If you’re bailing out of the stock market like so many others, perhaps you’ve decided to start real estate investing rather than stockpiling your money under the mattress.
If so, then this article is for you. In it, we discuss three fundamental things about real estate investing you should understand before you make your first real estate investment.
1) Understand the Basics of Real Estate Investing
Real estate investing involves the acquisition, holding, and sale of rights in real property with the expectation of using cash inflows for potential future cash outflows and thereby generating a favourable rate of return on that investment.
Moreover, investing in real estate is more advantageous than a stock investment (which usually requires more investor equity) because real estate investments offer the advantage to leverage a real estate property heavily.
In other words, with an investment in real estate, you can use other people’s money to magnify your rate of return and control a much larger investment than would be possible otherwise.
Moreover, with rental property, you can virtually use other people’s money to pay off your loan.
But aside from leverage, real estate investing provides other benefits to investors such as yields from annual after-tax cash flows, equity buildup through appreciation of the asset, and cash flow after tax upon sale.
Plus, non-monetary returns such as pride of ownership, the security that you control ownership and portfolio diversification.
Of course, capital is required, there are risks associated with investing in real estate, and real estate investment property can be management-intensive.
Nonetheless, real estate investing is a source of wealth, and that should be enough motivation for us to want to get better at it.
Average price of ready residential transactions in Dubai from the fourth quarter of 2018 to 2022 (in AED per square foot)
– Statista
2) Understand at Least Four Elements of the Return
Real estate is not purchased, held, or sold on emotion.
Real estate is not about love, it concerns return on investment. As such, at the very least, prudent real estate investors consider these four elements of return.
They are what reveal to the investor the potential benefits of purchasing, holding on to, or selling an income property investment.
Cash Flow
The amount of money that comes in from rents and other income less what goes out for operating expenses and debt service (loan payment) determines a property’s cash flow.
Furthermore, real estate investing is all about the investment property’s cash flow. You’re purchasing a rental property’s income stream, so be sure that the numbers you rely on later to calculate cash flow are truthful and correct.
Appreciation
This is the growth in value of a property over time, or future selling price minus the original purchase price.
The fundamental truth to understand about appreciation, however, is that real estate investors buy the income stream of investment property.
It stands to reason, therefore, that the more income you can sell, the more you can expect your property to be worth.
In other words, decide about the likelihood of an increase in income and throw it into your decision-making.
Loan Amortization
This means a periodic reduction of the loan over time leading to increased equity.
Because lenders evaluate a rental property based on income stream when buying multifamily property, they present lenders with clear and concise cash flow reports.
Properties with income and expenses represented accurately to the lender increase the chances the investor will obtain favourable financing.
3) Prepare and Do Your Homework
Successful real estate investing requires preparation and research. Here are six suggestions that will help you get started.
Form the correct attitude
To succeed at real estate investing, foremost, strike the notion that you’re house hunting and remember that real estate investing is a business.
Unless an amenity affects income, look beyond curb appeal and facilities such as spacious kitchens and focus on the numbers.
Develop a real estate investment goal with meaningful objectives
Have a plan with stated goals that best frames your investment strategy; it’s one of the most crucial aspects of profitable investing.
What do you want to achieve? By when do you want to achieve it? How much cash are you willing to invest comfortably, and what rate of return are you hoping to generate?
Research your market
Understanding as much as possible about the conditions of the real estate market surrounding the rental property you want to purchase is a necessary and prudent approach to real estate investing.
Learn about property values, rents, and occupancy rates in your local area
You can turn to a qualified real estate professional or speak with the county tax assessor.
Learn the terms and returns and how to compute them.
Get familiar with the nuances of real estate investing and learn the terms, formulas, and calculations. There are sites online that provide free information.
Consider investing in real estate investment software
Having the ability to create your rental property analysis gives you more control over how the cash flow numbers are presented and a better understanding of a property’s profitability. There are software providers online.
Develop a relationship with an excellent real estate agent
Develop a relationship with an excellent real estate agent that specializes in the rental property and understands your real estate market
It won’t advance your investment objectives to spend time with an agent unless that person knows about investment property and is adequately prepared to help you correctly procure it.
Remember, not all real estate professionals are created equal and you want an investment property specialist.
There you have it, as concise an insight into real estate investing as I could provide without boring you to death; just take them to heart and you should be fine. Here’s to your investing success.
Rabee Khan is the founder of Serps Growth. He has led 100s of successful SEO campaigns in the most competitive verticals like SAAS, health, finance, law and now in Real Estate. He’s also helped 100s of agency owners scale by systemizing their SEO. Rabee is a Search Executive skilled in Business Planning, Interpersonal Skills, Analytical Skills, Advertising, and Marketing Strategy with a demonstrated history in the marketing and advertising industry.
