In today's era, investing has become easily accessible to everyone with the Internet. No matter your age, from 20-60, there are multiple ways to jump into the investment game. Because…
“Ninety percent of all millionaires become so through owning real estate.” - Andrew Carnegie, billionaire industrialist
But how do you start investing in property? Crypto and Bitcoin might be slightly easier in terms of setting up because of their apps and flexibility in the amount of cash to put in, but property usually requires a larger amount initially.
So here are 25 dos and don'ts from experts for people who want to start investing in property:
"An investment in knowledge pays the best interest." — Benjamin Franklin
Educating yourself is absolutely essential before making any financial decisions. Prior to seeing a consultant and/or your advisor, do take out the time to learn the basics and essentials of property investment and real estate.
Because only the investor would be able to gauge whether real estate investment is really suitable for their individual situation, including cash flow and stakes. It would indeed, familiarise the beginner with the multiple facets and dimensions of real estate.
A good source would be trustworthy books and multiple sources or articles on the internet. Join a local networking group that shares ideas and information rather than pitch products to members.
Invest in small, single-family units.
“Single-family homes are your safest bet for attracting the correct tenant. Everyone would love to live in a house. Some people just cannot afford to or do not want to own. The single-family home historically has over the last hundred plus years always appreciated.” - Don Wede, President of Heartland Funding Inc.
As usual, it is the wisest of choices, to begin with, a small investment as a way of testing the waters. Even better would be an investment in an area well-known to the investor.
"Rental properties represent a great way to get involved with real estate investments. Emerging neighborhoods offer growth potential and tax incentives for buyers. Buyers that purchase properties in emerging neighborhoods maximize profits and ensure that their income covers their costs.” - Ralph DiBugnara, President of Home Qualified
It comes under no scepticism that a rightly invested property in a busy area with a demand for rental properties is worth much more than multiple, idling properties that struggle to have renters. Learning about the population, influx of people, income bands, crime/unemployment rates among others help in estimating the profitability of the investment. Higher crime rates are associated with lower occupancy rates.
“My rule of thumb is that you should set aside 50% more of your budget as reserves, especially as a new investor. Your budget almost always goes higher than anticipated and when you're rehabbing houses, one issue can detect another one, etc.
For example, fixing a leaky pipe may turn into replacing the pipe and removing mould damage and replacing the drywall. In terms of timeline, I would say that the same thing goes: If your timeline is 60 days, prepare for the project to take 90 days. With added expenses, comes added time.” - Allison Bethell, Fit Small Business
“Do not put all your eggs in one basket.” - Warren Buffett
If you’ve been learning about the investment market, you’d know that diversification plays a big part in placing a successful investment. And the 5% rule is to ensure that your portfolio is diversified. The rule suggests that:
For example, you have $10,000 as your total investment budget, and you have three stocks that you’d like to place your investments on. The 5% rule suggests that you should not place more than 5% of your total budget in any single asset/stock, so at maximum, you’d place $500 in the stock you’ve chosen.
Let’s say you have another group of stocks that are considered high-risk: Stock 4, 5, 6. The 5% Rule suggests placing a total of 5% (which is $500) on the whole group of high-risk assets. Which means distributing the 5% across all three stocks.
The 5% rule is basically a guideline for you to prevent significant losses from happening in your investment.
“Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.” – Warren Buffett
Preach, Warren. Before placing your investment in a property, remember this: The property invested in should bring no less than 1% rent or cash flow per month. For example, if the property is worth 600,000 dollars, a minimum of $6000 rent per month would be the ideal asking price to rent.
“I flip $10M worth of real estate annually and have for over a decade now. My go-to move is to reach out to my network of wholesalers every time I need a new home. You can leverage social media to find groups of wholesalers to connect with.
Never accept the first offer from a wholesaler. Always ask for a lower price. They need to move homes fast, so offer to close quickly for a discounted price.” - Ryan Stewman, Hardcore Closer, LLC
“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett
… and vice versa.
Find a balance between investing all at once into a certain kind of property on one end and scattering your interests in all directions. The former brings about a quick downfall during any market downward trends. The latter brings about managerial issues as different expertise is required for different sectors.
Experts recommend a few separate clusters of modest, well researched, well-placed properties with good tenancy turnover.
Invest in properties that provide an extra bedroom or two at minimal price increments. In that way, you can easily make it your own place of residence while renovating.
In certain situations, it also allows for a reduced tax rate - provided that the minimum duration of stay is met. Usually, it takes 2 years of stay in the last five to cut down taxes on capital gains.
“Don't push people to where you want to be; meet them where they are.” - Meghan Keaney Anderson
With the current scenario, travel and inspection of properties have become quite burdensome. A strong online presence minimises the need for travel, which also greatly reduces inconvenience and travel expenses.
Your investment property will gain more potential clients, online and offline, in any situation.
Rural properties are usually the first to tank during recessions. A well placed rural investment or two in a previously researched locality is commendable.
However, bulk investment into rural properties is not recommended. Instead, urban spots with the potential of development are more valuable in terms of both rental and sell-out options.
“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” - Theodore Roosevelt, Former U.S. President
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson, Nobel Prize-Awarded American Economist
Look for sustained, long-term, and steady return investment rather than hot spots of the gold rush.
Properties tend to follow a cycle, which shows that most markets have a tendency to eventually plateau and hit rock bottom. Thus, a gradual increment and steady return option are preferable to a sudden but unpredictable one.
"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim Helu, Mexican business magnate and investor.
Despite COVID-19, house prices in most advanced economies rebounded in 2020, largely thanks to the expansionary fiscal and monetary policies introduced to revive economic activity.
