Successful real estate investors share some common qualities, often learned from mistakes they have made. Real estate is an ever-changing market, but over the years, it has proven to offer solid returns with less volatility than most investments.
These are the basic rules to follow to become a successful real estate investor.
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Understand the national market, but it is even more imperative to understand the trends of your local real estate market. Successful investors warn that hot markets should be avoided because you risk paying top dollar and may lose later.
Real estate markets work in cycles. If you are interested in housing, look out for the signs of an expanding phase in the housing cycle. The signs are a rise in sales and prices in an affordable area. These are teamed with low construction and increased capital investment. Supply does meet the demand in these areas, and homes usually have an affordable entry price.
A market with lots of construction is usually past the phase where there is peak demand for housing. Areas with an oversupply of housing usually see price decreases for one to three years before prices settle again.
Location is always important for investors. The best areas to invest in usually have a high population density. Also, they are near basic amenities like good schools, easy access to public transportation, medical care, and malls. Investors also look for family-friendly neighborhoods with low crime.
As an investor, avoid areas only dependent on one economic driver, like tourism or a particular industry. The danger here is that if that one driver ceases, demand for property drops, driving prices down.
Like all other commodities, the return on investment in real estate depends on the price you pay for a property. You will want to pay a good price, but cheap property in an unsafe neighborhood will not offer the same return as property in a safer neighborhood.
Learn everything there is to know about your market. Know the prices you should be paying and rentals you can charge for each square foot. If you are a buy and flip investor, be careful what you spend on renovations and ensure they make the property appealing to what buyers in your area expect.
Distressed sellers are the best place to look for a bargain, and often these may have not put their homes on the market yet. Make a point of finding sellers like this in your area. Usually, these homes are in a good condition, but the owners need to make a quick sale.
Experts warn that foreclosure auctions are not always the best place to look for bargains because many properties are often in disrepair.
Buying an investment property means you will also have to budget for quite a few expenses. These include the commission of the realtor, repairs, closing costs, insurance, utility costs, and municipal taxes. You need to understand this upfront to avoid losing money on a deal.
It is especially important to know what you should be paying for various types of repairs. Do not fall into the trap of trying to save a few dollars by doing DIY on an investment property unless you are an expert. This may decrease the resale value of the property.
Most additions and changes to properties require a permit from the local authorities. Learn the rules and regulations of your area before turning any space into a home or shop.
As a real estate investor, you need to be sure that you can carry yourself financially if there is a dip in your cash flow or have vacancies for longer than expected. One way to ensure you don’t need to sell a property at a time like this is to create a cash reserve.
Also, make sure you don’t go too deep into debt. The higher your down payment is on a property, the less mortgage insurance you will pay. You may also be able to secure a lower interest rate from your lender.
Finally, investment property must only be bought if the math looks good, and not for sentimental reasons. That means that you need to manage the risk to ensure you make a profit.
There are several investment opportunities in real estate and these are not only found in the housing market. Warehouses, industrial spaces, office buildings, agricultural land, etc. can all generate a rental income and grow in value over time. Understand the market and learn the rules if you want to succeed as a real estate investor.
