Real estate investment can be your ticket to financial freedom, but with a caveat. It involves such a huge amount of money that it poses a kind of risk that most people can’t withstand, in case things go wrong. The element of risk can’t be completely eliminated, but you can substantially improve your chances if you follow the best practices. Here are some tips for you on getting started and succeeding in real estate investing:
Set Your Goals
Your strategy will depend on what you want to achieve through real estate investment.
- Are you investing in real estate because you want to retire early and go on long vacations? Well, you will need to replace your full-time income with rental yields from your portfolio. So calculate how much rental income you will need to generate and how many properties you will have to buy in a given period of time in order to achieve your rental goals.
- Do you want to invest in real estate for a part-time income and financial stability? If you want to keep your job, how will you look after the property’s management? Will you hire a property management agency?
These are just a few examples of how your individual goals can have an impact on your real estate investment strategy.
Familiarize Yourself With Investment Metrics
The primary reason as to why most people fail at real estate investment is that they don’t know the mathematics that helps determine an investment property’s buy profit potential.
Some of the formulas you must master are:
- Net income
- Cash flow
- Operating expense ratio
- Return on investment (ROI)
- Cap rate
- Cash-on-cash return
- Gross rent multiplier
- Internal rate of return
- Debt service coverage ratio
- Vacancy rate
Applying Real Estate Investment Metrics In Reality
You can spend a fortune on books, tapes, and seminars, but if you don’t know how to apply the theory in the real world, your education will be of no use. Don’t buy a property before you have run all the metrics. Get important documents such as rent rolls and rental agreements to make a realistic assessment of the potential rental income from your target property. Do your homework and invest when you are completely satisfied.
Know Your Steps Ahead Of Time And Learn To Adapt
You can buy your first investment property by taking out a mortgage from a conventional lender, but what if you want to build a portfolio of multiple properties. How will you go about buying your second and then third property? For that, you will need to get familiar with certain concepts like private partnerships, crowdfunding, equity loans, refinancing, and hard money lending.
Besides, your investment plan shouldn’t be carved in stone. You will come across unforeseen circumstances, so you should be able to learn and adapt accordingly.
Avoid Common Pitfalls
You need to do your due diligence whether you are buying a primary residence or an investment property. Follow the basic obligations such as:
- Buying in a location
- Performing a home inspection to know property’s condition
- Buying in a good school district
- Buying in a low crime rate area
- Shopping for the best mortgage deal
- Checking out amenities in the neighborhood such as parks, schools, transport and sporting facilities.
Don’t Hold Out For The Perfect Deal
Many beginner investors let good deals slip because they are holding out for something better. You must realize that the “perfect deal” rarely exists. Better to execute on a deal that meets most of your criteria than wait for another that may never come.
Real Estate Investing Is A Business
Your mentality and approach to real estate investment will play a great role in your success as an investor. Real estate investment is a business, not a hobby. A business needs an action plan and discipline. You will need to have realistic goals and set deadlines. While real estate investment is widely believed to be a great source of passive income, nothing can be further from the truth. You have to toil hard to learn the ropes, set up this business and run it successfully.
Building a real estate investment portfolio can help you stay ahead of taxes and inflation and build security for the future. Follow the best practices to minimize risks. Just take the leap!