“The stock market is designed to transfer money from the active to the patient.” - Warren Buffett
Take your time determining the profitability estimates as regards mortgage costs, repair, maintenance, tenancy turnover figures, and management expenses.
Being aware of the property cycle also gives you a better outlook. Prices tend to follow a general pattern every 5 to 10 years. Experts advise acquisition during recessions and the early rise of rates for best outcomes. The opposite is true for sales and liquidations.
Investment Don'ts #2: Skimp On Expert Opinion and Legal Advice
“The best way to be successful is to learn from other successful people.” - Martin Dai Nguyen
Oftentimes, it is best to invest in experts and save valuable time in profitable ventures, rather than do it yourself and make costly errors. Of course, regular supervision does no harm and brings on a strong presence.
"If you don’t know where you are going, you will probably end up somewhere else." – Lawrence J. Peter
There are two types of investments: Buy to rent and buy to sell.
Former does well in houses in good condition and immediate rentability. Modest sizes in densely populated parts of the area.
The latter does well with somewhat worn-out houses that need maintenance and some fixing. This may be initially task intensive and expensive but the returns are greater and well worth both time and money.
It would therefore be highly preferred to pre-plan as per requirements and intentions for the property in question.
So, which one are you?
“A small loan makes a debt; A great one an enemy.” - Publilius Syrus
Do not accumulate multiple mortgages. Cross-collateralizing is a no-go zone. Rather, equity from your home can be used in its place. Do not invest in a second similar property before the first brings in cash flow.
“Don’t wait to buy real estate. Buy real estate and wait.” - Will Rogers
Property and real estate investments, even though are said to follow a cycle, take time to start proceedings.
For example, an investor may wait for the perfect timing to purchase a property. However, as he or she waits for it, another investor may chip in and acquire the property. Or, at the time of lowest pricing, the prospects of having profitable returns may be obliterated.
Similarly, to find the best tenant or purchaser means waiting for periods that could bring a significant and steady cashflow
“Remember there's no such thing as an unrealistic goal - just unrealistic time frames.” - Donald Trump
If you cannot hold a property for at least 6 months before reselling, then you should reconsider buying it. Don't set unrealistic time-frames. 6 months always means 9 or more. And never buy a property that your personality has an aversion to, be it purported for sale in the future.
Only buy a property that is worth your effort and money.
“Risk comes from not knowing what you are doing.” - Warren Buffett
Never venture into purchase or mortgage before inspecting personally the intended property. Especially, do not take the word of sales agents or neutral parties who hold no stake in the matters of purchase.
There are two kinds of title insurance: i) lender's title insurance and ii) owner's title insurance (includes extended policies).
The majority of lenders mandate the borrower to purchase a lender's title insurance policy to protect the lender in the event that the seller is not legally able to transfer the title of ownership rights. A lender's policy only protects the lender against loss.
As title searches are fallible and owners remain at risk of financial loss, there is a need for additional protection in the form of an owner's title insurance policy. Owner's title insurance is usually purchased by the seller to protect the buyer against defects in the title, though optional, is highly recommended to protect against market fluctuations.
“Never invest in a business you cannot understand.” - Warren Buffett
Don't let blind faith in advisors or certain emotional components influence your purchase. Often, these factors make investors choose properties with low yields, high taxes or prices.
This applies, particularly to rental properties. Get good tenants who would help in keeping the property in shape as well as pay the rent regularly. Tenants with delayed or a habit of accumulating overdue are a liability when it comes to property investment.
Two disappointing situations arise when price points are unrealistic. One, setting an unreasonable price and not being able to make any deals. Secondly, rigidly adhering to the price point without any consideration.
Every seller is capable of providing these. However, if the price is near non-negotiable, there may be additional services that may be added which would render your property more attractive to renters. For example, it might already be furnished and ready to move in - which removes the hassle of buying for first-time renters.
“Your greatest and most powerful business survival strategy is going to be the speed at which you handle the speed of change. That speed of change is trend.” – Ajaero Tony Martins
“Multitasking is the ability to screw everything up simultaneously.” - Jeremy Clarkson
Amateur investors in real estate often try to manage all loose ends by themselves when they begin their venture. Though this is suitable for smaller investments, provides a good learning point and makes for a more hands-on approach, it is seldom recommended when the stakes are higher or multi-faceted.
Lawyers are experts in their field of drawing out the legal fine prints involved which may be overlooked by amateurs. Similarly, professional renovators are familiar with the ins and outs of durability and quality which may not be the case with novice ones. It is always best to have expert services, albeit expensive.
In the long term, it makes for a cost-effective process rather than repeated repairs which are also quite cumbersome. Similarly, personally doing taxes and drawing legal contracts may result in missing out on essential details resulting in more loopholes and chances of litigation. It is best to leave the special effects to the experts.
Last but not least,
“If the market were to tank tomorrow and you are still happy you own the property, then you have the right property.”
By making sure your investment has good cash flow so as to mitigate the expenses incurred by the principal. Thus the principal is being gradually attained and you still receive the tax benefits of the property. Therefore, you don’t mind a price decrease. – Jimmy Rex, Rex Real Estate Team
In summary, real estate is an average of extremes. One can't be too choosy or too careless. Neither can one wait for the perfect property, prices or timing. But unwise and hasty investments may turn into endless sinkholes. Thus, careful considerations and weightage of pros and cons are always beneficial.
To conclude, real investment requires a significant amount of research, market instinct, logistic and managerial support, financial sorting out and advice and in most cases expert professional support.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." — Robert G. Allen
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