Monday, December 30, 2013

How to Invest in Real Estate and Minimize Risk - 5 Suggestions For New Investors!

Anyone with enough money and a decent credit score can purchase investment property. Real estate investing is not rocket science. You find a property, contract with the seller, obtain your financing, and sign around on all the dotted lines. Voila! you just became the proud owner of a rental property and CEO of your own personal investment group.

Simplified, of course, but the point is that simply buying an investment property does not suggest prudent real estate investing. Many real estate investors jump into deals where they get burned financially; cursing the day they became a landlord.

This article might not prevent that; nonetheless, it might offer several suggestions that help real estate investors minimize the risk. The list is not exhaustive, nor necessarily the most crucial. They are meant simply to share a couple of things learned along the way with new real estate investors who might not have considered them otherwise.

Suggestion One: Create a meaningful investment plan. Think about what you can logically expect to achieve, write it down, clearly define it, and use it as a foundation for all your subsequent investment decisions. Every acquisition should be part of an investment plan, and when a property can fit into the plan without overburdening or sidetracking you from your goals, pursue it; otherwise walk away.

Suggestion Two: Keep in mind that "only women are beautiful." Avoid the temptation to purchase investment property because you are enamored with the waving palm trees or arched doorways. Amenities, other than those that might promote an increase in rents or occupancy, have little bearing on income property profitability or rate of return. How much money does it make? That is the real question.

Suggestion Three: Understand that you make money when you buy, not when you sell. Base a buying decision on a property's "real numbers" and not "pie-in-the-sky" numbers concocted by over-zealous sellers. Crunch the numbers yourself. If your numbers do not support a property's selling price and the seller is reluctant to listen, better to walk away then to "hope for" appreciation. It is always best to adopt the philosophy, "buy on Monday what can be sold on Friday."

Suggestion Four: Think about resale before you buy. Similar to the previous suggestion, we include it because it expands the argument and does add a point worth considering during your buying decision. Focus on reselling the property. Bear in mind that the same things you care about such as cash flow, financing, operating expenses and tax benefits are what a buyer will care about in the future. Before you buy, run the numbers to see what the property looks like in the future holding to the idea, "if it's not worth selling, it's not worth buying."

Suggestion Five: Remember, you are buying cash flow not a home. Unlike a house, where you shelter your family and raise your children, the purpose of real estate investing (at least it should be) is for you to make money. If a property appears to be profitable, try not to walk away from it merely because it is not where you would want to live or the tenants are not especially to your liking. This is not to suggest you purchase a "cheap" property in an area with known drug, prostitution, or gang activity (that would violate many of the suggestions above). The idea is more common sense then that. That you should not walk away from a potential moneymaker simply because the neighborhood is somewhat run down or the tenants drive an older vehicle. You want to feel safe going to the property (of course), just allow for the probability that you will never live there.

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