Whether you're an experienced real estate investor or just starting out, the goal is always to make as much money as you can from your real estate investments. Getting the right property investment advice will not only help you maximize your return on investment but also keep you from getting into a situation that puts you in serious financial trouble.
Why you should invest in real estate
Real estate is a tried-and-true investment that has provided significant wealth for people for generations. Investing in real estate has unique benefits over any other type of investment, which is what continues to make investing in real estate a popular strategy for building wealth.
The benefits of investing in real estate:
- Hard asset that won't go away.
- Always be needed.
- Steady cash flow.
- Ability to leverage.
- Builds equity.
- Additional tax deductions.
- Ability to defer capital gain taxes.
Choose your real estate investment strategy
There are multiple strategies for property investing. The strategy you choose should be based on your reasons for wanting to invest in real estate.
Most real estate investments are geared toward receiving rental income from tenants. After covering expenses, this rental income provides you with monthly cash flow. To maximize cash flow, you don't necessarily want to buy the nicest property. Low-priced properties often provide the most cash flow for the price.
Even though the real estate market has its ups and downs, real estate values go up over time. If you're more interested in the long-term profits from appreciation instead of cash flow, focus on higher-quality real estate in growing markets.
Even the most expensive pieces of land today were once an insignificant part of a vast, unsettled area. As cities continue to grow and new developments emerge, land that might not be worth a lot now could be worth a fortune one day. Study growth trends in your market, look for industries that are in demand, and seek out specific areas where you think that demand is likely to increase. You may find some distressed properties or even vacant land that could be the next big property development.
Finding the right property investment
The deal can make or break an investment. While you don't necessarily need to find the lowest price, you will need to buy a property at a price that allows you to get a good return on investment.
People usually turn to sites like Zillow (NASDAQ: Z) (NASDAQ: ZG) or LoopNet (NASDAQ: LOOP) when they start their investment property search. While you may be able to find some good opportunities on these sites, the best real estate investments are purchased before they even make it to those sites.
Building a network of investors and real estate agents is the most effective way to find the best investment properties. Since active investors are always looking for a great opportunity, a real estate agent or another investor will present the opportunity to their network before putting it on the market. Great multifamily investments are almost always sold this way.
In addition to finding a good deal, you need to make sure it's the right type of real estate investment for you. Not every investment is right for everyone.
Ask yourself these questions when considering a real estate investment opportunity:
- Do I know enough about this type of property?
- Am I familiar with this market?
- Can I actually afford it?
- Does it fit my investment goals?
- Will it still be a good investment in five years?
- Will I be able to sell it?
Financing your investment property
One of the greatest benefits of real estate investing is the ability to borrow the majority of the purchase price. In most cases, you only need between 20% and 30% of the total purchase price of the property investment.
Even if you're purchasing a single-family residential rental property, the mortgage will still be a commercial loan. Since you're purchasing the rental property to make money, the lending regulations for consumer loans for a primary residence don't apply. For instance, the Truth in Lending Act doesn't apply to loans made for business purposes, which your rental property would fall under.
There are several lenders that offer easy financing for investment properties and commercial real estate. The trouble with these lenders is that they offer loans at high interest rates and often with unexpected fees. Many of them even have stiff prepayment penalties, making it difficult to refinance into a more affordable loan. When financing an investment property, make sure you're working with a reputable lender and that you fully understand all the loan fees involved.
Loan terms for an investment property are often different from those for a residential mortgage. Loans are normally amortized for 20 to 30 years but usually have a balloon payment due in five, seven, or 10 years.
Some investors are so anxious to get financing for a deal that they agree to terms that aren't beneficial to them. The lower the interest rate you get on a loan, the better it makes the investment. A lower interest rate means a lower monthly payment. Obviously, a lower monthly payment means more free cash flow. You may also be able to afford to pay more for a good investment property with the right interest rate.
The great thing about using leverage to purchase an investment property is that your return on investment is higher. The cash-on-cash return is higher when you finance a property. You can learn more about how this works in our article on cash-on-cash returns.
Let's say you have $100,000 in cash to invest. You can either pay cash for one property that costs $100,000 or put 25% down on four $100,000 properties. The latter will give you more cash flow, and if you keep the properties long enough, you will have four times the amount of equity.
Managing your investment property
Buying an investment property is just the beginning. To ensure your property investment pays off, you have to properly manage the investment.
Many investors fail because they are more concerned with lowering expenses than they are with growing their gross rental income. No matter how low your expenses are, you won't make any money if you don't have rental income. Focus on increasing your gross income first, then figure out the expenses.
You have to be ready and willing to spend money when it's needed. Delaying certain repairs, such as replacing a roof or windows, can result in more expenses down the road. You can easily be stuck spending twice as much by putting it off. Besides that, if you let the property fall into disrepair, it's hard to maintain the property's value and maximize the amount of rent you can collect.
The best way to be prepared for major expenses is to set aside reserves every month. These are your capital expenditure, or capex, reserves. If you budget a certain amount each month to go into a separate account, you'll have the money available to cover major expenses without having to deplete your personal accounts.
Grow your network
One of the best ways to grow your knowledge is by learning from your mistakes. The next best way is to learn from other people's mistakes. You can learn a lot from property investors who have already experienced some of the challenges you'll come across. Take advantage of the opportunity to learn as much as you can from them.
You may also find some great opportunities with other investors. You may have a great deal on the table, but not enough money to get it done. In that case, having other investors to reach out to can be a great asset. You also might find that another investor has a great opportunity for you to partner with them.
Above everything else, the most important thing you can do is find a mentor who has already achieved some of the goals you have set. Having somebody to turn to when you're struggling to make investment decisions, to talk you through moments you're discouraged, or just to offer a different perspective on things will do a lot to help you along your real estate investing path.
A great way to grow your network is to attend local real estate investing events or meetups. You can even look up local real estate investing groups with the National Real Estate Investor Association.
This property investment advice won't do anything for you if you don't put it into action. Whether you're ready to make your first investment or trying to grow your property portfolio, you have to keep moving forward toward your goals. And whether you're taking time to learn more about investing, reaching out to brokers or other investors, or hunting for deals, being consistent in putting this property investment advice into action is the key to becoming a successful real estate investor.