Whether you consider yourself a business person or not, real estate investment is just that: a business. If you can take a business approach to your real estate investments, understanding the potential benefits and downfalls, you may have much better success with them and be able to keep an emotional arm’s length relationship with the properties you buy.
While any type of real estate investment requires some hard work, hands-on involvement, and diligence, especially if you are investing your own sweat equity, the profit potential is enormous if you do your homework first and stay the course. Consider these tips if you are thinking about investing in real estate for short or long-term profitability.
Understanding Your Financial Goals
As a real estate investor, you want to understand your financial goals before you buy a property. Do you want to invest in residential properties or commercial ones? Do you want to buy, fix, and flip for a fast profit, or do you want to hold on to your properties for the long run and reap long-term passive rental income and equity?
Understanding your goals and how much work you are willing to invest allows you to consider all the potential benefits as well as the pitfalls of investment properties.
Playing to Your Strengths
Investing in real estate requires a certain amount of diligence and hard work on your part. Whether you have the time to invest in doing that work yourself or have baked in the amount of cash required in getting the help you need, it’s essential to go into it with eyes wide open, knowing yourself and your strengths and weaknesses.
Because fixing and flipping demands a great deal of skilled work, understanding your fixer-upper talents (do you have any?) or how much money it will cost to hire out for this labor (potentially, a lot) will enable you to work around much frustration and have a much better understanding of what your bottom line may truly be after your expenses. Benefit: Fixing and flipping can often command a significant short-term gain that you can then invest in other properties.
Buying and renting will also come with its own set of demands. Whether you are considering long-term rentals or short-term vacation properties, you will need to understand how to market to and find the right tenants for your property. Unfortunately, getting the wrong ones can be a nightmare.
Being a landlord will also require a certain amount of knowledge and talent as a manager, unless you are willing to pay someone else to do it for you. Managing your own properties means you will need to keep them properly maintained and be on call for emergencies. Benefit: buying and renting investment property will reap long-term, passive income and offer equity as the property increases in value.
Understanding Your Costs and Budget
Understanding your budget and estimated costs are critical when investing in real estate.
Most real estate investments require not only the upfront cost of the purchase but also the added expenses of making it marketable or rentable. In addition, the longer you own the property while you are making it more marketable or rentable, the more it will cost you in taxes, insurance, holding costs, and ongoing maintenance costs.
Updating costs can be substantial, especially if you are updating kitchens and bathrooms in an older home. Although updates may look superficial, these two rooms can cost the most but will have the most considerable influence in the home’s marketability if you intend to flip the homes or rent them. Cosmetics such as paint and landscaping are also important for curb appeal to get buyers or tenants interested in your property and in the door.
While at first glance it may look as if there will only be minor improvements needed, once you get into the bones of the home, there may also be unfortunate surprises. Having an extensive property inspection is critical so you are well aware of any potential cost issues that lie under the surface or in the home’s major systems. You should also always have a professional survey and title search conducted, so you are aware of any potential property issues or title deficiencies.
Understanding the Profit Potential of Your Investment
Understanding how a property will perform as an investment is critical. If you are looking to purchase property that will offer monthly rental income, estimating your potential cash flow will look at what you can anticipate.
You can do this by taking the rentals in that area against what you expect your monthly expenses will be. You will always have those times when the property is empty, so accounting for that is important as well. The cash flow of an investment property can be fluid, depending on the market, availability of other rentals in the area, and the economy. But doing a cash flow analysis can offer a good estimate of what you may be able to expect from your investment on a monthly basis and determine if it works within your investment expectations.
Estimating your return on investment is another important number to consider for a potential investment property. Return on investment will be a measurement of how efficient the property will be as an investment. The simple calculation for establishing ROI is to take the gain, or potential profit, from the investment, back out the cost of the investment, and then divide by the cost. A typical good return on rental investment is around 10% but this can vary depending on the investor and the potential of the property and area.
Doing Your Market Research
One of the most important things you can do as a real estate investor is to complete a comprehensive analysis of not only the property itself but also of the neighborhood and the area real estate market.
Real estate markets are cyclical and can be geographically dependent. Some areas may be up and coming and are experiencing a great deal of growth and expansion, whereas others may have already hit an oversupply of housing and are heading toward a downturn in the market value of homes. Some neighborhoods may have experienced a recession, but the municipality is investing in the area, and occupancy rates look to be growing. Know the market for the properties you are looking at so you can understand your exposure if you are unable to sell or rent immediately.
Know the neighborhood, understand the demographics of the other homeowners or tenants, and know the local real estate laws and possible constraints you may be dealing with. What may have looked like the perfect property may end up not being quite so perfect after all. Not having comprehensive information about the current market, municipality, neighborhood, or property can be a serious and costly investment mistake.
Understanding Your Financing Options
Most real estate investors make use of mortgage financing to purchase their investments. But investors need to understand key differences in lending opportunities for investment properties vs. primary residence properties.
Mortgage lenders see investment properties as a higher lending risk than those that will be borrower-occupied. Consequently, while conventional lending is available to investors, conventional mortgage lenders will typically set the qualification bar higher for them and usually charge higher interest rates to offset that perceived risk. Interest rates on investment properties will also vary depending on the lender, the type of property being financed, the location, the amount of down payment, the amount of the mortgage, and the creditworthiness of the borrower.
For investors who are looking to fix and flip their investment properties, a hard money or private mortgage is usually a good option. Qualification for these loans are typically based on the value of the property instead of the borrowing credentials of the investor. Consequently, these loans don’t have the extensive qualification processes that conventional lenders have which makes them expeditious when time is of the essence. They can also be more open to supporting investment properties that traditional lenders would consider too risky. Hard money and private mortgages usually are short-term options allowing an investor time to flip and sell or secure another longer-term financing option.
For many investors, non-qualifying mortgages are a very good option since investors typically are self-employed and have a more difficult time getting approved under conventional lending criteria. Whereas a conventional lender will require proof of income through W-2s and tax returns, non-qualifying mortgages verify a borrower’s income in other ways. Non-qualifying lenders also often offer more flexible lending terms than conventional lenders.
Financing for investors doesn’t have to be difficult. If you are a real estate investor and would like to explore lending options for your investments, contact the mortgage professionals who offer a broad range of mortgage products for investors and owner-occupied residential borrowers alike.