The real estate market is always changing, and not just in terms of where people want to live. But we all know that real estate provides better returns on investment than the stock market without as much volatility. In real estate, your risk of loss is minimized by the length of time you hold on to your investment property. When the market improves, so does the value of your property. Here’s our rundown of how to become successful in real estate investment.
1. Choosing Your Market & Timing The Investment Wisely
For successful real estate investment, it’s more important to know your local market than just what’s going on nationwide. Your purchase and its success will be most influenced by the factors at work in your specific real estate market. A good rule of thumb to become successful in real estate investing is to avoid very hot markets. Some real estate investors here may brag about the appreciation of their properties or rising rates, but you risk buying at the top of the market and losing your money.
The real estate markets move in cycles due to the desire for economic profits, and every real estate market is at a slightly different phase of its housing cycle. You need to find markets that are in the phase of expansion – where sales and prices are rising, affordability is good, construction is low and capital investment is rising.
The exact market you’re in should inform your approach as you choose investments. Peak new construction tends to occur past peak housing demand, which ultimately leads to temporary oversupply and lower prices. This bust phase usually lasts between 1-3 years before a price floor is found.
To become successful in real estate investment, your focus should also be on the location of the property within the market. You need to invest in those neighborhoods which have high population density, are developing, and have all basic amenities nearby.
All great neighborhoods have this in common:
- Low crime rate
- Great schools
- Access to parks and leisure destinations
- Access to medical care
- Access to public transportation
- Access to shopping malls and restaurants
- Good walkability
All of these translate into high demand for housing. If housing supply meets housing demand, real estate investors should not miss the opportunity since entry prices of homes remain affordable.
Avoid any area that is dependent on one economic driver such as the tourism or auto industry. Detroit is one such example of a market whose economy was heavily driven by the auto industry. When its auto industry failed, it led to a drastic decline in home values. All the rentals went vacant as no one able to find work. Fewer jobs in the city eventually resulted in fewer people able to live there. There were more houses than people who want them, so the law of supply-and-demand drove prices down.
2. Buy Low
Real estate investing can be compared to investing in a dividend-paying stock. The return on investment is based on how cheap you bought the commodity. However, you have to look at the return on the investment. A cheap little house in an unsafe neighborhood can be bought for little money, but you won’t get much money from it, either.
3. Tap into the Hidden Market
The ideal case is buying property from a distressed seller because you can get it way below the fair market value. Forget foreclosure auctions; this can yield deals, but you’ll often find properties in dire need of repair. Instead, look for homes with distressed sellers who haven’t put it on the market yet. The couple going through a divorce or family that wants to sell Mom’s home after she passed are the ideal sellers; they just want to get the money, and the buyer is probably getting a well-maintained home.
4. Understand Your Costs Up Front
If you’re new in the business of real estate investment, it is crucial to understand your costs upfront. It isn’t just the cost of the property and realtor commissions. You’ll need to pay for repairs, and too many newcomers to real estate investing don’t know how to accurately estimate costs to repair that cracked foundation, fix electrical problems, and address pest infestations.
Don’t think you can solve the problem by working on weekends to add a little paint. Most DIY work detracts from the value of the home, and trying to fix someone’s electrical and plumbing issues yourself may make it unsellable unless you’re already capable of doing work like this to code. Others fail to budget for closing costs, insurance, or utility costs and end up losing money on a deal.
5. Understand The Market
One of the best ways to avoid problems when investing in real estate is to understand the market. Understanding your real estate market will help you to evaluate the price of an investment property. Know how much the typical house in a community is worth per square foot and the rent you could charge for a given investment property. Renovate properties in ways that make it more appealing to the expected buyer.
For example, never reduce the bedroom count in a family-friendly community. Nor should you reduce the size of the closet or shrink the master bath to put in a hot tub few in the area would appreciate. Don’t rip out a good yard to put in a pool if there is little demand for it. Choose the best real estate markets like the metro Atlanta area which has seen stellar growth in real estate.
In the Atlanta real estate market, demand has caused home values to rise around ten percent a year for the last few years. Housing prices in Atlanta dipped in 2017, allowing prices to adjust. Average home prices today are similar to where they were at the 2006 peak, but they’re more affordable when you take inflation into account. If you put time and effort into truly understanding your local real estate market, you can significantly improve your chances of becoming successful in real estate investment
6. Manage Your Risks In Real Estate Investment
There are several ways in which you can manage risk in a real estate investment. First, don’t go deeply into debt. When buying an investment property for sale, aim to put at least 10% down. Twenty percent is better since it eliminates private mortgage insurance and often yields a lower interest rate on the loan as well. Second, maintain a large cash reserve. You’ll reduce the risk of having to sell a property fast at a loss if you have the cash to carry the property long before it needs to move.
By having a larger cash reserve, you’ll also be able to pay for unexpected repair bills before you can put a property on the market. Running to a hard money lender to get the last $20,000 to fix a property is possible, but it comes with a high-interest rate that eats into your profit margin. Managing risks in the right manner can significantly improve your chances of becoming successful in real estate investment.
Don’t buy a property for which the math looks bad because you’re afraid you’ll lose out on the deal. Never fall in love with an investment property. You’re not going to live there – someone else will. Be aware of your risk tolerance. Then take action to manage the risk, whether you’re avoiding the fixer-upper you’re afraid will be a money hole or improving your cash position before you buy it. If you can’t handle the potential stresses of fix and flip, buy turnkey properties instead.
7. Go for Best in Class – Not “The Best”
A common mistake in real estate investment is trying to develop a property to be the best in the area. They may try to renovate homes in a working-class area and turn it into a luxury home. You can’t sell that for the same price you would receive in an upscale area. You end up losing money. Over-building a home is wasteful. Go for “best in class” touches, not trying to make an office building the fanciest or elite product.
First, fix everything that is broken or damaged. Then make little changes that stand out but don’t cost much. Two-tone paint over a single color paint job is one good example. More convenient soap dispensers and trash receptacles are another. Skip the Corian or granite countertops, the top of the line appliances, or expensive decorating.
8. Maximize Value of Real Estate
Look for ways to maximize the value of the real estate, eking out more profit for the same investment property. It could involve renting out a corner to a bank to install an ATM. You could rent out space in the lobby for a small commissary, generating rental income from what otherwise failed to add to the business’ cash flow. In an apartment complex, you can look for value-added services. For example, offer trash pickup from someone’s door to the dumpster for a modest fee per month.
Or add a concierge or security guard to the building. Now you can charge higher rent for a more attractive property. Another variation of this applies to house flipping. Instead of buying the home, fixing it up and selling it to a home buyer, fill it with a tenant, instead. Once the tenant has moved in with a lease, start looking for buyers. This is called a turnkey rental property, and it can easily be sold to a new investor who wants to jump into real estate investment without any hassles.
9. Know the Rules and Regulations of Real Estate Investment
Don’t turn that basement into a second rental unit until you know whether or not that’s allowed. Don’t convert the first floor of the building into commercial space if local zoning laws prohibit it. Be careful about food service business rules before you replace a break area full of vending machines with a little sandwich shop. Never assume you can add another room or second story to a building. Understand the degree of work that requires a permit before you start it.
10. Consider Non-Traditional Real Estate Investments
Remember that real estate investing doesn’t have to equal a choice between investing in single-family homes and apartment buildings. You could invest in office buildings, storage unit complexes, industrial space, and warehouse. All of these generate rental income. In the case of offices and industrial buildings, you may be able to reduce overall costs with a triple-net lease where the tenant covers basic insurance and pays the property taxes and maintenance. Your investment then yields steady cash flow with few out of pocket expenses.