Regardless of your familiarity with investing, you’ve perhaps considered a venture into real estate. We’ve all seen the fix and flip shows, and your angry uncle Dave constantly pushes it…
The only way to get wealthy is to buy some damn real estate, why don’t people understand that!?!?
It’s true though! Following decades of social change, industrial development, and economic fluctuations, real estate continues to be one of the most reliable investment options.
By conducting sound research and taking advantage of favorable market conditions, you can learn how to truly make money in real estate.
With a little help from Big Uncle D, of course.
Below you will find several important real estate tips, direct from trembling lips of your angry Uncle Dave.
Tip #1: If the numbers add up…just buy!
Numbers don’t lie like people do you nitwit!
First of all, here is the definition of a nitwit.
Secondly, research is important. But, some people take planning and consideration to such an extreme that it becomes a stumbling block. Analysis paralysis is your number one enemy in real estate.
At some point, you have to bite the bullet and make a purchase when the numbers make sense. You should be able to estimate the cash flow of a property so that you know when it’s the right time to buy.
Cash flow is all about the amount of cash you actually get from the investment on a monthly basis.
To make this calculation, consider all the expenses and payments associated with operating the property. With residential rental property, you generate revenue by collecting rent from tenants.
The money you make from rent will be used to cover taxes, insurance, payments, repairs, updates and any other costs associated with property ownership.
A good real estate tip is to take into account all the costs you will incur by owning and operating property, and weigh them against the potential profits. You may be surprised by just how much it costs to operate the property.
In some cases, investors purchase properties on which they can barely break even after expenses.
Calculating your cash flow is a simple equation: subtract your total expenses from your total income. The resulting figure is the amount of money that you will actually generate from your property.
Cash flow example
Here is a monthly cash flow calculation example on a property you rent for $1,600 a month:
- Mortgage = $600
- Taxes = $200
- Insurance = $50
- Reserve for repairs = $50
- Property Management = $100
Your cash flow in this example is $600. Not too shabby! This means that you’re building up reserves for future major expenses. And, you can also withstand a future interest rate increase should one come your way.
After you have this number, you can calculate your annual return on investment. This is a percentage rate that tells you how much of your investment you get back on an annual basis. You can determine this number by taking your annual cash flow and dividing it by your initial investment.
In the example above, your annual cash flow is $7,200, and assume you purchased a $300,000 property with a 20%—or $60,000—down payment.
By dividing your cash flow by your initial investment, you’ll find that your annual return on investment is 12 percent. Again, not bad considering the average yearly stock market returns is 7-10%.
In this example, your return on investment is exceptional. It’s difficult to pinpoint exactly what a “good” return on investment is.
However, anything above 15 percent is usually considered to be a sound investment. If you find a property that can get you to an ROI of 15 percent or above, seize the opportunity and buy.
There are now online marketplaces for turnkey rental properties that do a lot of the math for you.
For example, Roofstock is a turnkey rental property marketplace that Andrew has used to buy two of his properties (that he has never stepped foot in). Buying a property on the other side of the country without stepping inside takes a lot of trust. Roofstock apparently does not take your trust lightly.
To help you be confident in your purchase, they strive to provide as much information as possible on the property before you decide to buy. All of this information, coupled with quality standards make up the Roofstock Certification.
Their expertise is in evaluating, negotiating and closing property transactions. So they aren’t trying to sell you anything but instead are looking to add value to an existing and usually convoluted process. If you want to learn more about Roofstock you can find our full review here.
Tip #2: Buy and hold
Buy, and NEVER let go! Just like your hands on that nudey mag I saw you with when you were a young lad.
You’ve probably heard about people who invested in properties or stocks and then lost it all when the economy hit a rough patch. What you might not hear so much about is the fact that these same people may have been able to recoup their losses if they had held out a little longer.
You only lose money when you sell. And, the losses many people suffer in real estate is because they sell at the absolute wrong time.
That’s why buy and hold as a real estate investment strategy is so powerful.
When you pull out of the market at the first sign of a downturn, you lock in your losses. Buying and holding enables you to ride out shifts in the economy. This is a key real estate tip to keep in mind.
Source: Vizion Group
When you purchase real estate, you should do so with a long-term mindset. As you can see from the above example, purchasing and holding is a much better long-term wealth creation strategy.
Property can effectively diversify your portfolio and earn you short-term profits in the form of cash flow. This is in addition to sustained appreciation over time
Real estate always appreciates
Despite the ups and downs the economy and market take, real estate always has an upward trend. Thus, your investment will likely appreciate in value the longer you hold onto it.
One of the most significant benefits of buying and holding real estate is the fact that it gives you a stable income. As long as you keep your rental properties occupied, you can depend on a consistent, pre-determined source of revenue.
That is, as long as your tenants aren’t nitwits.
A long-term buy and hold strategy gives you ongoing cash flow, yearly tax advantages, and long-term appreciation. As the famous Gary Keller says,
It’s like compound interest with a turbocharger.
This allows you to supplement your income or, in some cases, support yourself entirely. As you build equity in your property, you can tap into financing to purchase more real estate and build your rental income even more.
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Tip #3: Get organized!
If you’re not organized, you’re dead!
