Buying an investment property is not an exclusive matter. I mean, come on, anyone can do it. But, success is what’s exclusive to those who know the rules of the business.
As we all know, every business comes down to a few rules which guarantee success. As a matter of fact, real estate is no exception. So, what are the most important rules that the most successful real estate investors abide by?
Rule #1: State your end goal for buying an investment property
Everything we do in life, we do it for a reason. As for real estate investing, there is also a reason for getting into it. Therefore, think it through. What do you want out of buying an investment property? Is it the rental income or is it the appreciation? Do you have a financing strategy ready? Do you have a budget to serve you until you start seeing some progress?
Bottom line is: start with a plan. Your plan is the solid ground that you will rely on throughout the process. But, note that setting a plan does not mean that’s exactly how things will work out for you. Sometimes, you are going to have to make some adjustments along the way. However, it is always better to have somethings clear before starting.
Rule #2: Do not believe everything you see or hear
If you turn your TV on, we bet there is at least one real estate show airing on one of the channels. Watching these channels is great, no doubt. They are there to educate people like you who wish to start a real estate business. However, there is one thing that beginner real estate investors do not understand about these shows: these shows include hundreds of hours working on an investment property before they edit it all into a one-hour time frame.
Buying an investment property involves many preparations that are not part of these shows. Legal matters, due diligence, and research are part of these preparations. That is why we say that you should not, under any circumstance, believe everything you see or hear.
Rule #3: Analyze the price
Most successful real estate investors know that you make the money when you buy the property. Wondering what that means? Simply put, making money in real estate is not about the end profit as it all starts with paying the right price for an investment property. Basically, this rule states that the asking price is not always the same as the fair market value (the actual market price). So, how do you determine the fair market value of investment properties?
The answer is through real estate market analysis (aka the comparative market analysis). This type of real estate analysis focuses solely on examining the location through what we call in real estate, the real estate comps. Essentially, it looks into other investment properties that have been recently sold in that area, thus, making it more of a comparison method through comparables.
Note: The real estate market analysis also relies on the investment property analysis to determine the value. So, make sure you continue with rule #4 to fully understand the concept.
Related: How Do You Find Real Estate Comps?
Rule #4: Crunch the numbers
Determining the fair market value of an investment property also comes down to what we call the investment property analysis. This means that, unlike the real estate market analysis, you take into account the internal factors that contribute to the property’s value. The most important figure you want to look into is the return on investment. It helps a real estate investor analyze the potential rental income in addition to the rental expenses an investor could expect. It also helps real estate investors in finding the best positive cash flow properties in a certain area. So, really, it is a great method to avoid losing money in real estate before even buying an investment property.
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Rule #5: Negotiate
If you think that all there is to buying an investment property is making an offer and waiting for the seller to accept it, you are wrong. Negotiating a deal means that you know the numbers and have the right documentation to convince the seller of the price you have in mind. It also means that you know when to pull back from that deal.
Understand that even if a certain deal does not work, it does not mean that you’ve done something wrong. It definitely doesn’t mean that there aren’t any other better deals either. If it does not work, move on to the next investment property that makes sense.
Rule #6: Buy low
One rule that successful real estate investors follow is to buy low. This means that they look for investment opportunities that will cost them less while adding value to the property and even increasing their net worth. For example, foreclosures and short-sales are wonderful opportunities for many real estate investors. When you buy a property that is selling for less than the original market value, it contributes to your equity in the property. Keep in mind that in this case you apply for a lower mortgage and will have to provide less in down payment. However, the original value of the property adds up to your advantage in the form of equity.
Now, imagine you manage to apply forced appreciation by renovating the property. That also will add up to your share of equity. Therefore, always make sure you invest in higher equity opportunities where possible.
Rule #7: State a strategy before buying an investment property
There are so many real estate investment strategies that allow for the maximum returns for a real estate investor. Your part is to pick one that makes the most sense for you. Never start with the process of buying an investment property not knowing what strategy you want to work with. After all, it is essential in order for you to buy the right type of property for your strategy.
One example we could give is on rental property investing. It is never enough to state that you want to invest in rental properties. In fact, looking into the location and other factors, you want to pick the optimal rental strategy that goes well with these factors. A touristic area would be a great fit for buying an investment property and renting it on Airbnb. A university district makes it worth buying an investment property to rent to students. In this case, common sense and numbers are what’s going to help you the most.
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