“Real estate investing, even on a very small scale, remains a tried and true means of building an individual's cash flow and wealth.”
- Robert Kiyosaki
Today, there are endless stories doing the rounds about people who have earned themselves a fortune simply by investing in real estate. Real estate can indeed be a powerful tool when it comes to diversifying your investment portfolio. There are no two ways about it!
What’s more? Right now is the best time to invest in real estate.
According to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI), U.S. homebuilder sentiment surged to 83 in 2020, up from the previous year’s 68 – which has been the highest recorded reading ever in the survey’s 35-year history.
However, as compelling as it may look on the outside, one important thing to remember is that real estate investing, just like every other business, has a number of risks associated with it.
In addition to that, regardless of the type of property you are investing in, or whether you plan to resell or rent it later, any real estate investment requires a decent amount of capital to begin with — which makes it extremely crucial to furnish added measures in order to ensure a profit on your investment.
In this article, I’ve highlighted three important things investors should always check before buying a property. Let’s get started.
1) Local Market Conditions
Analyzing the conditions of your local market is one of the most important considerations when it comes to investing in real estate. It really doesn’t matter whether you are a first-time investor or have some past experience, you need to do this every single time purchasing a property crosses your mind!
This may definitely sound daunting when you are new to the game.
It can help you comprehend when is the best time to purchase a property or sell one that you already own so the deal gets you the best return on investment (ROI).
You can get started on your real estate market analysis by understanding:
- The performance of competitors in your local market,
- Existing and up-and-coming communities that are in demand,
- Listing and sales data—such as appreciation rates, property prices, average volume sold,
- Common features of recently sold and listed properties,
- Financing data,
- Demographics (population data),
- Other social, economic, environmental, and political data as these factors can impact your buying decisions.
While it can seem like a lot of work to unearth and study all that information, the payoffs are going to be huge. You can leverage state-of-the-art tech innovations such as data analytics.
If you put effort and time into fully understanding your real estate market, you immediately gain a competitive edge over your counterparts. More so, if you’re considering taking the BRRRR (Buy, Rehab, Rent, Refinance, and Repeat) route and turning into a full-time real estate investor.
2) What’s My Exit Strategy?
If you aren’t already familiar with the term, a ‘real estate exit strategy’ is nothing but a predefined plan or path through which an investor can easily remove himself from a deal at any given point.
Implementing an intelligent exit strategy is crucial to success, as the right approach will ensure minimal risks and greater profits. Having said that, more often than not, investors fail to perceive how important it is to educate themselves on tried and tested exit strategies.
It is never a good idea to get into negotiations with a seller without knowing how you will be exiting from the deal if things don’t proceed as planned.
Not only will blind ambition garner risks, but it will eviscerate any potential chance to negotiate from a position of power. Essentially, neglecting to consider an effective exit strategy brings down potential profit by manifolds.
Formulating an effective exit strategy really depends on the investor’s knowledge of the following factors:
- Long and short term goals with respect to the said property,
- Experience level of your advisor or agent,
- Purchase price of the said property,
- Time taken to close the deal,
- The property’s existing market value,
- Terms of the deal,
- The existing condition of the property,
- The existing condition of the local market of which the property is a part of,
- Supply and demand,
- Financing options available, and
- Potential profitability of the property in the future.
Having a pre-defined exit strategy in place can not only take you a step closer to desired outcomes, but it can also save your business a great deal of money over your entire career.
3) Financing Options for the Property
Lastly, one of the most important considerations that will take you a long way in deciding whether you should be investing in a property in the first place or not, is – looking up all the financing options available.
More first-time buyers are now entering the market than ever before, and move-up buyers are seeking bigger loans as their equity grows. Whether you are making your first investment in real estate, purchasing your third rental property, or going about your hundredth flip, you likely will need financial assistance to close the deal.
But with various real estate financing options to research and evaluate, and literally hundreds of lenders to choose from, borrowers can easily become overwhelmed.
To make things a little trouble-free for you, here’s a list of some of the most sought-after financing options available in the market today:
- Conventional Loans: With a conventional loan, buyers typically need to make a 5-25% down payment of the original purchase price. Lenders or banks granting these loans usually adhere to strict guidelines before issuing them. However, since there is less risk associated with conventional loans, borrowers typically benefit from low-interest rates.
- Portfolio Loans: Portfolio lenders may be more easy-going on the terms of a loan but often charge comparatively higher interest rates. This is an ideal option for borrowers with circumstances that fall outside the standard guidelines of mortgage underwriting.
- Hard Money Loans: While these types of loans are ideal for property flippers and other investors, they can be hard on the pocket. Although interest rates on hard money loans are very high compared to conventional loans, you can bag them without much hassle.
- Blanket Loans: Blanket loans are commonly leveraged to fund more than one property, larger tracts, or land that in due course, will be branched out and sold. It enables the borrower to sell parts of the property without having to retire the entire mortgage.
No matter which financing alternative you plan to move ahead with for your real estate investment, it is important to educate yourself thoroughly about the advantages and challenges of each option before you go all in.
On the whole, a real estate investment can be just the breakthrough you need at this point in your career, provided that you do it right and after understanding different facets of the industry.
A carefully formulated strategy will almost always make you land on the winning side.