Investing in real estate can be a lucrative investment option with both short-term and long-term financial benefits. It can also be quite risky. So why is it that some people have massive success in the business while others struggle to even get started? Regardless of the path you choose to take in real estate investing, one thing remains constant: the real estate principles. These are the basic fundamental principles that real estate investors should be aware of. Whether you are a beginner real estate investor or an expert in the game, these principles will greatly improve your chances of success.
Here are 11 important real estate principles and practices you should know:
1. Set Investment Goals
It is statistically hard to achieve anything without having clear and specific goals. Setting investment goals is one of the fundamental principles of real estate that every investor should master. Your investment goals will become your roadmap and action plan to create wealth through real estate investing and become financially independent. Your goals in real estate investing may include the type of investment property you want to acquire, the number of investment properties you want to purchase each year, the annual cash flow you aim to generate, etc.
2. Educate Yourself on Real Estate Investing
One common mistake beginner real estate investors commit is making investments without taking their time to learn real estate investing. You need to learn the real estate basics before you get started. For instance, you should know how to create a real estate business plan, how to choose the best strategy, how to find profitable investment properties, how to manage multiple properties, how to screen tenants, etc. You should also have a good understanding of the basic real estate terms and acronyms to be able to communicate well when doing various real estate transactions.
Investors who don’t invest their time and money in real estate education are more prone to risky investments and lower returns. There are many sources of real estate knowledge available, both free and paid. Be sure to visit Mashvisor’s blog to get more insight on real estate investing.
Related: 38 Most Important Real Estate Abbreviations and Acronyms
3. Assemble a Real Estate Team
Most successful real estate investors have a great team behind them. Before you even begin searching for your first investment property, have your real estate team in place. This is not to say that you can’t invest alone. However, having a proficient and experienced team that you can trust to support you can give you an edge over the competition. Some of the people to include in your team include a real estate agent, mortgage broker, lawyer, accountant, financial advisor, and contractor.
4. Carefully Screen All Tenants
Finding good tenants is one of the major challenges in real estate investing. Get the wrong tenants and your investment journey can turn into a nightmare. The wrong tenants could cause a lot of damage to your rental property or even stop paying their monthly rent. You may be forced to evict them, a process that can be costly and quite lengthy. That’s why it is crucial to carefully evaluate all of your prospective tenants before you rent out your home. Collect their personal information, check their credit reports, eviction records, and criminal history.
5. Do the Math
When buying an investment property, you need to consider a number of things before selecting the right one for you. One of the real estate principles that can help you in this process is always looking at the numbers before making an investment decision. Even though emotions may be involved when you are buying your own home to live in, when looking for an investment property, it is all about getting the numbers right. You should treat it like any other business. It is about the return you get on your investments.
Some of the crucial numbers to look at include market value, cap rate, cash on cash return, and occupancy rate. By concentrating on the numbers, it will be easier to keep your emotions in check when buying an investment property. Working out these figures manually can be a very long and stressful process. Fortunately, Mashvisor can help you get all the crucial numbers when conducting real estate market analysis and investment property analysis.
Related: Cap Rate vs. Cash on Cash Return
6. Buy From a Motivated Seller
One of the real estate principles to keep in mind when buying an investment property is to buy from motivated sellers. In real estate, money is made when you buy. You may have mastered all the important skills but without this skill, it is virtually impossible to make instant money in real estate. If a property seller is not motivated, it is hard to negotiate a great bargain price and buy below market value. People may be motivated to sell their property because of various reasons, mostly due to an urgent need for money. Learning how to find motivated sellers can help you accumulate great wealth quickly.
7. Invest in the Best Location
The location of an investment property is key to having a profitable business. When buying a rental property, never undermine the importance of selecting the right location. The location of your investment property will influence demand, the type of tenants, and your return on investment. You should always focus on finding a good location (city and neighborhood) even before selecting a particular investment property. Look to invest in areas that are growing demographically and economically. You can use Mashvisor to find profitable neighborhoods by using the heatmap tool.
8. Think Big But Start Small
One of the best real estate principles that a new real estate investor show be aware of is to start small and gradually build their portfolio. Not everyone has the financial muscle to make large investments when they are just getting started in real estate investing. However, you can start to invest in property with little to no money and accumulate wealth in the long term. Find real estate investing strategies that don’t require a huge initial capital investment and that have a low operating cost and then build up from there.
9. Have a Real Estate Mentor
Getting started in real estate investing can be challenging and overwhelming. Having someone who is experienced in this realm who can offer you advice and guide you in your journey is critical. Working with a good real estate mentor can help you to cultivate your skills much faster. Surrounding yourself with likeminded people that you admire will also motivate you to work harder and push to greater heights.
10. Invest in Cash Flow
Another example of important real estate principles to know before becoming a real estate investor is to invest in cash flow. Investing in positive cash flow properties will help you to grow your business. You will need cash flow to be able to pay for your mortgage and other expenses. As a result, your equity will grow over time through loan amortization and appreciation. On the other hand, investing in negative cash flow properties can lead to bankruptcy and foreclosures.
11. Focus on Residential Properties When Starting Out
Investing in residential properties is also one of the crucial principles of real estate investing for beginners. Investing in residential properties is a good strategy to use in the beginning since they are easier to understand, acquire, and manage. Most real estate investors only get into commercial real estate investing after having enough experience.
The Bottom Line
Real estate investing can be a lucrative business but it does come with some risks. Investors who don’t follow the right real estate principles can end up losing a lot of money. However, by applying these principles, you can achieve massive success and become financially independent. It all boils down to how much effort and time you are willing to put in to learn and put these principles into practice.