Real estate is commonly viewed as a wise investment due to its potential for stable income. Despite fluctuations in the housing market, it often yields higher returns than stocks.
New real estate investors may feel uncertain about where to start, making it crucial to heed advice from experienced investors. Here are a few tips to keep in mind when starting in real estate investing.
1. Choose Your Market & Time Your Investment
In real estate investing, understanding the local market is crucial for success. The factors that affect your specific market will significantly impact your investment more than broader national trends. A key strategy for success is to avoid markets that are experiencing a rapid increase in prices and activity, as these are often at the peak of their cycle and may soon experience a decline.
Real estate markets go through cycles driven by changes in economic conditions. Every market is at a different stage of its cycle. Identifying markets in the expansion phase (with rising sales and prices, good affordability, low construction, and increasing capital investment) is a good strategy.
It’s important to also consider the property’s location within the market. Investing in neighborhoods with high population density, development potential, and access to amenities is an intelligent choice. Additionally, avoid investing in properties at the peak of new construction, as oversupply and lower prices may follow in the short term.
2. Understand the “Hidden Market”
Acquiring property from a distressed seller is a beneficial scenario. it allows you to purchase it for less than its fair market value. Rather than focusing on foreclosure auctions, which may yield properties in poor condition, seek out homes with distressed sellers who have not yet listed them for sale.
Common examples include couples going through a divorce or families selling a loved one’s home. In these situations, people are motivated to quickly sell the property, and the buyer may be able to acquire a well-maintained home.
3. Know Your Market
To mitigate risks when investing in real estate, it’s essential to have a thorough understanding of your market. This will help you to accurately assess the value of an investment property. Familiarize yourself with the average cost per square foot of homes in the area and the potential rental income for a specific property.
Additionally, make renovations that will appeal to the target market of buyers. For instance, avoid reducing the number of bedrooms in a family-friendly community or shrinking the size of the closet or master bathroom.
Also, avoid installing features such as a hot tub or pool if they are not in high demand in the area. Instead, focus on investing in markets with growth history, such as the Greater Houston Area.
4. Get to Know the Rules
Before converting a basement into a second rental unit, ensure it is legal in your area. Similarly, check local zoning laws before converting the first floor of a building into commercial space.
Additionally, never assume that you can add additional rooms or a second story to a building without proper permits. It’s important to understand the requirements and regulations before starting any renovation work.
5. Join a Networking Group
Joining a networking group of real estate investors can be a valuable step for those looking to expand their knowledge and connections in the industry. These groups provide a platform for individuals to share their experiences and insights and collaborate on potential investment opportunities.
By connecting with other investors, you can learn about different strategies and market trends, gain access to exclusive deals and off-market properties, and receive mentorship and guidance from more experienced members. Additionally, networking groups can also provide access to industry professionals such as real estate agents, contractors, and lenders.
It’s important to research and find the right networking group that aligns with your goals and interests. Joining a networking group can be a great way to learn from others, build relationships, and, ultimately, help you make better investment decisions.
6. Calculate Your Costs Up Front
As a new real estate investor, it is vital to have a clear understanding of all the costs involved in a transaction. Beyond the purchase price and realtor fees, there are expenses such as repairs and renovations to consider. Many novice investors struggle to accurately estimate the cost of fixing structural issues, electrical problems, and pest infestations.
It’s important to remember that DIY work on a property can often decrease its value. Attempting electrical or plumbing repairs without proper training and experience can make a property unsellable. Additionally, don’t forget to budget for closing costs, insurance, and utility expenses to ensure a profitable deal.
7. A Rainy Day Fund
Having a contingency fund in place is crucial to handle unexpected expenses. This fund should be able to cover any future costs that may arise. The size of this fund will depend on the property type and the investor’s specific needs. It is essential to always be prepared for any eventualities.
8. Know the Tax Laws
Stay informed and up-to-date with the tax laws in your area. This way, you understand how to file for the right deductions based on local and state tax laws.
9. Manage Your Risks
Risk management is crucial for success in real estate investment. To minimize risk, aim to put at least 10% down when buying a property, and aim for 20%, if possible, to eliminate private mortgage insurance and secure a lower interest rate.
Keep a large cash reserve on hand to cover unexpected expenses and avoid the need to sell at a loss. Avoid properties with poor financial prospects, and do not become emotionally attached to a property. Remember that it’s an investment.
Assess your risk tolerance and take action accordingly, whether it’s avoiding fixer-upper properties or building up your cash reserve before making a purchase. Consider turnkey properties as an alternative if the stress of fix and flip is not suitable for you.
10. Best in Class vs. “The Best”
A mistake often made in real estate investment is attempting to create a property that surpasses all others in the area. This can involve trying to turn a working-class area into luxury homes, which can result in financial losses as the property will not be able to be sold for the same price as it would in an upscale area.
Instead of over-building, aim for “best in class” improvements that add value without excessive cost. Start by fixing broken or damaged items and make small, noticeable changes, such as adding two-tone paint or convenient soap dispensers. Avoid costly upgrades such as top-of-the-line appliances or expensive countertops and decor.
Developing Your Portfolio, Your Vision, & Your Career
Real estate investment is a viable path to financial success and freedom. It offers better cash flow prospects than the stock market, but it’s essential to be aware of potential mistakes. With the proper guidance and community, you can build a profitable portfolio alongside a group of investors looking to improve their cities.
