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Investing in real estate can be a great way to provide yourself with a passive stream of cash flow that will last for years. However, you can’t jump into the real estate game without knowing how to play. Here are some tips that will help you invest in the right properties while increasing the odds that you see a good return from your investment.
1) Be Conservative With Your Projections When Investing In Income Property
When investing in income property, you should be conservative when projecting your monthly, yearly, or quarterly profits. On average, you should never purchase income property for more than 100x monthly rent. This will ensure that you are investing at a good multiple based on sound cash flow metrics.
When you project your yearly income and profit, assume that you will experience general vacancy rate of at least 8% annually. This signifies that your unit will be occupied for 11 months out of the year. Usually good tenants tend to stay for several years so this is a solid way to create a cushion so that you cat set yourself up to over-perform on your projections.
2) Set Money Aside for Maintenance
You should set aside $1 per year per square foot that you own when investing in income property. This means that you would set aside $2,000 a year for maintenance each year on a 2,000 square foot house. If you are buying your first property, you should also have a cash or a line of credit available to deal with emergencies in the event that something happens before you receive any rental income from the property.
Generally, a 45% expose ratio is a solid and conservative assumption for the long-term expense ratio of the property. This accounts for management, maintenance, and other miscellaneous fees that you might not foresee, but are likely to occur. For more detail on these two key metrics read this previous article on generating double-digit returns through real estate.
3) Study the Market Carefully
Know who might want to rent your property before you buy it. One of the ways to guarantee you are investing in the correct market is follow the metrics I used when compiling my list of best markets to invest in real estate. Buying a property in an area with good schools and parks for kids may entice a family of four with a large amount of disposable income to be interested in a rental.
Corporations that rent housing for their employees may also be interested in renting your property if it is close to public transportation or other attractions. The nice part about executive rentals is that your tenant isn’t there for most of the year. This reduces the odds that your tenant makes a mess of your property.
Older people make great tenants because they don’t like moving and tend to pay the rent on time. In some cases, they may even pay their rent in advance. If your property is located close to scenic areas or a short drive from health care facilities, they may be enticed to inquire about your home or apartment for rent.
4) Find Several Sources of Investment Income
You will need several sources of investment income when you buy your first house. This is because you will not be able to get a mortgage on a foreclosed property. Typically, you will get loans from investors who are willing to front some of the money in exchange for a portion of the profit when the home sells. However, you should also inquire about bank loans or lines of credit in case you cannot find willing investors or you still need more money to cover potential costs in the future.
5) Have a Mentor When You Start Out
You shouldn’t start buying houses without the help of a real estate expert. Having a mentor allows you to learn from the experiences of others. This makes it less likely that you will make the same mistakes that they did when they first started investing in real estate.
Your mentor may also provide you with needed capital to buy your first house or be able to steer you toward deals that can help you make the largest profits in the shortest amount of time. He or she may also be able to connect you with other investors who are willing to help you purchase larger properties that can offer an even larger profit margin.
Investing in real estate can be a profitable venture if you know what you are doing. If you are not experienced with real estate, take some time to research the market, find someone to help you and make sure that you are conservative with your profit projections. If you can do that, you increase the odds of seeing as large of a return on your money as possible.