Property Investment has huge profit potential. It is one of the tried and tested ways to generate true wealth. It involves owning and managing real property for rent or buying, refurbishing and reselling them for profits also known as flipping. However, both investment cases are not a walk in the park. There is plenty that can go wrong. When it does, you are left with a burden that is not easy to let go of. It keeps taking money out of your pocket without gaining asset value. Property Investment, therefore, requires you to do your due diligence and make sure you are buying into a profitable venture. There are tips from successful real estate investors that will help you get things right. This article rounds up the most important of them. Keep reading to find out how you can make a profitable property investment.
Understand the Risk Involved
As mentioned before, investment property can take a wrong turn. When it does, it can eat into your money and leave you worse off than you were before. And because real property is an illiquid asset, you will have a hard time selling cumbersome property. Then when you do, you will most likely realise a loss. It is very important to know where to look for things that can go wrong.
Consequently, the biggest risk involved in real estate is the change in supply and demand for the type of property you chose to go with. There are two major types of property you can decide to go with, residential property and investment property. Residential properties are housing units that are meant to be used as rental homes while commercial properties are meant for business use. Ordinarily, when making a property investment, you go with the type that is in low supply but has a high demand. With enough research and additional expert opinions, these factors are usually predictable. But they can shift unexpectedly and suddenly have a negative impact on your investment. It is important when planning to consider how you will manage in such a case. Managing such an event sometimes involves waiting it out till the market bounces back, and it is profitable to sell. Setting aside money to help weather this storm can be crucial to surviving such times.
The risk is not usually only limited to uncontrollable or unpredictable forces and events. Sometimes, the risk involved can be because of a mistake or the wrong choice of personnel, equipment and materials. Fortunately, there are sections in this article that will help you with these. But if you are making your first investment in real estate, you are more likely to make one of these mistakes than someone who is experienced. If it is your first real property investment, you will do best if you have a mentor
Have a Mentor
Mentors in the real estate industry are not lacking in supply. There are lots of people online and offline that beginner property investors can listen to, be an apprentice to and be a student to. As mentioned before, there are two ways to make property investments. Buying property to refurbish and sell (also known as flipping) involves three steps. The first is selecting property that you think will attract investors (mostly rental property ones) or home buyers (individuals looking for houses to live in) who want a finished product. Second, do the necessary repairs and renovations to improve the property’s value. Finally, sell it at a profit. There are a lot of technical skills involved in doing repairs and renovations. If you don’t have a background in building houses like in carpentry, masonry, interior design, or architecture, you might find it difficult or impossible to do repairs on your own. Hiring good help will also be hard for you if you don’t have experience in property development. If you are flipping and don’t have some technical house-building skills or property development experience, you should have a mentor as a guide.
A mentor is free help, consultancy and education. They are everywhere. Your friend, father, or even your father’s friend can be a mentor as long as they have some background in investing. It is even better if they have a background in property investment. If you go online, you will get a lot of good podcasts from successful real estate investors who can mentor you. You can easily access them through social media and popular business platforms like LinkedIn. Even more, most of them are usually happy to give their experiences to aspiring investors. However, you should be careful when selecting a mentor. There are those who will guide you well, but there are also others who might mislead you.
Create a Team
Networking is one of the key pillars of success. The popular adage that summarises this goes, “your network is your net worth.” Have successful real estate investors, entrepreneurs and financial experts as friends and business associates. As you get more involved in the real estate sector, you will find people to work with who add value to your work. Notice these people and create a network of like-minded individuals who make each other’s businesses thrive and grow.
An experienced and skilled team complements the limited skill and experience you have. Flipping, for instance, is more likely to succeed if you have carpenters, masons, interior designers, and architects on the team. Property investment is a diverse field. If you have team members with diverse specialisations in various field like property tax, real property laws and regulations, and economics, the whole team can see the project through successfully by contributing in their various specialisations.
Get Involved in Property Management
It is a popular belief that rental property investment is just money and no work. Rental property income is the other type of property investment. It involves buying property for the rental income that it provides. Although both flipping and renting property requires property management, it is more of a necessity in renting than it is in flipping. Rental properties need regular repairs and renovations, to-let advertising, rent payments follow up, tax declarations, cash flow (rental income minus all operating expenses and mortgage repayments) accounting, tax payments, and mortgage payments (if any).