If you are not on top of things as a property owner, you are going to have to deal with all sorts of negative consequences. Late payments and bills, tenants who can’t rely on you, deals that fall through, and a very disappointed Uncle Dave.
Owning and managing a rental property can be overwhelming. It requires a lot of organization. Taking the time to really get organized is crucial when you’re looking at how to make money in real estate. Below are some good real estate tips.
Find a system that works
We are all wired differently, and the organizational system that works for somebody else might not work for you. Try out some different organization systems. Including physical filing cabinets and digital organizational software.
My favorite tool is Google Drive, and I scan and e-file everything. Stick with whichever option you like best. As long as it works, it doesn’t really matter which system you opt to use.
Organize things, little by little
No matter what you do, what you purchase, who you pay or who pays you, keep detailed records of everything that happens at your property.
File away receipts and keep your records up to date at all times. Trying to compile information when tax season rolls around is overwhelming. Maintaining your records as you go allows you to avoid a last-minute scramble to compile and organize them.
Keep your ear to the ground so that you are always informed about what’s going on in your local market. Go now, and set up a daily Google Alert!
Changes in rental rates, demand, and property value will affect how you operate your property. Doing some research and staying up-to-date about what’s going on in your local market allows you to make the best decisions possible.
There’s a wealth of great resources out there that you can use to stay organized. These include sophisticated software designed for property investors and managers. My favorite tool for staying organized, along with Google Drive, is Evernote. This tool allows me to create todo lists and keep detailed notes.
Take advantage of all the technology and tools to keep you on top of your real estate game.
Do this, despite what Uncle Dave says,
Damn kids these days with their Pac-Man videos games and hula hoops!
There is nothing wrong with getting a little help by hiring a contractor or assistant. Even a part-time employee can make a huge difference when it comes to managing your workload.
When you’re first starting out, this may not be an option for you. But as you grow, you may need someone to take calls, knock on doors, organize maintenance, and so on.
You can delegate record-keeping and other organizational tasks to a contractor you found on Upwork so that you can focus on the big picture.
It’s easy for work to overtake your life. Suddenly, your dining table is overrun with paperwork. Your phone is ringing off the hook at all hours of the night and you’re spending your weekend checking emails and making business calls.
For you to be your best when you’re at work, you must define boundaries and give yourself time to focus on your personal life. If you have an office at home, close the door after business hours.
Shut off notifications for work emails and route business calls to your voicemail after hours. When you make a point to separate your work and personal life, you can enjoy a much better balance.
Tip #4: Analyze frequently, pull the trigger rarely
The best time to buy a home was five years ago!
Although you’ll be pulling the trigger rarely, you still need to pull it. A constant analysis is key to successful real estate investment.
You must carefully weigh all the numbers and factors to be certain that you are making a purchase that will be sufficiently profitable to you in the long term. Start by thinking about income, property appreciation, and factors specific to your local market.
Is there a new employer coming into town, a new transportation system, new commercial and retails units? Know where to best places to invest for the long-term care. And, always be analyzing deals—this is the only way you’ll become a pro-investor.
Cash flow is a great start
When a new deal comes your way, you should start by calculating your cash flow. Next, take into account projected property appreciation and other factors that might influence the long-term value of the property in which you invest.
You should know the average appreciation over time in your market, so start doing your projections!
And, in case you’re wondering, the national average appreciation rate was 5.4% between 1963 and 2008.
There’s no way for you to be absolutely certain about the profitability of a real estate investment. But weighing it carefully will give you much more confident about your purchase.
When a good deal comes your way, it’s important that you are prepared to execute on it. Work with an agent who specializes in real estate investments. Make sure they send you deals regularly for your analysis.
Also, have an analysis system. If a property adds up after initial analysis, go visit. After you visit, if you like the property and it checks all your boxes, then send your appraiser. And so on.
The reality is that the dream opportunity is not going to fall into your lap. You have to put forth the effort to seek it out and secure it.
Analyze your opportunities and pull the trigger when—and only when—the time is right. Taking this approach means you’ll quickly find how to make money in real estate in the most effective way.
Tip #5: It’s all about teamwork
No one achieves success in isolation!
So true Big D, so true!
A critical real estate tip to remember when you are trying to learn how to make money in real estate is teamwork. You cannot do it all on your own. Surrounding yourself with supportive team greatly increases your chance of success.
Start by determining what kind of help you need. Enlist the help of a real estate agent to help you identify investment opportunities and become familiar with the local market.
Find a lender to help you finance your investment. Work with a tax professional to help keep all of your financial records in order. And, a property manager can help you with the day-to-day operations of your real estate investment.
Here is a breakdown of my current real estate team—and we are killing it!
Nothing happens in isolation! Real estate investing is a team sport.
These key players will help make your venture into real estate investing a successful one. They’ll also help you make great investment choices that pay off in the long term.
Of all of the real estate tips you can receive from Uncle Day, the most important is: don’t be stupid, stupid!
Always err on the side of being over-informed about the market where you are investing and the details of the investments you’re making.
Educate yourself about every aspect of the real estate investment process and continue learning more as you navigate it. Read books, talk to other investors, and go to meetups. Always be analyzing deals.
If you commit to real estate investing and embrace the unpredictable and take calculated risks, you have a good chance of succeeding.