Do you have what it takes to make it in the rough-and-tumble world of real estate investing?
Don’t be so quick to assume that the answer is “no.” You’d be surprised by what people are capable of when given the chance to shine. Here’s what you can do to boost your odds of success, no matter how much raw talent you bring to the table.
1. Know Your Market
First and foremost, you must be familiar with any real estate market in which you choose to invest. Working with experienced partners is a good start, but you can’t rely on others to do all the work for you. Thoroughly research local market conditions before making any buying decisions; this is the only sure way to avoid jumping at opportunities that may not be what they seem.
2. Look for Outside-the-Box Income Potential
Despite efforts by some municipalities to shut down operators, short-term rental potential is a vital component of any thorough investment property analysis. Factors that may play into short-term rental potential include location, condition, amenities, and sleeping space.
3. Learn the Real Estate Auction Ropes
The best value-add opportunities are very often found at real estate auctions, where bank and agency sellers sell properties to recoup nonperforming loan losses. Although you can bet that these sellers do everything they can to maximize their return, auction properties may sell at substantial discounts to market value — a critical consideration for investors planning substantial improvements.
4. Conduct a Thorough Cash Flow Analysis Before You Buy
Although the cash flow equation itself is straightforward — total income minus total expenses over time equals cash flow — a proper cash flow analysis can be deceptively complex. Make sure you understand how to calculate cash flow — and then do it correctly for every investment property you’re considering.
5. Calculate Your Likely Return on Investment
Even if your cash flow analysis shakes out, you’ll want to make sure you’re earning a reasonable return on investment. If a given deal’s projected return isn’t competitive, why proceed?
6. Determine Your Appetite for Improvements (And Stick to It)
Every real estate investor, no matter how big or small, must determine for themselves how much to allocate for property maintenance. The general rule of thumb here is to set aside at least 1% of the property’s value each year, although opinions differ about whether that’s too much, too little, or just right.
What’s not in dispute is that some maintenance set-aside is necessary. By contrast, improvement set-asides can be all over the map. Value-add investors may devote the majority of their allocations to major improvements, while turnkey investors may set little if anything aside for pre-occupancy tune-ups. There’s no right or wrong answer here, as long as you stick to your guns.
Make the Most of Every Opportunity
Over time, you’ll develop the tools and skills needed to objectively assess potential investment opportunities. You’ll flesh out an investing philosophy that guides your buying and selling decisions. And you’ll lay out a set of tactical and strategic processes that help you achieve your real estate investing goals.
There’s no shortage of opportunity in real estate investing — provided you know where to look and you’re not afraid to seize it. Here’s to making the most of every opportunity.