Real estate market investment conditions can be as volatile and unpredictable as it is rewarding. This is why it’s a good idea to be equipped with some critical nuggets of information if you’re considering putting your hard-earned money into this particular business venture.
To help you out, here are ten essential rules of real estate investment you should look into before closing that first investment deal.
1. Before you do anything else, start getting familiar with the terminology
You can’t dive headfirst into the water if you have no idea how deep it is or what’s in it. The same thought applies to real estate investment. You must be willing to take at least a crash course on investment if you want to be confident that you’ll be making the right decisions.
To get you started, here are three common investment terms:
Appreciation – The increase in a property’s value over time.
Equity – The degree in which an investor owns a property.
NOI (Net Operating Income) – The amount leftover when operating expenses have been deducted from the total income.
By setting goals that are specific, measurable, acceptable, realistic, and time-bound (a.k.a. SMART), you’re creating a clear vision of what you want to achieve with your real estate investment. Eventually, those goals should help inform your action plan and shape your back-up plans.
3. Consider the market before the property
An effective way to tell if a property is worth investing in is to find out whether its market and its fellow properties within that market are in good condition. Also known as the top-down approach, this technique will also focus your goals and determine exactly what kind of properties you’re aiming for. However, don’t just rely on real estate marketing when you do this; talk to reliable people as well.
4. Prioritize market conditions over loyalty
At this point, it seems only logical to invest in your local market since it’s the closest to home you could ever get and you might already have an idea of its real estate investment scene. However, the reality is that each market is unique because multiple factors influence it. Try not to let familiarity convince you that investing in a particular market is an excellent decision when there’s another market a little farther away that could yield better results.
5. Know the value of an income property
Aside from feeling out the market that it’s in, you could also gauge the value of an income property by looking at its capitalization rate. Essentially, this ratio is a market-driven value that takes into account a property’s NOI and its value. It is, in other words, a property’s current rate of investment return.
6. Aim to create a diverse property portfolio
If you have a diverse property portfolio, it means that you’re investing in different kinds of properties that are in different locations and operate within different markets. This rule helps to reduce the risk of going bankrupt by making sure that you have a lot of properties to fall back on should one of your deals turn sour.
7. Look for investment properties that have a positive cash-flow
Cash flow is one of the first things to consider when trying to determine the value of a property. Positive cash flow means that you’re earning money from your investment, while negative cash flow means the opposite.
8. Be a picky closer
Although it’s good to build a diverse property portfolio, keep in mind that, ideally, it should still be lean. This means that you’re only choosing to close deals that will truly yield high returns of investment. In short, the old principle of quality over quantity applies here as well.
9. Be wary about taking loans
There are those who believe that as long as you could safely borrow money from external agencies, you should. This is, however, extremely dangerous in the long run. As mentioned a few times earlier, real estate investment markets could sometimes be dangerously fickle. You should put yourself in a safe place by taking on leverage only when you absolutely need to.
10. Strive to be in control at all times
You could be your own boss when it comes to real estate investing by not taking part in partnerships, especially those that seem unreliable.
Here are two bonus rules for you to have something for the road: first, keep yourself informed with updated information by looking for additional reading materials about the rules you just read. By doing this, you’re also helping yourself abide by the second bonus rule, which is that you should only apply rules that you think are appropriate and useful to your goals.