In my opinion, becoming a successful real estate investor takes patience, knowledge and understanding. In this blog post I’ll share several principles and fundamentals I believe real estate investors should consider in order to create and scale a sustainable real estate investing business.
One of the greatest advantages of real estate investing is that you can use or borrow other people’s money to purchase and control income producing properties. Sounding like a broken record, you cannot really do that with any other asset class. Banks are willing to lend up to 80% of the purchase price, which only magnifies your overall rate of return, which in turn accelerates your wealth creation.
Invest for Cash Flow
Cash flow is king! It is the glue that keeps the investment together. Cash flow covers all operating expenses and debt, which basically means that your tenants are buying properties for you over time. Having a positive cash flow allows you to acquire more properties faster, get greater returns from your investments, and ultimately build your net worth over time.
I know what you ate thinking…“What if I buy a distressed property that doesn’t cash flow but is a good opportunity, is that’s okay?” Yes, it is, but only if beforehand you have a solid conservative plan to stabilize the property and make it cash flow positive. What you don’t want to do is buy a property at a breakeven point, then the rental market softens and you have to start paying the mortgage out of pocket. If that happens things can get dicey really quick. Don’t put yourself in that situation. Be smart, have a plan and stick to it.
Do not go after a market because it’s sexy. Don’t be married to a specific market either. Many investors I’ve met think they have to invest in their own backyards or to invest in properties that are within a one- or two-hour drive from their home. In my opinion, you want to put your money where it is going to work the hardest for you, which may mean markets that aren’t close to home.
The United States is a very large country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to a variety of local factors. Therefore, you should recognize that there are times when it makes sense to invest in a particular market and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or because you bought property there before.
Diversify across multiple markets. The goal is to have three to five income-producing properties per market. However, this is subjective to the investor – it can be 10, 5, 3… whatever you want – but three to five properties are a great starting point.
After you have three to five properties in a particular market, move to another geographically different market with its own local economy. Ideally, select a market that is in a different state. Build your portfolio to three to five properties in that location and then move to the next market. This is easy to do when you have the right team or are working with a reputable turnkey property provider.
Diversifying within the real estate asset class will help
reduce your overall risk. Real estate is one of the few investment vehicles
that allows you to control your downside and risk, so be sure to take full
advantage of all that real estate investing has to offer by diversifying your
portfolio across different markets.
In my opinion, there are investors who still haven’t learned the hard lessons they should have from the crash of 2007-08. Here’s a reminder: It is very dangerous to speculate and chase after appreciation. It may be the fastest way to build wealth on paper, but you need to have a longer-term perspective rather than settling for the short-term, riskier forms of growth. To be clear, it is smart to have a strategy to force appreciation via value-add methods like performing renovations, lowering expenses, etc. However, it is not smart to buy a property, sit back, cross your fingers and speculate that it will increases in value.
Developing your real estate portfolio into a cash flow producing exercise takes work and planning. If you have real goals and plans, you’re going to be involved. Passive investing does not mean completely disengaged. You don’t get to be a set it and forget it investor.
Are you interested in learning more about creating turnkey passive income and generational wealth through multifamily apartment investing? Visit www.syndicationcapital.net for free information, guides and resources that will help you get started.