Working as I do with both seasoned and new real estate investors, I often am reminded of my younger self and how my mindset differed from that of someone who had “been around the block” before.
As a “newbie,” I always loved learning new things and seeing the opportunities that then presented themselves. I always knew there were things I did not know, but as I became aware of them I wanted to learn more. Later, I discovered things I had not been aware of at all but that I needed to know.
Eventually, I learned the best opportunities were to be found in the areas that I did not know.
This same scenario plays out whenever I talk with those less-seasoned investors.
They often ask things like, “How come some people keep getting all the great deals while I keep getting the leftovers?”
My reply, of course, is that they do not simply get lucky, but instead they know how to find the great deals.
I suppose this falls into the category of “knowledge is power.”
3 things seasoned investors do to win great investments
No. 1 – Create your own pro-forma report
I am often asked to evaluate property for investors.
What an eye-opening experience this is! This would actually be funny if it were not true: Seasoned investors always evaluate property based on the same set of criteria.
They never simply take the seller’s word for it. Often sellers artificially inflate projected cash flow by simply omitting expense, and all too often the buyers are so lured by the ROI that they accept this as reality. Of course to make an investment based on sustainable returns, it is imperative to calculate all anticipated expenses and make your decisions based on true numbers.
You want to avoid the biggest mistake of all: evaluating a property without taking into account the cost of property management because you plan to do this yourself. By omitting this expense, you just inflated the value of the property. Income property is valued (at least in part) based on the revenue it provides. By keeping expenses low, you lose your ability to negotiate better prices.
Also, repairs and vacancy rates are often omitted. These numbers may be more of a best guess, but there should be a consistent methodology used when evaluating all your properties. For example, $50 per month per unit or perhaps 3 percent, 4 percent or 5 percent of the rent amount. When you always evaluate your investment prospects the same way, you will get the results the seasoned investors get.
No. 2 – Identify low-risk investments
Many people buy property that they have to turn into an investment property.
Seasoned investors buy performing assets. I know when I started out, I tried to find property, and then tried to determine how much I could purchase the property for, and then tried to establish what the expenses would be.
Over time you may be able to pin this down better, but seasoned investors have figured out that when you buy a property that is already tenanted, you have a performing asset. All these costs are already established, making for a lower-risk investment.
No. 3 – Establish an optimum exit strategy
In the world of real estate investing it is always said that you make your money going in. This simply means you need an exit strategy. Not just an idea of how or when you may sell, but how you may get the absolute best retail price and how you will maximize your return.
For example, buying the most highly sought-after property type that will be in high demand will represent your most liquid investment class. For residential homes that may be the three- bedroom, two-bath, two-car garage located within the area of homes that represent that city’s median home price. Multifamily tends to be two-bedroom units near bus stops and in close proximity to employment.
You see in both of these examples the pro-forma was not yet part of the equation. It is strategically buying the right type of property for best exit strategies that seasoned investors look for before looking at actual property. To further assist with a stellar exit strategy, a seasoned investor may want to exchange a property and reposition his asset to the next best market, thereby delaying capital gains tax with a 1031 tax-deferred exchange.
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