5 Steadfast Rules Of Real Estate Investing
By JD Esajian on December 21, 2018
Investing in real estate is all about realizing a return on your investment. As obvious as it may seem, the goal is not to simply accumulate properties but to find ones with real upside. You want to purchase real estate where you can add value to either through improvements or by buying in the right market. Because of this there are many properties and deals that aren’t worth the risk and passing is the best option. Not every deal is going to be a perfect fit, but the farther away you get from your predetermined criteria the more difficult it is to make a profit. If you are disciplined enough to walk away, you will have the capital and resources to pounce when a truly good deal comes your way. Here are five steadfast rules you should incorporate when considering your next investment purchase.
- Location is key. If you are even remotely associated with real estate, you have most likely heard the old adage about location. Without question location is the most important factor in any investment purchase. Instead of thinking about the purchase price or the numbers, think about where the property is located. Getting a cut-rate price on a property thirty miles outside of town may not produce the anticipated return. Instead of getting a steal, you are stuck with a property you can’t get rid of regardless of how much money you throw at it. You are always better off paying a little more for quality in a prime neighborhood rather than pinching pennies in an inferior area. From the specific location on a street to a broader view inside the town, location is a not so hidden key to investing success.
- Demographics. There are literally dozens of key demographics to consider with any investment purchase. Some should be weighed more heavily than others, but all must be considered. The demographics are the components that drive supply, demand and ultimately the real estate activity inside a market. They cover everything from recent sales activity to employment rates to foreclosures in the area. You can cover much of this simply by researching the town either online or at town hall. The key is to make sure you have the most recent and accurate data as possible. Data even six months old won’t give a true representation of the market. You also want to dig a little deeper and see what you can find. Read the local town newspaper to see if any large employers are leaving the area. Buyers always go where the jobs are. If companies are coming in and the town is growing, buyers will flock and demand in your investment will rise. If jobs are going to neighboring towns, you may be stuck with an investment you can’t get rid of or can’t sell for what you anticipated. In your down time research one market and know the demographics inside and out.
- Condition. As we stated, simply buying and hoping for appreciation does not work. You want to purchase properties that currently have a deficiency where you can add value. What many novice investors fail to understand is that all work is not created equally. Blindly throwing money at the property does not automatically mean you have created value. You need to do the right work to attract the most interest and drive demand. This all starts with an assessment of the current property condition. It is essential to evaluate the whole property and not just what you want to see. Overlooking, or underestimating, an item with the foundation, plumbing or electrical can end up costing you thousands of dollars. Once you have given the property a full assessment then you can attach a cost of repairs and work your way towards an estimated end sales price and a number you are comfortable offering.
- Numbers. Investing is all about the numbers. The truth is that you can easily make the numbers anything you want to fit your narrative. If you reduce the cost of repairs by a little and increase your estimated sales price you can end up with a bottom line you are comfortable with. However, when it comes time to do the work you will be left disappointed in the bottom line. It should go without saying that you need to know and understand all the numbers that are involved in the transaction. What is arguably more important is the discipline to follow the numbers wherever they may lead you. If the numbers tell you that the risk is not worth the return you need to walk away. If they tell you to offer a little more than you think because the margins are there, you should do so. Never blindly follow numbers but use them as an integral part of your due diligence.
- Exit strategy. Before you get involved in a property, you need to know how you plan on getting out. What you will find is that a rehab deal is full of the unexpected. Not only do you need a plan, you need to make sure it is realistic and fits your timeframe. You should also have a backup plan and even an emergency option if the first two fall through. Buying and hoping everything works out, is not a strategy but a recipe for disaster.
Getting involved in a bad deal can set you and your business back months. You are better off waiting until you are more comfortable with a deal than reaching for a speculative one. Use these five rules to help you find your next deal.