Investing in Real Estate: How to Win the Life-Sized Game of Risk

June 4, 2018

Investing can be easy for the Wallstreet tycoon with 20 plus years of experience, but for the average Jane or Joe, it presents quite the challenge. There are so many different ways to invest, and industries to invest in. Besides that, most just-starting-out novice investors don’t even know where to begin.

Most of them turn away from the penny-stocks and focus their attention on real estate. With enough success, a real estate investor can do more than well for themselves. The average American moves roughly 12 times throughout their life, making real estate an extremely profitable industry. But make no mistake — the real estate game isn’t for the faint of heart. One misstep could leave you high and dry.

If you’re ready and willing to hop on the real estate rollercoaster, then sit back and keep your hands and feet inside the ride at all times. Here are a few tips to help you start investing.

How to Build Wealth

According to an article by Forbes, there are “four primary ‘wealth generators’ at play when you invest in real estate.”

Which type of wealth you generate will depend heavily on the strategy you use to invest, but they can all be beneficial. Here are three of the four generators (the fourth is tax benefits, which is less interesting to first-time investors):

    • Cash Flow

      If you plan on renting out properties that you purchase, then you will have a direct flow of income from the tenants. This is sometimes a route that many people opt for because it (can) provide a relatively immediate and direct flow of income. However, there are many restrictions and variables at play when using this method. The more properties you own and rent out, the more income you generate, but you’ll also have more property-related expenses. If your lease agreement states that you (as the landlord) will pay for a certain utility, for example, then as your number of tenants increases, so does that expense. You might also have to budget for repairs, maintenance, potential vacancies, and more.

 

    • Appreciation

      The concept of appreciation is fairly straightforward. Basically, your profit would come from the housing market, and the margins would be based on how much your property has increased in value since the time of initial purchase. Consider this example: the median purchase price of a property bought by investors in 2017 was $155,000. If in 2019 one of those properties was valued at $160,000, then the investor would have an appreciation of $5,000. However, this strategy is subject to the housing market, which can be temperamental. To be successful with this method, you will need a good sense of patience and ability to predict market trends. You can help increase your appreciation by boosting your return on investment, though. House flippers often do this by buying a house in poor condition and renovating it on a budget that will leave room for profit. If you don’t want to renovate, you can always do simple things such as landscaping, which can increase your ROI by 15%.

 

  • Loan Pay-Back

    This strategy also relies on having tenants. When you purchase a home with a mortgage, each month that you own the property your loan payment decreases. In other words, your tenant(s) are essentially helping you pay off your loan over time, which means you’ll pay it back sooner and with relative ease. Once the loan is paid off, you now own a property worth a set amount and owe nothing more on it, and each month of rent you receive is essentially profit. So, big picture: you buy a house with a loan, the tenant pays back the loan, you now own a house outright (a valuable asset), and then the tenant continues giving you money. Win-win-win-win, if you play your cards right. However, you will need to consider the five cost variables before settling on this strategy, including your loan-to-value, loan payments, principal and interest, taxes and insurance, and mortgage insurance.

When picking a method(s) to use, consider using a risk/reward analysis to weigh potential outcomes.

Do Your Homework

Before you bust out your checkbook and start strolling the neighborhood for properties, you should do your homework. Even though that is probably what you’re doing now (why else would you be reading this?), your homework should be a lot more involved than one or two blog posts. You’ll need to factor in appreciation influencers, such as location, curb appeal, related expenses, etc. You’ve undoubtedly heard someone state “location, location, location” as the most important variable in real estate. Well, it’s true.

Where you buy a property will heavily dictate your income. Not to say you can’t make any money if the location isn’t great, but you could make more elsewhere. When looking at properties, consider distance to schools (and quality of schools), community amenities such as parks and pools, local shopping, dining, and more. A home can be improved in a short period of time, but changing a neighborhood takes a while. Don’t shy away from a house that needs a few repairs. What might cost you $3,000 now could make you $30,000 later. You should also note curb appeal. How does the house look from the street? There’s a big difference between someone saying, “Wow, look at that place — gorgeous,” and “Oh…wow, look at that place — yikes.” Something as simple as a weekly or bi-weekly lawn mowing (which is something roughly 80% of Alabamians do) could be invaluable in increasing a property’s curb appeal.

While it will definitely help, there is a lot more to real estate than a well-researched investment strategy. It’s a great first step, yet it shouldn’t be your only one. You will need to continuously look for new and profitable ways to increase your ROI, find up-and-coming neighborhoods with growing job markets, and much more. Don’t go it alone, either. You could benefit from consulting with real estate agents, brokers, and financial advisors who can help smooth out some of the “loop-de-loops” from your rollercoaster ride.



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