Real estate investing is a lot more hands-on than buying stocks, commodities, or other investments. Specifically, single-family rental investments are an excellent way for new real estate investors to break into the market and make consistent profits.
If you want high returns from real estate investments, however, you need a high-level of market knowledge and decision-making prowess. The hands-on aspect of real estate investing creates a higher potential for profit but also leaves more room for error.
Start the investment process by researching your local market, evaluating any purchase options, and select a property based on criteria that are proven to increase your odds of success.
- Make decisions based on logic and information, not emotions
- The best deals make money from day one; long-term appreciation should be a bonus
- Create a thorough budget and research every possible expense (i.e., vacancy expense)
- Research your local sub-markets and neighborhoods, instead of relying on broad market information to make decisions
When considering your first (or next) single-family real estate investment, keep these five pointers in mind:
1. Don’t let emotion cloud your decision making.
If most or all of your real estate experience to date has been buying and selling your personal residences, keep in mind that you were purchasing for a different purpose with a different set of criteria in those instances. Buying a home for yourself and your family is an inherently emotional endeavor. You “love” the large kitchen, your spouse is “wild about” the main floor master bedroom, the kids are “so excited” about the pool.
With investment real estate, it’s all about the numbers. If the combination of the purchase price, estimated renovation costs, expected rental income and market conditions support a purchase decision, you can feel comfortable moving forward.
2. Buy based on current returns, not future appreciation.
Will the property have a positive cash flow the day the renters move in? That’s the evaluation criteria you must use. Trusting that area rents and home values will increase over time and that that is where you’ll get your return is a recipe for disappointment, if not disaster.
3. Budget realistically.
As a property owner and landlord, there are expenses you will incur in order to maintain the value of your asset, so you must plan accordingly. The most obvious of these expenses is the upkeep on the property. However, there are other costs you should budget for. One that is often overlooked is vacancy expense.
4. Know your sub-markets/neighborhoods.
Choosing to make a single-family rental investment in a particular metropolitan area simply because a national article states the market, in general, is positive can backfire if you don’t get the details on the specific sub-market or neighborhood where you intend to buy. While the key financial indicators for a city such as job growth, population growth and others may be on the rise overall, that doesn’t guarantee that the specific community you are interested in is enjoying the same kind of upswing. In fact, one sub-market may be growing because businesses are moving there from the area you have in mind.
5. Learn about local regulations and federal laws.
All forms of investing are governed by regulations. However, with stocks and commodities, understanding those regulations is your broker’s job. In real estate investing, the responsibility for understanding everything from local annual registration and inspection requirements to federal fair housing laws falls to you. The time to learn about these legal issues is before you make your purchase. Failing to understand your obligations until after you’ve missed a deadline or violated an ordinance can be very costly.
View the original article at Forbes