When it comes to buying an investment property, there are steps you should definitely follow and things you MUST avoid. Many real estate experts have reviewed the stages of buying an investment property and making it a successful and profitable income property. Even so, such guides are not fully complete and cannot represent a clear picture of how to start making money in real estate. This is due to the fact that such guides do not provide a picture of the possible pitfalls you may encounter when buying an investment property. But don’t worry, we will do that in a second. By knowing which traps to avoid, you can be more focused on finding the best income properties and becoming one of the most successful real estate investors. Here is how NOT to go about buying an investment property.
#1 NOT Having a Real Estate Investing Strategy
The experienced real estate investors know that having a real estate investing strategy is crucial for the success of your business. Consequently, not having a strategy will almost certainly result in you losing money from your investment properties. Well, “that one is obvious” you may say. Yes, it is. However, when financing income properties for the first time, many investors neglect this step or forget about it completely, assuming that going with the flow will help them find properties with high return on investment and clear their investment plan. Even though this ideal scenario might occur from time to time, it is generally not the case. That is why defining your real estate business plan in advance is necessary and here is what we mean by that.
Searching for the right location and investing in positive cash flow investment properties is strongly dependent on your pre-established real estate strategy. The reason behind this is simple. Each market favors a specific type of investment. For example, it would not be a good idea to invest in rental properties in a real estate market where there is a strong demand for buying properties rather than renting them. Fix and flip would be much more suitable for such a location, right? Interested to learn more about real estate investing strategies? Make sure to read “Learn All About the Best Real Estate Investing Strategies.”
#2 NOT Knowing Where to Invest in Real Estate
Besides having thought of a strategy to adopt in real estate investing, you need to have the right attitude towards finding where to invest in real estate. The US housing market is tremendously big, which is a challenge for every real estate investor when buying an investment property, regardless of their experience. Despite the fact that a state or a city might show potential for growth and high performance rates, investing in a bad neighborhood can simply ruin your business. Therefore, having the right knowledge and being able to perform comparative market analysis is essential.
Comparative market analysis, also known as real estate market analysis, is a type of research which helps the real estate investor evaluate a specific housing market and/or compare several markets. Such analysis can present you with information regarding the median property price rates in the area as well as the median return on investment, cap rate and cash on cash return in the location. Moreover, you can also study the trends and forecast of the market. This way you can avoid investing in a bad neighborhood and easily find the most suitable location for your rental properties. Curious about where to invest in real estate? Make sure to read “Real Estate Investing for Beginners: Where to Invest in Real Estate.”
#3 NOT Being Able to Conduct Investment Property Analysis
Similar to finding the perfect location, you should also find the perfect property. Buying an investment property is a hard process that requires a lot of effort if you want to be among the most successful real estate investors. Certainly, performing investment property analysis can help you tons with buying an investment property. This type of analysis calculates real estate metrics per property. Thus, it gives you a clear view of which investment tends to perform well on the market and will generate positive cash flow and which one will generate negative cash flow.
Nevertheless, calculating cap rate and cash on cash return for various properties is hard, even if you have the knowledge to do so. Luckily, technology has progressed a lot and can offer some great solutions for such cases. Speaking of technology, real estate experts suggest using a rental property calculator to guide you in the process of buying an investment property.
Many experienced real estate investors trust and swear by Mashvisor’s rental property calculator. The tool computes all the values you need in seconds. It also suggests the optimal rental strategy for the chosen investment. Additionally, you can enter the payment method for even more precise results.
#4 NOT Having a Clue of “How Much Should I Charge for Rent?”
How much should I charge for rent? That is one of the frequently asked questions when buying an investment property. Well, the idea is simple- try to avoid losing money. This implies that your property should not generate negative cash flow. Hence, the rental income should be higher than the rental expenses. Keep in mind that breaking even is not an ideal scenario, but it might happen sometimes and it is not that scary. Anyhow…let’s go back to exploring how to start making money by establishing the right rent to charge the tenants.
Typically, you can compute how much to charge for rent by conducting comparative market analysis and using real estate comps. Real estate comps are recently sold properties with similar characteristics to your investment. By using them, you can calculate the market value of your rental property. How does this help? The rental rate usually falls between 0.8% and 1.1% of the market value of your property. And that is how much your monthly rental income might be. Besides calculating the rental rate, do not forget to include the estimated costs of the property. This is important when deciding how much to charge your tenants. Ensure your property is a positive cash flow one. Interested to hear another answer to the question “How much should I charge for rent?” Make sure to read “Question of the Day: How Much Rent Should I Charge?”
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