one opportunity to another, but can involve historical data, local and national economic analysis, interest rate trends, pricing comparisons, and detailed in-person inspections.
Remember, in real estate investing, just as any other element of life, if it sounds too good to be true, it probably is. Don’t let the promise of a seemingly great property blind you from characteristics that may transform a great prospect into a bad one.
- Evaluate the Neighborhood
When evaluating a property, the neighborhood it’s located in can make a huge difference in the viability of a purchase. While most investors know to consider average prices – a high priced property likely won’t sell well in a lower priced, blue-collar area – there are other elements of your investment that should be included in your points of consideration.
Take, for example, property sizes. As you analyze the feasibility of a property, don’t forget to include average size of homes and condos into your calculations; a 400 square foot studio may fit in well in a large urban area, like New York, but it’s unlikely to impress in spacious suburbs in the Midwest. Your purchase and subsequent investment in the property should match the expectations of the neighborhood.
- Do an ROI Analysis with Realistic Expectations
Return on investment, or ROI, is an essential metric for virtually every investor. In essence, this means that your investment in real property will end up paying off in the end, whether you’re buying property to fix and flip or to rent out to tenants. While there are a few different ways to consider ROI, most investors utilize calculations like ‘Net Operating Income’ (NOI) to determine the feasibility or benefits that come with an investment.
Net Operating Income, or NOI, is calculated by taking the expected revenue from a property minus the necessary operating expenses. This figure is pre-tax and excludes loan payments, capital expenses, and depreciation.
Take, for example, a $400,000 condo. In your market, you may be able to rent this property out for $2,000 per month plus the cost of utilities, which are paid in full by the tenant. However, operating expenses, like lawn care, general maintenance, and repairs, total approximately $500 per month. In this situation, your property earns $24,000 per year less $6,000 in operating expenses for an NOI of $18,000 – a good ROI. However, in an extreme example, if you rented your property for $1,600 and spent $1,500 monthly on operating expenses, your annual NOI would only be $1,200, an amount so low that one out of the ordinary cost, like a roof replacement, could be enough to turn your property into a money pit.
- Consider Potential Tax Effects
As the adage goes, there are only two absolutes in life: death and taxes. Accordingly, real estate transactions, as with any other form of income or loss, are not immune to the impacts of taxation.
Property tax applies throughout the year, which can range from a little to a lot depending on the geographic location in question. For commercial buildings or homes in high-cost metro areas, property taxes can total tens of thousands of dollars a year. Further, the gain on real estate transactions can be taxable. If you purchase a home for $400,000, make $25,000 in upgrades and modifications, and then sell for $500,000, you will be subject to taxes on $75,000 in taxable gains.
- Talk to Other Real Estate Investors
Real estate investing is sometimes a solo operation, but that doesn’t mean you’re an island. In reality, there are likely quite a few other real estate investors in your general area and many more in your state or region.
All investors come from different backgrounds and different perspectives, offering unique insight you may not have otherwise uncovered. For example, someone with an economics background may be better able to determine the influence of the overall economy on the housing market, while an investor who got burned by a particular realtor or the dynamics of a specific neighborhood could provide valuable information not readily available anywhere else. When you talk to other investors, it’s possible to learn more about successful investing than you could discover on your own.
- Location, Location, Location
“Location, location, location” is the mantra of the real estate industry for a reason. Whether you like it or not, location is a major influence in how successful – or unsuccessful, as the case may be – a real estate transaction ultimately is.
A lot of factors can influence what makes one neighborhood, city, or state desirable over another. The local economy plays a primary role here, determining who will want to buy or rent and how much they’re willing to spend. Since location is such an important factor, the location can affect the quality of the schools and the safety of the neighborhood.
Note also that location may dictate what kinds of properties are available. Suburban areas may be light on commercial office buildings, while downtown metros may not be able to offer family homes with land. If you’re most comfortable with a particular kind of investment, location will strongly influence your success.
- Be Aggressive on Price
In investing, price always matters. If you are seeking beneficial returns, the best price you can get for a property, whether buying or selling, can make all the difference.
Many investors aren’t necessarily used to taking a strong, aggressive stance on negotiations in normal life – after all, there aren’t many opportunities to haggle in the supermarket or at the department store – but learning to take a stand can benefit your investing game.
When you make an offer on a property, know how much wiggle room you have, and stick to it. Walking away is often a better choice than going over budget and sinking money into the purchase price that should be used for renovations. In the same vein, your approach to selling a property should be similar. If you need to make a particular figure to meet your desired return on investment (ROI), do your best not to go below your threshold, but keep in mind carrying costs and your time when keeping an investment property.
- Estimate Repairs
A very limited few properties are absolutely perfect. Even newer or well-maintained properties likely won’t fit your exact specifications, so before making a purchase, take time to evaluate exactly what you’ll need to do to bring the property to bring it up to par. While some investments won’t need more than a coat of paint, others will need substantial renovations.
