Real estate has the reputation as the prototypical overlooked investment opportunity, because it is “non-homogeneous”. That means that unlike the stock market where a share of IBM stock is a share of IBM stock and there is a wide pool of investors constantly setting the price through the bidding process. However, this isn’t eh case in the Real Estate market. Every house is different, every neighborhood is different and the pool of investors is typically local. This means that there is the opportunity to find motivated sellers, overlooked gems and diamonds in the rough.
So, maintaining a collection of real estate holdings in your investment portfolio may be the best way to generate long-term wealth for you and your family. Stocks, bonds, and mutual funds are deservedly popular among the money-conscious, but houses, condos and apartments can prove more valuable in the long run. Here are a few tips to help you take your real estate investment career to the next level.
Take Advantage of Affordable Financing
After the housing and mortgage crisis, many people were avoiding home ownership because affordable financing was simply not available. After five years of market growth, that has all changed. Even those who don’t have 20 percent to put down can find decent terms for short- and long-term mortgages. Searching around for the best financing deal can save you a bundle and can open up other lucrative investment opportunities for you and your newfound extra capital. The major advantage of using financing is the effect of “leverage”.
Archimedes famously said, “Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.” The same holds true for Real Estate. By putting down a small percentage of the value of a property you gain control of the entire building. Suppose a house costs you $80,000 and you are able to add $20,000 in improvements and sell it for a net $120,000. If you paid the entire $100,000 yourself you would make a nice tidy 20% profit.
However, if you put $$19,000 down and borrowed the rest and end up paying $1,000 in interest, your total cost would be $20,000 and your profit would be 100%. Unfortunately, leverage can work against you as well and so you need to be cautious with it. For instance, if you were planning on a quick flip on the above deal and the market suddenly dried up and you had a 12% “hard money” loan, so you were paying $250/month in interest, suddenly instead of interest costs being $1000 they begin to double and triple and then you have to drop the price of the house to get a sale (if there are any buyers at all) and before you know it your profit has all evaporated.
It could easily look like this: At the end of four months, $19,000 cost, $80,000 mortgage, $1,000 interest. But no sale. Four months later you’ve dropped the price to $110,000 and still no sale (but another $1000 in interest). Four months later you finally sell it for $110,000 and pay 6% real estate commission ($6,600) plus 3% to the buyer in closing costs ($3,300) and so your costs are $19,000 cost, $80,000 mortgage, $3,000 interest, $6,600 commission and $3,300 closing costs for a total of $111,900 for a net loss of $1,900 or 10% of your original investment, plus a lot of work and aggravation.
Learn to Love Inspections
Most beginning real estate investors do not understand the risks inherent in purchasing a house or property. They then fail to take the proper steps to safeguard themselves and their money in the case of changing market conditions, and unforeseen expenses. The savvy investor builds in a margin of safety, studies all the possibilities and trusts inspectors before committing money to a project. Cooperating with, rather than fighting, inspection officials can change the entire way you invest.
Devise Several Exit Strategies
This is the step of the process that trips up many would-be millionaires. Real estate is a fickle business, and deals can open or close with little to no warning or explanation. Before making an investment, it is a sound strategy to plan out at least three or four different potential exit strategies so that you are not stuck holding the short straw. Identifying potential partners, or even particular groups of people that could become business partners, is extraordinarily important. Having a “Plan B” and even a “Plan C” can go a long way toward ensuring your success.
Decide what path you want to take are you a long term investor or a short term speculator? Do you want to buy a property and hold it for appreciation while your tenants pay off your mortgage or would you prefer to buy a house in need of modernizing and make the repairs and then flip it? Many real estate investors plateau at a certain level because they simply do not have the expertise to grow or refine their investment portfolios. Attending seminars, reading books, or enrolling in educational programs could provide the one insight that enables your success. Programs like Success Path teach investors the ins and outs of industry progression based on tried and true formulas that have worked for star investors. They may require a lot of work, but this may be a great way to approach real estate with new strategies.
Remain Confident, Even in Debt
Every investor is aware of the maxim that you must spend money to make money, but you need to understand the difference between good debt and bad debt. Good debt provides leverage which is not to be underestimated as a helpful tool — particularly in real estate. But bad debt is consumer debt and/or being over-leveraged. Over-leveraged investments helped contribute to the financial and housing crises, but real estate moguls would not exist without responsible leveraging of assets.
The goal of the responsible real estate investor should be to avoid zombie real estate traps. This is where buildings are over-leveraged and under-capitalized, and a vicious cycle occurs, culminating with a decline in property values. Experienced investors can avoid this trap with self-education, caution in financing and property acquisition, and respect for the long, slow process of building a real estate portfolio.