Wait, Don’t jump into real estate just yet…. Do it right or don’t bother
So you’ve decided it’s time to make a change in your life – you’ve decided to change the financial future of your family and yourself for generations to come. With so many options for investing out there in the marketplace, real estate continues to be at the forefront for people who are truly serious and dedicated to building a long-term wealth strategy that can be repeated over and again.
But if this is your first venture into the real estate investing arena, what obstacles do you need to recognize to ensure your investing business hits the ground running? To take some of the guesswork out of your investing journey, I’ve put together four key tips that you can use to start moving at full speed. You don’t want to spin your wheels on the real estate ‘treadmill’ for too long – the scenery and fresh air out on the road is a far better option.
Your Key Considerations Before Taking The Plunge:
You’re Becoming A Landlord
Before you take the plunge into the deep end of real estate investing, make sure to blow up your water wings. Analogies aside, there are two critical questions you need to ask yourself before becoming a landlord:
#1 – What do you want real estate investing to provide you over the long term? If it’s fast money or a passive investment, in most cases real estate won’t be for you. If you want long term sustainable wealth and income, then it is a perfect option.
#2 – Am I patient enough to do the homework that it takes to buy a quality property (an investor)? Or am I an emotional buyer that gets caught up in the hype of a market (a speculator)?
The Right Time To Buy
The right time to buy isn’t necessarily when the newspaper headlines say so. The ‘right’ time to get into the rental property market is determined by studying specific markets (i.e. city or town) to determine if it is creating long-term jobs and attracting people to migrate to the area. Once that has been figured out, an investor then needs to look at whether or not the area is overheated by an outside ‘Key Influencer’. If it is, it will be over-valued and therefore more difficult to be a sustainable investment environment.
Strategic investors understand that all markets are cyclical and that to insulate themselves for the inevitable ups and downs of a market, buying property for cash flow is always the number one strategy in a long-term real estate investment strategy. All markets being cyclical, they are driven by two sets of stimulus:
Key Drivers: These are the economic underpinnings of a market – GDP growth, job growth, population growth are some of the key structural components that support the long-term cycle of a real estate market.
Key Influencers: These are the stimuli that push a market to overshoot the underlying economics. These can include: record-low interest rates, increased foreign investment, speculation, Olympic-type world events. These are not direct economic actions, however, they influence the markets (good or bad).
Is This A Good Investment?
After determining whether the market is poised to grow in demand (job and population growth), the next question MUST be: Can I find a property that can be rented out for more money than it is going to cost me to own/operate?
Investment real estate is a business that is driven by revenues (rents) and expenses (including, but not limited to, mortgage payment). If you can’t find a property that pays you positive cash flow ever year then it is no longer an investment, it becomes a purely speculative purchase (which is NOT recommended).
Many beginner investors overlook the fact that real estate investing is a business and with all businesses, there must be an operations budget in place to cover inevitable expenses. Here is a list you can use to start building a budget (items with a ‘*’ are costs that won’t occur every month but MUST be budgeted for):
*Repairs & Maintenance
Once you’ve determined the market rent you will achieve and subtract the monthly operations budget from this, then you can understand whether the property has the potential to be sustainable or not. Always remember – cash flow is king.
An Expert Team
In real estate, it is incredibly important to have a team of professionals on your side – whether you are buying one property or many. It is good insurance for you for the professionals you work with to have real estate in their portfolio as well; that way you’ll know they are paying very close attention to the latest rule and tax changes that are constantly occurring. Here are four pillars to your real estate investing team:
Investment-oriented lawyer – This is one of the most critical team members. Always use a lawyer that is not the same as the seller or the developer.
Accountant – They will help determine whether you should buy in your personal name or under another structure. There is no black and white answer to this question – it all depends on each individual’s personal, family and corporate situation.
Investment-oriented mortgage broker – It is more difficult to get financing on investment properties than it has been in decades. What has worked in the past no longer works in the present. Having a specific investment real estate mortgage broker on your side will make a big difference in your business (rather than someone who deals mainly in homeowner purchases).
Like-minded fellow investors – When there are questions to be asked or pathways to be determined, you will have someone who has already gone out and done it able to give you their real life, on-the-street insights. This will help keep mistakes to a minimum and success to a maximum.
Take these initial tips and considerations to heart, be honest with yourself before you begin your real estate investing business. The best way to avoid mistakes is to learn from those who have already done the dirty work. Be sure to check out past posts on this blog for many others tips, strategies, shortcut and actions steps. you can use right away to give you an advantage as you begin building your portfolio. Cheers!
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