So, you’ve decided you want to invest in real estate. Now what?
Do you just go online and start looking at houses to buy, rent, or flip?
Do you even know what flipping is?
What do you even want to get out of investing in real estate? Don’t say, “Money!” because other forms of investment will earn you money too.
There has to be a particular reason to invest in real estate as opposed to something else. Luckily, others have been exactly where you are right now and became successful real estate investors. And you can learn from all their wins and losses to also come out on top!
Why Real Estate?
Real estate is an excellent investment for many reasons:
- Regular income stream
- Your investment is likely to appreciate in value
- There’s a lot of tax advantages
- It’s far less volatile than the stock market
Additionally, as you expand your portfolio, you can use economies of scale, which is when your assets’ scope gives you enough leverage to negotiate for better prices on goods and labor.
What do you want to accomplish in real estate?
Do you want to make a certain amount of money in passive income monthly or retire in a particular time frame?
Write out your goals using the SMART method. That means goals that are:
Once you’ve written out your SMART goals, you need to figure out how to get there,
Choose Your Strategy
There are seven common real estate investment strategies:
- Investing in real estate properties
- Buying and holding properties
- Flipping properties
- Real Estate Investment Trusts (REITs)
- Buying, rehabbing, renting, refinancing, and repeating (BRRRR)
You should study each strategy carefully. In addition to weighing their pros and cons, you should also ask yourself how involved you want to be in your real estate investments and which strategies are most suited for your personality and lifestyle.
Make a Financial Plan
When investing in real estate, you'll have to have a financial plan in place. You have to consider operating expenses, associated costs, emergencies, big value items like replacing an HVAC, revenue, tax benefits, etc.
Luckily, investing in real estate is far more accessible than one might think.
- There are ways to invest with bad to no credit
- There are real estate tax advantages
- Many financing options
- Tax advantages depending on the legal entity of your real estate investment business
- States with no property taxes
- Landlord friendly states
- You can collect rent online
If you don’t live in a state that fits into your SMART goals, don’t forget that you can remotely manage a rental property! And if you’re having a hard time finding the right properties, invest in class C and class D assets to increase your cash-on-cash return (CCR).
CCR is the measure of how much cash your cash makes you, and you can make your CCR go up by investing in class C and D properties. These are usually older properties, require more repairs, aren’t in high demand areas, experience tenant turnover more often, and are less likely to appreciate. Still, they are also more affordable and, as a result, could be your entryway into real estate investment.
There’s also always the possibility that if you hold onto a class C or D asset long enough, that the area will experience a renaissance, and you’ll have a more desirable property on your hands in the future.
The indicators that suggest that the real estate market will be strong in 2021 show that young people are leaving cities for suburbs that are expected to stick around for a while. So, if you can’t snatch up a property in the most coveted areas, expand your search, and somewhere down the road, people might look at your property and say to themselves, “I should have invested here early just like they did!”
Marketing Your Property and Screening Tenants
Once you have your property, getting the right tenants is the next most important step. Doing so requires knowing:
- How to write a great listing.
- How to screen your tenants.
- How to avoid common lease violations.
- How to minimize landlord liabilities.
When you make your tenant criteria clear in your listing, you’ll narrow down your pool of applicants before they even see the place. A rigorous screening process will further winnow down your potential tenants, but so will being upfront about pets, drugs, smoking, and overnight guests. That way, you’re more likely to avoid an early termination.
Although, do keep in mind that working animals like service and emotional support animals are not pets, and it’s against the law to prohibit them.
Put Together Your Team
If you want your real estate investment to remain passive, you’ll want to hire a property manager. Property managers do a lot:
- Screen tenants.
- Collect rent and security deposits
- Early Lease Termination
- Legal agreements
- Rental property turnover
If you have a few properties to manage, you could conceivable manage your investments on your own without it taking over your life. But if you’re serious about scaling your portfolio or investing in properties remotely, you’re probably better off with a property manager.
Exit Strategies and Contingencies
You always need to have a plan of what to do when things go awry, and they will. That’s why real estate investors:
- Budget for vacancies
- Have at least six months’ rent in a savings
- Try to pay off debts before investing
- Set a portion of collected rent aside for maintenance
But no matter how well prepared you are, sometimes the unimaginable happens. In 2020, for example, the US was gripped by the coronavirus pandemic. Investors were left wondering what record-breaking unemployment would mean for the real estate market.
There was also concern with how to deal with tenants who couldn’t pay their rent in full and couldn’t be evicted because of the CDC’s nationwide eviction moratorium. Individual state eviction moratoriums (like California’s AB3088) were also new laws to contend with.
For many investors, there were no easy answers. This is why, when it comes to real estate, always learning, being flexible, and having connections are invaluable. If you don’t know what to do, someone else might; if you’re in a jam, you might have to make sacrifices; and if you need help, you may have to ask for it. Of course, these skills are just as important in taking advantage of an opportunity as they are in fixing a mess.
Bottom Line on Developing a Property Investment Plan
Real estate investing can be very rewarding and, in many ways, a safer way to invest your money. But it also requires planning, research, preparation, networking, and flexibility. Of course, you can also always hire a property manager to handle most of the work for you. That way, your investment will genuinely be passive!