The internet is bursting with tips from real estate investors, each with their own idea of what makes a successful real estate investment. With the US housing market valued at $43 trillion, it is understandable why everyone is scrambling for a piece of the pie.
However, investing in real estate is not as easy as it seems, so here are some top tips on pro real estate investing.
1. Choose one real estate strategy and stick to it…
One of the reasons why real estate investing receives rave reviews is because there is a little bit of something for everyone. There are different ways to invest in real estate, and one of the more popular ones is property flipping.
You’ve probably watched a TV show where the show’s star buys an ugly, dilapidated property, fixes it up, and sells it fast for a tidy sum. That’s generally how flipping properties works, and most times, it works great. It provides a quick and creative way to make money, even with little money down.
The downside to flipping is that you must work within a short time, manage contractors, stay on budget, and pay hefty taxes. And, once you’re done selling, you’re done. There’s no more money coming in.
Another popular strategy is rental properties, especially multifamily rentals. Done correctly, you can expect monthly deposits into your account for as long as you continue to own the properties.
Commercial property type matters…
The major downside to this real estate strategy is the managerial headaches that come with it. Whether you rent out office space, retail space, or industrial space, you must find a way to manage it all.
Further, multifamily units require 24/7 staff or maintenance to handle tenants’ issues or emergencies. Moreover, industrial properties require special licensing for technicians working around the property. Luckily, you can easily overcome this by hiring professional property managers.
To avoid getting overwhelmed, choose one strategy, focus on one property type, and go all-in. Do you want to focus on industrial space or multifamily rentals? Or perhaps you want to focus on office or retail space. Whatever the case, it would be prudent to pick an investment strategy best suited to you and focus on it.
2. Understand how real estate makes money…
There are four primary ways you can make good money in real estate, call them wealth generators. They include:
It refers to the amount of money you will earn from people leasing space on your property. It is one of the primary ways property owners make money. Rental income often appreciates with time.
The tenancy deal should bring you about 1% of the property’s value every month, so you should recoup your investment in about nine years, and from thereon, you will enjoy profits for as long as the property is in existence.
Appreciation refers to the natural rise in a property’s value over time. The real estate market is volatile and can go up or down depending on several factors. The market can also experience a severe crash, as seen in the 2007 housing crisis.
Any graphs showing real estate value over time will indicate a steady rise over the years. There will be dips here and there, but overall, real estate property values will generally continue to rise.
For commercial properties, you can guarantee an increase in value if you do any of the following:
- Reconfigure space by adding or dividing space. This works well, especially for office space. You can also add parking or storage space.
- Update and modernize. Your commercial building must be similar in aesthetics to surrounding structures. Update your HVAC system, replace old lights, and update water heaters.
- Exterior facelift. Paint the outside of the buildings, remove the trash, or construct pavements. These are all small yet effective ways to improve a property’s appearance.
- Increase security. Invest in quality alarm systems, gates, and shutters to make the property more attractive to tenants.
As the property’s value appreciates, so too will the rental income or price of the property. Simply put, buy and wait.
Loan paydown …
If you acquire a loan to purchase property, the loan gets paid down every month. Say, for example, you bought a property with a mortgage and made the repayments every month for around 25 years.
Even if the house never appreciates over the years, you will still have a property valued at the same price you bought but paid in full.
As a commercial property owner, you are entitled to some tax benefits. When used correctly, you can leverage these benefits to defer or reduce the amount needed to pay in income and capital gains tax. These benefits include:
- 1031 Exchange
- Lower tax benefits for beneficiaries
- Commercial mortgage interest
- Real estate tax losses
3. Understand market cycles…
Whether you invest in commercial or residential real estate, you can expect the market to go through four phases. These phases are recovery, expansion, hyper-supply, and recession. In a perfect world, you’d simply buy properties when the market is at the bottom, then sell them for insane profits when it is at its peak.
This strategy doesn’t always work out because you must invest differently depending on the market’s phase. Factors to watch out for that affect the real estate market cycles include:
- Global crises. Most recently, the Covid-19 pandemic caused an economic fallout that impacted the real estate market. Anything from wars to natural disasters can affect the market when they disrupt the global supply chain.
