Many people see investing in real estate as a way to generate cash flow, build up a nest egg and have tenants pay your mortgage for you. That’s a great strategy, but there’s a technique to it. It isn’t as easy as simply buying a property and renting it. Uneducated investing is how you get into trouble. There are certain principles you need to know and steps you need to follow to help ensure your success.
Don’t Assume Rents will continue to climb.
I see a lot of green investors bank on the appreciation of rents over time. While that is something that can happen with a value add structure, it is not something you want to make a purchasing decision on. Rent growth at the top of a real estate cycle is a very risky play because when a recession hits, you will have rent stagnation and probably some vacancies.
Run Your Numbers
The key to any property is cashflow. The problem is a lot of investors simply look at the rental income vs. the mortgage, which is important, but that’s all they look at. They forget to take into account property tax, insurance, utility bills, repairs, maintenance, property management fees, and other regular expenses. When running the numbers, also include an allowance for vacancies and future capital expenses (roofs, new A/C, etc.) After all of this, if the property still cash flows then it is something you should consider purchasing.
Know Your Market
I love investing in the markets where I live because you will never beat the familiarity of a market you are in daily. Avoid investing in an unknown real estate market by yourself; always have an experienced local team who thoroughly understands it. This point cannot be emphasized enough.
Hire a Professional Management Company
So many investors try to save money by managing it themselves. While this can be done, it is a lot of work and you have to stay on top of it. If you or the people you are investing with are planning on self-managing, make sure they are experienced and capable of taking this on. I’d also recommend talking to real estate investors who have self-managed their properties, so you’ll have a realistic idea of what’s involved.
Understand Real Estate Cycles
This is a big one that gets overlooked by many investors. You have to understand how the market cycles: from recovery to expansion, to hyper supply, and finally to recession. There is a right time to buy in the cycle and a good time to hold off. Seasoned and educated investors understand these trends, and you’ll be one of them once you understand this cycle.
Invest with a Reliable Real Estate Company
In the past seven years, who could have failed in real estate? Each year everything appreciated and rents grew. You honestly had to try to fail, but things are different now. MC Companies has a proven track record both when the market is up and when it goes down. It is important that whoever you invest your money with has this kind of experience. The next few years there will be a massive opportunity, but you need a company that is experienced to navigate it for you, because there will also be massive room for error.