Investing in real estate isn’t for the timid; if buying a house is the single biggest investment of most people’s lives, then trying to do it again and again can make even the most seasoned investor weak at the knees.
Fortunately, there are a number of strategies that you can apply to increase your odds of success – and limit your exposure to risk.
Invest for the Long Term
Real estate values operate in cycles; sometimes the market is going up, and other times it’s heading down. As they say, any fool can make money in a rising market; if they’re able to time their exit before the market correction occurs.
Equally, buying at the peak, and then watching your investment slip into negative equity can test the nerves of even the most experienced individuals.
The key is to appreciate that over time real estate always seems to rise in value. The key, as with investing in shares, is buying and holding for a long-enough period of time. While money can still be made in rapidly flipping properties, a solution with better odds of success over the long term is simply to get into the market and stay there for decades.
The longer you own those properties, the greater the chance that overall values will have risen, irrespective of what the market is doing, leading to a healthy measure of capital growth.
Reinvest Your Profits
Once you own a number of cashflow-positive properties it’s tempting to ditch your job and live on your passive income. Doing so, however, limits the income you have to invest in future properties. It’s important to appreciate that real estate investing is a “numbers game”; the more properties you own the safer your portfolio is as a whole.
There’s more. We’ve already established that the property marketplace is cyclical; this means that one of the best opportunities for capital growth is to snap up additional properties as values drop. When the market begins to rise in the future you’ll find that your portfolio value balloons comfortably.
The second strategy to real estate investing is therefore to keep buying as long as you have the capital available. Only when you’re earning enough to live on and to reinvest should you become a full-time property investor.
Compare Funding Options
Funding can make or break a real estate deal; sending a seemingly profitable deal into the red, or vice versa. Indeed, the interest rate that you’re paying is one of the most important factors in determining whether or not a specific property makes financial sense. It’s therefore something that you should keep a constant eye on.
Don’t be afraid to shop around to find better interest rates, or to remortgage existing properties if it’s going to increase monthly cashflow or free up equity for future investments.
At the same time, an increasing number of investors are ditching bank finance altogether, and instead using alternative solutions. Popular alternatives can include joining a local investor’s syndicate or buying cheap properties for cash.
Without the need to pay interest to a bank such funding options can rapidly reduce the costs of actually buying an investment property, potentially growing your cashflow.
For the ultimate in security, investigate the limited number of companies offering rental properties with guaranteed returns. Such investment companies consequently offer predictable, reliable returns which makes budgeting and forecasting much simpler.
Target Growth Areas
Rental yields can differ significantly between area. In some, properties are so expensive to purchase that rents barely cover mortgage costs. In others, property is undervalued, and higher yields may be seen. This is especially so in growth areas.
A good example of such a situation is when one or more large companies suddenly decide to set up shop in an otherwise unremarkable town, or when new transport routes such as roads or railway lines suddenly open up an area to commuters.
Keep your eye on the news for hints as the “up and coming” areas and consider focusing your property search on this area, confident in the likelihood that property prices are set to rise dramatically in the years that follow.
Buy Below Market Price
It has been said before that the best business people make money when they buy an asset, rather than when they sell it. Put another way, if you can buy an asset such as a property for less than it is worth on the open market then this can greatly increase your odds of profit.
The obvious question is how you might manage to buy properties below their market rate, or someone might sell it for less than it is worth. Here, there are actually quite a range of possibilities.
For one, some developers sell properties “off plan” (before they are built) and use the capital generated to actually fund the build. The buyer acts as a source of capital, and so benefits from reduced costs.
Alternatively, a home-owner may be keen to sell. Consider someone who is looking to move house and has found their ideal property, but can’t sell their current home. Another option is that a house is being sold as part of an estate sale, and the beneficiary cares more about freeing up capital than on the specific price paid.
In such cases, if you have ready capital and are able to move quickly then you can land a deal, buying an investment property that makes profit on the very day of your ownership.
The key to real estate investing is really to do your homework, so you understand the financials involved in such a decision. Eye up ways to save money on interest rates and to buy properties at preferable rates, then be willing to sit and hold. Taken over the long term, such a process can greatly reduce your risk, making property investing a far more reliable and secure vehicle for your money.