One of the most common questions asked regarding real estate investing is, “how do I get started?” or “what do I need to know?” Real estate investing can sound like rocket science to beginners or to those who have never even thought about real estate. What a lot of people don’t know is ordinary people who invest in real estate just once can be very successful and benefit from their investment their entire lives. Investing does not require a degree or a lot of prior knowledge, and the resources today make investing very feasible. Let’s examine what is actually required for one to invest.
1. Understand Cash Flow
You don’t have to be a math expert but understanding positive cash flow is the core of the calculations that you will come across. Positive cash flow means income is more than expenses and that should be made priority when investing. To figure this, you’ll have to be aware of all the expenses that could come up with an investment property – maintenance, vacancies, insurance, HOA fees, property tax, mortgage, etc.
There are many other figures to be aware of. If someone proposes investing in a property with a 3% cash on cash return, an investor should know to walk away from such a deal. Differentiating good deals from bad ones takes time and practice, but it’s good to know what are the acceptable averages for cap rate, cash on cash return, price to rent ratio, etc.
A lot of investors know how to create excel sheets and calculate these figures for themselves but don’t be frightened – not every investor does this. Since spreadsheets are becoming outdated, you can use investment property calculators which generate these figures automatically – saving a lot of time and confusion.
2. Understand Market Conditions and Risks
An investor doesn’t have to know the ins and outs before investing but know when is the right time to buy or sell. When buying or selling, know what to expect based on the market conditions. For example, investors who bought properties solely for appreciation were unsuccessful during the recession and market crash. Knowing market behavior and such patterns does not only act as risk management, but is also the best way to learn about real estate investing.
Understanding the dynamics of an area is also important, like knowing which areas are in high demand. This means inquiring about neighborhood amenities, job market, transportation, home prices, rental rates, etc.
With any investment, comes risk. With real estate, it’s usually economy related. Not much that can be done about that but if the cards are played right, an investor can maintain income during an economical crisis.
Other risks include getting bad tenants or being unable to pay mortgage payment and having to foreclosure. Fortunately, these risks are a lot more manageable.
3. Communication and Management Skills
Networking is absolutely key for real estate investors, especially for beginners. You will need a network of different team members to gain new opportunities, assistance, and knowledge. Learning from the experienced is the best way to learn after hands-on learning. As an investor, you will be required to make different decisions, ranging from banking to renovating. It’s a lot easier if you already have a team to consult.
Know how to properly communicate when screening and managing tenants. Since legal compliance is a big part of being a landlord, know how to be firm with tenants when necessary. Having proper communication skills is also important when it comes to negotiating closing costs or hiring labor.
Management can go under this point, as well. A lot has to be managed as an investor. The property has to be maintained, tenants have to be accommodated, payments have to be tracked, etc. If an investor does not want take all of this on, they will need to hire assistance which also has to be properly managed.
4. Understanding Customers/Tenants
Real estate investing is not just buying properties, renting, and selling. It does require understanding consumer behavior and demands. If you’re trying to appeal to a certain demographic, such as college students, know what they’re looking for in a property and if you’re able to provide it. What kind of amenities are such tenants going to look for? Are they going to be able to pay rent? If you’re renting out a single-family home to a family, they’re going to take schools and crime rate into consideration. Off-campus students, however, are going to look at public transportation and proximity to universities and amenities.
5. Patience and Persistence
Real estate requires investors to continue learning about the market trends and about their own investment through observing. Of course real estate is not a get-rich-quick scheme so patience is required. It will take time looking for resources, deals, making the investment, and managing, but the rewards are worth it.