For first time investors, it is best to do these on your own so as to learn and make mistakes. If you are starting out on your own without a team or a partner, it is best to start small. Start with a one-unit property and do everything on your own. This way you will experience first-hand the things involved in property management. You will realize there is a lot that goes into maintaining the cash flow. The tenants are harder to deal with than most people know. And the laws that govern tenant-landlord relations are often a little one side. In some instances, the landlord is favoured over the tenant, in other instances; the tenant is favoured over the landlord.
After gaining meaningful experience you can outsource management to a licenced property manager. This does not mean your management job is over, it is just easier. Now you have to manage the manager. There are good property managers and there are bad ones. If you have had experience managing your properties, you should interview them on your own. You will be able to tell if they are the addition you need to your team, or if you should keep looking. A good property manager will be kept for the long haul. You will need help with good management partners as you add more units to your real property portfolio.
Do the Maths
Having your figures right is the most crucial factor to consider before making a purchase decision. If you are flipping, the estimated after repair value (ARV) should be able to cover the expense you are willing to take the risk for, and make you profit. If you are buying for rental income, the cash flow should be substantial enough for the property to be worth buying. In-depth calculations should be done before buying investment property. But if you are considering various real property per day, you may not have enough time to do in-depth analysis of potential return on investments for the various offers. That is why there are formulas that have been developed over time in real estate to help make quick decisions on whether or not to keep looking into a potential deal. They are the 1% rule, the 50% rule and the 70% rule.
The 1% rule is for testing rental property investments. If a real property goes for R 3 million, for example. For it to be worth looking into, the monthly rental income should be above 1% of R 3 million. It should be R 30 000 and above. This rule is sometimes called the 2% rule. In both cases, the rental income should be between 1% and 2% of it’s initial purchase value. It should not be below 1%.
The 50% rule is also for testing rental property investments. It states that the monthly operating expenses for the real property will always cost half of the monthly income from rent. This is not always the case. In reality, it may be higher or lower, but this is a rule of thumb. It is a rough estimate. The figure helps potential investors see whether or not there will be substantial cash flow from a real property, especially after subtracting the monthly mortgage payments (if any).
The 70% rule is for testing, “buy, renovate and sell property investments.” It states that the most you should pay for a buy, renovate and resell real property plus the cost of renovation should be worth 70% of its after repair value. For instance, if a house sells for R 300 000 after a renovations that cost R 50 000, the rule states that you should pay at most R 160 000, which is R 210 000 (70% of R 300 000) minus R 50 000. This last rule is not very practical for real property with very low or very high initial value. Hence, when using it you should use other additional information to gauge the practicality of this rule for your specific case.
One of the character traits of a successful real property investor is patience. Most real estate investments pay out in the long term as opposed to the short term. Even if you are flipping a real property and you have the resources, skill and experience; you will take at least a year to close the deal at a profit. If you buy rental real property on a mortgage, you have to wait for the house to pay down the mortgage before you can realize a significant cash flow from the monthly rental income. Whether you are flipping or renting, you always have to be patient with property investment. Patience requires planning. Before buying, make sure you can afford to hold even when there is an unforeseen circumstance. For instance, there may even be a market downturn when you are holding an investment. Try to plan so that you are not in a position to make rush decisions to save a sinking ship by aborting the mission.
Real estate is a wide sector with a vast quantity of knowledge, not to mention the experience that comes with years in practise. Always keep learning from studying, doing practical handy work, and following advice. First decide where to start, then expand onto other fields of study and skill sets. You will cover more ground this way and be useful as part of a team in which the team players have specific function. In addition to this, you can choose to practise a skill like carpentry, painting, plumbing, or generally replacing fittings. You can also study taxes, laws and regulations, accounting and the economics involved in real estate. Whichever way you start, always keep learning to improve your ability to make better investment decisions.
The tips included in this article do not guarantee a positive return on investment. They are meant to improve your chances of getting good returns on your investment. For more accurate, critical analysis always consult the experts.
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