Without a doubt, real estate is one of the best investment options for your portfolio. However, if you don’t know how to navigate the ropes, you can easily fall into the wrong side of things, losing your money. With the right strategy, however, you can diversify your portfolio, increase your monthly cash flow, build wealth, and retire under your terms, relaxed and more comfortable. If you are just starting, these tips will give you the perfect landing place, so you start on the right path.
1. Consider the different investment option
There are several ways to invest in real estate. If you are unable to buy the property, REITs would be your best option since they allow you to invest without owning any physical building. They are like mutual funds but in real estate. You can also flip houses, by buying an underpriced property, renovating it, and selling it for a profit. If you are thinking long term, however, your best option is to buy a property and let it out to tenants.
The buy to let option guarantees your rental income which can be potential capital for your next project. You need to be careful though. Calculate how much you can borrow against the rental income you will receive to see if it checks out. You can also change your home’s mortgage to buy to let if you want to start with your home and grow from there. The good thing with the buy to let option is that your borrowing power is not affected.
2. Check your purchasing power
Determining your purchasing power is vital in drafting a successful investment strategy. Using leverage, for instance, can increase your return on investment. Real estate leverage refers to using debt to increase your investment. To do this, you must create an opportunity for your tenant to pay off the property loan, which in turn lowers your down payment, and frees up cash you can use to purchase other investments.
3. Know the numbers
This is often where people miss the mark. Use the 1% rule to help you decide if the property is worth investing in. The rule is simple: if rental income is at least 1% of the acquisition cost, it’s probably a good investment. Make sure you factor in any remodeling costs and other expenses you might incur. If you buy a property for $70,000 and fix it with $30,000, your acquisition cost is $100,000. For it to be a good investment, you must rent it for at least $1,000 a month, which is 1% of the acquisition cost. However, this rule is an estimate. Always do more research when you find a property that passes this rule. Talk to a contractor, for instance, so you don’t get surprises when remodeling.
When done right, investing in real estate is very profitable. The profit you make should cover your risk, taxes, and the cost of maintaining the property. To win at this game, you must buy properties, never go bankrupt, and generate rental income so you can buy more properties.