- Economic stability. When the economy is healthy, and there are low unemployment rates, people have more disposable income to invest in real estate.
- Population age. The percentage of young and old buyers can affect the market. This is due to the diverse needs that different ages require.
- Insurance rates. Higher insurance rates equate to fewer buyers, while lower rates mean more buyers.
The recovery phase is marked by the recession’s end, but it starts when the recession is at its worst. The recovery phase is gradual and is the longest of the four stages. During this phase, many properties are available at below market price.
Investors purchase during this phase and begin remodeling or renovating the homes in preparation for the next stage, which is expansion.
It is at this stage that the market is considered healthy. Key signals to look out for during this phase are an increase in renters looking for space and increased housing demand. During this phase, the real estate market is most active and lucrative.
Market expansion is the right time to sell the properties you purchased during the recession. This phase is also a good time for investors to buy and renovate properties.
During this phase, there is an oversupply of rental properties and few buyers or renters. Too much expansion and property development cause this phase. The best thing to do during hyper-supply is to hold onto your properties.
Please resist the urge to sell them off out of fear of vacancies. It’s almost guaranteed that a recession and a recovery will always follow hyper-supply.
A recession marks the end of a market’s high. A key indicator is an overwhelming supply with little to no demand. During this time, many investors panic and try to sell off properties. But because a recovery always follows after a recession, continue to hold onto your investments.
It is almost always hard to determine when the next recession will start. You’ll often realize the market’s in a slump after it’s already started. Studying the real estate market to determine what cycle you’re in helps you:
- Prepare for trends depending on the cycle you’re in
- Invest timely
- Decide when to sell or hold onto a property
- Calculate the performance and value of your properties
One tip you can rely on, no matter what kind of market cycle you’re in, is to train yourself to recognize good deals when you see one.
4. Leverage the power of compound interest…
If you understood the power of compound interest, you’d realize why Albert Einstein called it the “8th wonder of the world”.
Compound interest is not exactly new. This is what banks use to explain how money can grow over time. You make a deposit and allow it to earn interest over time.
Instead of withdrawing and using that interest, you leave it and the original investment alone. Eventually, the interest earned on the interest from your initial investment continues to grow.
You can apply the same concept to real estate in several ways. It’s important to note that you do not invest the interest earned from a property; you reinvest rental income or the income generated from flipping a property.
It works best if you use one property’s equity or cash flow to purchase additional properties. This way, your portfolio continues to grow without significant capital injections on your part.
The same principle of time holds for compound interest in real estate. The longer you leave an asset or income compounding, the greater the returns. The earlier you use compound interest, the more money you can make because the returns are not visible overnight.
Because you’re not touching any of the income you make from renting or flipping, you’re forcing yourself to save or increase your assets as you purchase additional properties.
5. Consider investing in United States Property Coin…
Want to invest in real estate but not sure how to get started? If you qualify under Regulation D Rule 506(c) or Regulation S, then you have the option to invest in offerings of USPC. By investing, you will get access to real estate assets located in high-demand markets through security tokens, which use blockchain solutions that comply with laws and regulations.
Money is no longer a trustworthy medium of exchange as inflation renders today’s currencies an ineffective store of value. You’ve likely seen how dollar-backed stablecoins are struggling at the moment.
The main benefits of using USPC include the following:
- The stability of real estate gives you a high level of confidence for long-term appreciation…
- Offers a diversified portfolio of real estate properties, unlike other real estate-backed tokens…
- No hassle of managing real estate properties…
- As the real estate properties appreciate, so does the value of your USPC investment…
Of course, we always suggest that investors seek their own financial advice before participating in any offering of a security, digital or otherwise.
The Bottom Line…
You can use the above tips to go from a beginner real estate investor to a pro. You can choose to use all of them or focus on just one or two. Real estate investing can be tricky, but these tips will give you a leg up. In addition to studying the market, and choosing the right strategy, use USPC to help cushion you against the inevitable effects of inflation.