Investing in real estate can be a great way to generate passive income and start achieving financial freedom. However, sometimes getting an investing career off the ground is easier said than done. With that in mind, we've brought you seven actionable real estate investing tips to help you become a successful investor. Armed with this knowledge, you should have the know-how you need to get your real estate investing business off the ground.
Investing tip No. 1: Put the right pieces in place before you start to invest
They say preparation is half the battle, and it's true in real estate. Before you start your career as a real estate investor, make sure you have the right pieces in place to set yourself up for success. Here are some steps to consider.
Pick your investment strategy and niche
Start by picking an investment strategy and niche. Truthfully, there are lots of ways to invest in real estate. You could choose a buy-and-hold strategy, a fix-and-flip strategy, or wholesaling, or you could buy real estate investment trusts (REITs). As with any type of investing, each strategy has its pros and cons. Do your research to make sure you're certain which strategy is right for you.
However, it's also important to pick a niche within your real estate investment strategy. Put simply, your niche will help you focus on what types of properties you're looking at buying. For example, if you go with a buy-and-hold strategy, you could focus on single-family homes or apartment buildings. Meanwhile, if you want to invest in a REIT, you could choose one in the retail or healthcare sectors.
Draw up a business plan
The next step in your process should be to draw up your real estate investment business plan. While it might seem overwhelming at first, this is an important step because it will help you get clear on your investing goals and the strategies you'll use to reach them.
If you're also looking for real estate investment partners to help you get your business going, having a business plan can help you convince others to join your team.
Form a business entity
In this case, the last step is often the easiest: Form a business entity. This will give you that all-important separation of your business and personal assets, not to mention the potential for serious tax benefits.
Many new real estate investors choose to form a limited liability company (LLC) since it's often simpler to manage than either an S corp or a C corp. However, if you have specific questions about what type of business entity makes the most sense for you, talk with a tax professional about the specifics of your financial situation.
Investing tip No. 2: Learn how to perform a market analysis
After your business is set up, it's crucial to figure out where you'd like to invest. While many new investors stick to their local real estate market, you don't necessarily have to be tied down by your ZIP code. You can find success with remote real estate investing, where you choose a real estate market based on its metrics rather than its physical location.
However, to decide where to invest, you need to know how to perform a market analysis. First, you'll want to look at basic metrics of supply and demand, such as days on market for the area and the total number of homes for sale.
Once you have an idea of a potential market, look into the nitty-gritty details of various neighborhoods to find a few that suit your investment strategy. For example, if you're following a fix-and-flip strategy, you might want to look for up-and-coming neighborhoods. But if you're following a buy-and-hold strategy, you may want to look at school district data to find neighborhoods that would appeal to long-term tenants.
Investing tip No. 3: Gather your team of qualified professionals
Once you have an idea of where you might want to invest, the next step is to build a team of qualified real estate professionals local to that market. At the very least, you'll need a lender and a real estate agent who is knowledgeable of the area.
That said, if you're planning to follow a relatively passive investment strategy, you'll also likely want to include a property management company. Meanwhile, if you're planning on rehabbing homes, you'll want to look for some qualified contractors.
Investing tip No. 4: Come prepared for showings
As a new investor, going on showings will be very different from when you bought your own home. Here, instead of thinking about how much you personally like the home, your focus should be on whether the home is structurally sound and in relatively good condition. After all, focusing on buying a house without too many issues will ultimately save your bottom line.
To that end, if you're visiting a home you're interested in purchasing for an investment, be sure to bring a moisture meter, wall thermometer, and laser measuring tool. While these tools cannot give you the same amount of reassurance as an actual home inspection, they can help you decide whether a particular property is worth pursuing further.
Investing tip No. 5: Run the numbers to find the right deal
Once you have a handful of properties you're interested in, the next step is to run the numbers. Every successful real estate investor knows the decision to buy a property should be a business one rather than a personal one.
With that in mind, there are a few key metrics you should check before you decide to move forward with buying a property. They are:
- Capitalization rate (Cap rate).
- Internal rate of return (IRR).
- Net operating income (NOI).
- Cash-on-cash return.
- Debt service coverage ratio (DSCR).
Investing tip No. 6: Carefully budget for your carrying costs
As long as those metrics check out, it's likely a good idea to move forward with buying the property. However, you also want to make sure to budget for your carrying costs. Budgeting for carrying costs will give you a good idea of the total upfront cost of buying a home, aside from just the down payment and closing costs.
With a buy-and-hold strategy, these costs might include minor repairs, such as painting and putting in new carpeting; a vacancy rate while you're looking for a tenant; and property insurance. On the other hand, for a fix-and-flip strategy, you'd obviously want to account for the cost of your renovations, as well as traditional carrying costs like utilities and financing costs.
Investing tip No. 7: Use a comparative market analysis to determine the price or value
Once you own the home, it's time to think about how you'll bring in money. If you're following a fix-and-flip strategy, you'll do this by determining the after-renovation value of the home. On the other hand, if you're following a buy-and-hold strategy, your job will be to determine how much rental income you should get from the property.
With either strategy, you can achieve your goal by asking your real estate agent to draw up a comparative market analysis (CMA). A CMA looks at recently sold properties similar to yours to determine how your property should be priced.
Typically, your real estate agent will come up with three to five comparable properties (comps) to determine the price range for your property. Then, they'll look at the features unique to your property to determine where your property fits in that price range.
The Millionacres bottom line
Whether you're looking to get involved with residential real estate, commercial real estate, or REITs, sometimes you need a little advice to get your real estate investing business off the ground. Use these tips to help you get started as a new real estate investor. With the help of these tips, a little luck, and a lot of due diligence, you'll learn how to use the housing market as a way to build wealth.