A few elements go into the process of estimating repairs: your preferences, past experience, and professional input. Preferences often drive the kinds of changes you’ll choose to make. For example, if you’ve found that residents in your town will pay a rent premium for hardwood floors, flooring upgrades should be part of your budget. Just make sure you properly calculate your return on investment (ROI), in this case, the rent premium for adding hardwood floors. Experience plays into this as well; prices you’ve paid in the past will inform you of the expenses to predict in the future.
While it’s easy to assume you know it all, contractors and property inspectors likely know more. An inspection can help you determine what problems may be lurking under the surface, while your trusted contractors can provide a better estimate for the kinds of services necessary.
- Know the Risk Factors and Tolerance
Risk tolerance, or the amount of risk you are willing to take on, is something wholly unique to you as an investor. Some investors are very conservative, while others are extremely risk-friendly and are happy making big gambles in exchange for big rewards. It’s up to you to determine your level of risk tolerance and act accordingly.
Understanding your risk tolerance and knowing how to apply it aren’t the same thing. Accordingly, you’ll need to know the most common forms of real estate risk in order to determine how much you’re willing to take on. These can include:
- Debt risks, like overleveraging
- Tenant risks, like property damage that comes with bad renters, rent roll risk, and turnover rates
- Construction risk
- Market risk
- Geographic risk
- Physical asset risks, like unforeseen property improvements
- Avoid Overspending on Upgrades
Upgrades are a normal part of real estate investing, but the difference between good investors and great investors often means finding the line between needs and wants. For example, replacing the roof – a necessary update – versus replacing carpet because the color isn’t to your liking. Sticking only to essentials can lead to the lowest possible expenses, while going too far to the other side can drive up costs exponentially.
When determining what to upgrade and what not to upgrade, there are a few things you should consider, including:
- Renovations that affect property values, like updating the kitchen
- Required updates, like roof repairs and HVAC repairs or replacement
- Cosmetic upgrades to help you stay competitive, like modern flooring and color schemes
It’s also important to weigh the varying levels of renovations, like fully replacing cabinets versus refacing cabinets. In cases where the structure is fine, choosing the latter over the former can help you save big.
- Find Partners You Can Trust
You may be an expert in the due diligence and negotiation process, but unless you’re also a property inspector, contractor, plumber, electrician, HVAC technician, or roofer, there’s a good chance you’ll need some outside help.
Having a good team at your side can make a huge difference in real estate investing, especially when you have repairs and renovations on the horizon. In these cases, the professionals you turn to can drive everything from quality to price, significantly influencing your overall return on investment (ROI). When contemplating partners in your investment process, be sure to consider the following attributes:
- Expertise and years of experience in the field in order to guarantee quality
- Flexibility and creativity that can help you in planning renovations
- Transparent pricing with no hidden fees or add-on charges for services you need
- Honest approach to business to ensure you aren’t being scammed or lied to
- Reliable services that can offer you timeliness and efficiency
- Stay Local as Much as Possible
Your community is important to you. It’s where you chose to purchase your home, where you shop, where you work, and where you care for your family. You know the attitudes of the people who live around you, the median purchase and rental prices, and even the average political beliefs of your neighbors. All of these factors can play a role in the success of an investment.
Instead of taking the time to invest yourself in a new housing market that is completely foreign to you, stick with what you know. Make the most of your knowledge and experience and make local purchases whenever possible. As an added bonus, staying local makes it easy to check up on your properties or attend to issues quickly, improving your reputation as a property owner. There’s a big difference between walking down the street or having to pay a plumber to treat a leak on your rental property.
- Get Your Finances in Order
As an investor, your finances come first and foremost. Without money to invest, you’re unlikely to make much progress. As such, you should always know how much money you’re making, how much you’re spending, and how much you have on hand.
To stay organized, add these habits to your schedule:
- Keep accurate records, including outlining all income and expense activities with different ledgers for each property
- Monitor debts, including interest and principal payments, and how these expenses are influencing income
- Evaluate credit usage, including utilization ratio
In addition to tasks related to day-to-day financial management, regularly check in on the progress of your portfolio. For example, if your fix and flip is starting to cost you more than you originally planned, it may be time to pause, reconsider, and regroup.
Real estate investing has the potential to open a whole new world of passive income and portfolio growth, providing big things for your future. With these tips, it’s possible to refine your tactics and improve the returns you see on each and every purchase.
Bottom line? No matter your chosen approach to investing or the money you have to spend, the more organized and educated you are, the better.
Scott Clift is a licensed real estate broker with Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specialize in providing real estate loans for investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at (844) 574 LOAN or by visiting westparkloans.com.