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3 Things You Must Do to Succeed at Real Estate Investing
Here are three simple guidelines to follow if you plan to succeed in real estate investing. Not everything, of course, but at the very least you have to be willing to commit to these things if you want to become a successful real estate investor.
Shall we stare?
Acknowledge the Basics
Investing in real estate involves acquiring, holding and selling real estate rights with the expectation of using cash inflows for potential future cash outflows and thus generating a favorable rate of return on that investment.
More affordable than equity investments (which usually require more capital from the investor), real estate investments offer the advantage of strong real estate utilization. In other words, with real estate investing, you can use other people’s money to increase your rate of return and control much larger investments than would otherwise be possible. What’s more, with a rental property, you can virtually use other people’s money to pay off your loan.
But in addition to leverage, real estate investing also provides other benefits to investors such as annual after-tax cash flow returns, capital appreciation through asset appreciation, and after-tax cash flow upon sale. In addition, non-monetary returns such as pride of ownership, security of control over property and portfolio diversification.
Of course, capital is required, there are risks associated with real estate investing, and real estate investing can be challenging to manage. Nevertheless, real estate investing is a source of wealth, and that should be enough motivation for us to want to get better at it.
Understand the elements of return
Real estate is not bought, held or sold based on emotion. Investing in real estate is not a love affair; it’s about return on investment. As such, prudent real estate investors always consider these four basic elements of return to determine the potential benefits of buying, holding or selling an income property investment.
1. Cash flow – The amount of money that comes from rents and other income minus operating costs and debt servicing (loan repayment) determines the real estate’s cash flow. Furthermore, real estate investment refers to the cash flow of real estate investment. You are buying an income stream from a rental property, so be sure that the numbers you later rely on to calculate your cash flow are true and accurate.
2. Increase in value – this is the increase in the value of the property over time or the future sale price minus the initial purchase price. However, the fundamental truth to understand about appreciation is that real estate investors are buying an income stream from real estate investments. So it makes sense that the more income you can sell, the more you can expect your property to be worth. In other words, decide on the likelihood of increased revenue and factor that into your decision making.
3. Loan amortization – This means the periodic reduction of the loan over time which leads to an increase in capital. Since lenders evaluate a rental property based on income flow, when purchasing a multifamily property, provide lenders with clear and concise cash flow reports. Real estate with accurately presented income and expenses to the lender increases the investor’s chances of obtaining favorable financing.
4. Tax Shelter – This refers to a legal way of using real estate investment property to reduce annual or final income taxes. However, there is no one size fits all, and the prudent real estate investor should check with a tax professional to be sure what the current tax laws are for the investor in any particular year.
Write your homework
1. Form the right attitude. Dispel the notion that investing in rental properties is like buying a home and develop the attitude that investing in real estate is a business. Look beyond curb appeal, exciting amenities, and desirable floor plans unless they contribute to income. Focus on the numbers. “Only women are beautiful,” one investor told me. “What are the numbers?”
2. Develop a real estate investment objective with meaningful goals. Have a plan with stated goals that best frames your investment strategy; it is one of the most important elements of successful investing. What do you want to achieve? By when do you want to achieve this? How much cash are you willing to comfortably invest and what rate of return are you hoping to achieve?
3. Research your market. Understanding as much as possible about the real estate market conditions surrounding the rental property you are looking to buy is a necessary and prudent approach to real estate investing. Learn more about property values, rents and occupancy rates in your local area. You can contact a qualified real estate professional or speak with the county tax inspector.
4. Learn terms and returns and how to calculate them. Get to know the nuances of real estate investing and learn terms, formulas and calculations. There are sites on the internet that provide free information.
5. Consider investing in real estate investment software. The ability to create your own rental property analysis gives you more control over how the cash flow numbers are displayed and a better understanding of the property’s profitability. There are software vendors online.
6. Establish a relationship with a real estate professional who knows the local real estate market and understands rental properties. Spending time with an agent will not advance your investment goals unless that person knows about investment property and is willing enough to help you get it right. Work with a real estate investment specialist.
There he is. The most concise insight into real estate investing I could provide without boring you to death. Just take them to heart with a little common sense and you’ll be just fine. For your investment success.
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