Investing in real estate requires that you know all the different factors associated with it. Therefore, here is what you need to know in order to make money in real estate.
In order for you to be able to take a step towards real estate investing, you will have to start somewhere. However, this “somewhere” point should be acquiring real estate education. So, in this blog, we will let you know of the most fundamental aspects you will have to deal with in real estate investing.
Related: Investing in Real Estate: The Basics That You Need to Know
#1. Investing in Real Estate: Math
Well, we do understand that Math wasn’t everybody’s favorite subject in school. However, investing in real estate requires that you do some math! We know that this is bad news for many, but it is for your own good after all. Thus, to understand what we are talking about, take a look at the following numbers you will have to deal with as a real estate investor:
Investment Property Financing Strategies:
One of the most important figures you will have to deal with is the funding for your real estate business. We say that in terms of deciding on the amount of money you intend to borrow. If you’re not borrowing, then the amount of money you intend to pay in cash.
If you are wondering about the importance of the financing strategy, you will find that out in the next section when we talk about the property valuation methods. In this section, we are going to focus on the mere fact that you will have to find a suitable investment property financing strategy. By that, we mean that a good financing strategy is one that suits your financial status. For example, you want to become a landlord and start investing in real estate through rental properties. The first thing you do when buying rental property is borrow money. Let us suppose that you have decided to borrow that money from a hard money lender. Well, let us tell you: bad idea! Why? Because rental properties are long-term investments. Therefore, you are investing in a strategy that generates profit in the long-term while hard money lending is a short-term financing strategy!
On the other hand, if you decide to apply for a mortgage, we would say that is a reasonable investment property financing strategy. It will allow you to repay the mortgage in a period of up to 30 years. That, in fact, will give you all the time necessary to benefit from your real estate investment while building equity with each payment.
Investment Property Valuation:
Investment property valuation is another type of figure you will have to deal with when investing in real estate. Not only that but it is also associated with the investment property financing in a sense. So, here is an idea of what figures you will have to deal with:
The return on investment: At this point, you might or might not have heard of the ROI in business. Basically what it means is the amount of cash you will have on the amount you have already invested. Beware, this metric is calculated on an annual basis. Therefore, you will be dealing with relatively large numbers.
The rental income: Your rental income from a rental property is important. As a matter of fact, it is the indicator of whether you are profiting or not. Therefore, you will have to do proper calculations to make sure that you are charging enough to 1) cover the rental expenses and 2) generate a positive cash flow which is your profit margin.
The capitalization rate: Also referred to as the cap rate, it is a very important metric. It indicates the returns you will have on the total amount of money put into an investment property. Therefore, you will need to know what your net operating income is and divide it by the market value of the property.
The cash on cash return: This is yet another metric to evaluate the performance of an investment property. However, this method excludes any external financing resources in its calculations. Therefore, you only deal with the actual amount of cash invested.
#2. Investing in Real Estate: Understand Strategy
Investing in real estate comes in all different forms. So, really, there isn’t one way to make money in real estate. However, choosing the right investment strategy is a crucial process in order to prevent any major losses. Therefore, when you are choosing an investment strategy to go with, consider the following:
- How much money do you have to start with?
- How much time are you willing to be investing in real estate?
- What is the level of effort you are willing to put into this?
- What level of risk are you willing to take?
- Are you planning on managing the business yourself?
Make sure you take a minute to answer these questions in order to find out the right investment strategy for you. Also, understand the ins and outs of all the investment strategies available. For example, if you are intending on investing part-time, then we think it might be a great idea to invest in rentals. However, choosing the optimal rental strategy is also important. You must know that there are the traditional rentals as well as the Airbnb rentals. Deciding on which strategy to go with is up to you based on the previous questions in addition to your own life situation.
Related: Investment Strategies: Real Estate vs. Bitcoin
#3. Investing in Real Estate: Understand the Market
Getting a sense of the market is important when investing in real estate. First, it would be a great help in deciding on which investment strategy to go with. Second, it will, obviously, protect you from any unpredictable challenges. To get a better understanding of what we are saying, here is an explanation:
The Real Estate Market Analysis:
When buying investment property, it is important that you perform the real estate market analysis. This analysis will help you decide where to invest in real estate as the location plays a major role in the business. Therefore, what it means is basically a comparison between a few similar investment properties to determine the profitability and the appreciation rate of a property.
So, in other words, performing a real estate market analysis will help you spot the best places to buy an investment property right away. Moreover, the way it works is based on real estate comps, past investment history as well as comparative analysis.
Investment Property Analysis:
Investing in real estate also means that you need to analyze the investment property itself. There is no way a location can help if the property is in a hopeless condition in terms of rate of return. Therefore, this is directly related to the investment property valuation methods we have talked about previously. Examining the cap rate, the cash on cash return, the potential rental income along with the return on investment, in general, will highlight any shortfalls of the investment property. Therefore, you will always be able to spot the best real estate investments in the market.
Related: Every Real Estate Investor Needs These Real Estate Analytics Tools
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