Investing in real estate is one of the most popular forms of investment.
In the words of billionaire Andrew Carnegie, 90% of millionaires made their wealth investing in real estate.
When asked, most millionaires will tell you that if you want to be wealthy, investing in real estate is almost a sure bet.
It is easy to see why.
Investment property retains its value and tends to appreciate over the years. It also assures you an attractive and stable source of passive income and is a great way of investing for retirement.
That said, property investment is not something you should get into lightly.
Don’t presume “All I need is to buy some property, get some tenants inside it, and voila! I can sit back and watch the money roll in!”
The truth is that if you go in with that attitude, you are setting yourself up for failure.
In fact, the statistics show that 50% of those who get into real estate investing end up selling their property in the first five years.
Additionally, less than 10% of those who opt to stick it out end up owning more than two investment properties.
When you get into property investment well-prepared, it will be a springboard to building a significant property portfolio.
If you want to be a successful property investor, here are some tips to get you started:
1. Equip Yourself With the Right Knowledge
When it comes to setting up and running any business, knowledge is power.
You have to understand your customer’s needs, the business environment, professional association and trade bodies to join, and the rules and regulations governing the industry.
You shouldn’t just buy the first property that catches your eye. You have to know what makes a property “investment grade.”
There are four ways you can benefit from owning an investment property. If you get these four elements right, you will be successful in the real estate business.
These four elements are:
Capital Growth: This is the appreciation of an asset’s value over time. You have to make sure that your property has the potential to appreciate in value at a rate that builds wealth. In other words, the growth capital should be above average. Properties which offer the best capital growth have high demand from both tenants and owner-occupiers. Demand from tenants helps you pay off the mortgage while occupying owners help to push up property values.
Cash Flow: In the real estate industry, cashflow is the byproduct of letting out a rental property. Or in simpler words, it is the rent money.
Tax Benefits: A good tax strategy can help you maximise the income from your rental property. You should, therefore, learn all you can on your tax obligations, tax deductions, and tax penalties.
Accelerated Growth: As a real estate investor, you want your property’s value to increase as much as possible. This is why you need to invest in renovations which help you manufacture capital growth.
2. Choose an Investment Strategy
Now that you’ve equipped yourself with the right knowledge, it is time to select an investment strategy that suits you.
But don’t overthink it – you don’t need to write a 30-page MBA-level business plan.
You just need to select a simple investment strategy that will help you move from your current financial stage to the next.
You can modify or even change your strategy over time.
Here are a few real estate investment strategies to consider:
Buy and Hold: This is where you buy a property, wait for its value to appreciate, and sell it off for significant profit. This strategy is quite passive as you don’t have to do anything other than letting natural real estate appreciation work for you. But to make even bigger profits, you can have some renovations done on the interior and exteriors. You should focus on cheap renovations which bring great value.
Wholesaling: With this strategy, all you have to do is get a house for sale under contract from the seller, then market the house to potential buyers. If you’re good at marketing and closing sales, you can make a significant profit without spending any of your own money. To be successful at wholesaling, you need to have a strong network including potential buyers and real estate professionals.
Fix and Flip: This is a simple strategy where you buy an investment property, renovate it, and sell it for a significant profit. This option opens up more financing options to an investor than wholesaling, or buying and holding. For maximum returns, fix and flip the property as quickly as you can and take up another.
Real Estate Investment Trusts: This is a passive strategy where you invest your money with a real estate investment trust. This is very similar to buying stocks or company shares. This means that you only have to find a reliable, trustworthy REIT and know the best time to sell your shares. This strategy can yield great returns in both the short and long term.
3. Think about Location
About 80% of how your property performs is determined by its location.
Look for property in an area that has an established history of strong growth capital and has the probability to continue performing well.
Many new investors think that they can make a killing by going against the grain and investing in “the next hot spot.”
While there are investors who made lots of money that way, if you want the certainty of longterm capital growth, it’s better to go with the established trends.
Areas that are going through gentrification are also a great place to start. Gentrification means that a relatively cheap suburb has more wealthy people moving in, giving it the potential for future capital growth.
Look for properties that are reasonably close to amenities such as schools, hospitals, shops, and public transport.
A great way to suss out a neighbourhood is by looking at its vacancy rates. High vacancy rates indicate that tenants and owner-occupiers don’t find the area desirable, which could make it harder for you to make a return on investment.
Increase your cashflow by self-managing your property.
4. Consider Financing Options
Like in any other business venture, investing in property is a game of finance.
Therefore, you need a sound finance strategy from the beginning. Learn how you can maximise your borrowing power, use equity as a leverage to build your portfolio, and maintain a buffer to see you through any rough financial patches.
Here are some financing options for you to consider:
Portfolio Loans: These type of loans are kept by the banks or lending institutions instead of being sold off on the mortgage market. Although their terms vary, they usually have shorter terms than conventional mortgage loans (5-10 years) and higher interest rates.
Non-Conforming Loans: These are loans that are offered to borrowers who don’t meet the usual lending requirements such as those who have a poor credit history, are self-employed or have previously declared bankruptcy.
Hard Money Loans: With these type of loans, lenders are most interested in the collateral you can provide rather than detailed lending regulations required by other options. However, these loans usually cost you more. These kind of loans are ideal for short-term remodelling projects.
Private Lenders: You can get loans from private lenders such as wealthy individuals. One of the pros of using private lenders is that they can offer more flexibility than other options.
Seller Financing: You can approach sellers with equity who can allow you to pay the purchase price over time in instalments, or by using creative contracts.
The type of financing option you go for should be determined by your situation, your investment strategy, and personal preference.
5. Build Your Team
In real estate, you need to work with a team to be successful. In the beginning, you might not need employees. But you will still need to work with independent contractors and advisors in various areas of expertise.
Here are the different levels that make up a team:
The Inner Circle: These are your closest team members such as your spouse, business partner, and mentors.
Support Circle: This includes the fiduciary or critical relationships that help you with important, ongoing tasks. This includes your property manager, real estate attorney, accountant, and lenders.
Service Circle: These are the functional relationships for various tasks. The people in your service circle include closing agents, home inspectors, electricians, plumbers, painters and so on.
Network with other property investors to meet the right people for your team.
Once you have acquired an investment property, what should you do next?
One of the best moves is to subscribe to Lodge, Australia’s leading property self-management online platform.
Lodge enables you to manage the entire life-cycle of your property from advertising vacant units, screening potential tenants, creating digital leases, collecting and tracking rent online, smart expense management, secure document storage and so much more!
To get you started, read this free e-book for great tips on managing your property.