Purchasing investment property for the long-term can have multiple benefits such as earning cash flow as well as asset appreciation at the same time.
Owning real estate that generates continuous cash flow can add diversity to your portfolio as well as an income stream if you choose the right property. There’s stability and a level of predictability, which is better than short-term fix-and-flip properties when it comes down to retirement or just getting by in general.
When you’re looking at a decades-long investment, rather than one that may last a year or less, time is on your side for riding out housing market ebbs and flows. Real estate’s low correlation to stocks means your investment may continue to fare well during periods of widespread volatility.
Investing in buy-and-hold real estate isn’t all too different from investing in the stock market; it’s just not as risky because there are always people who need homes! The average real estate investment lasts 20 years or more.
It is crucial to know how and where to invest in rental properties. You want a property that will stay stable for years, if not decades, so it’s important you get this step right from the start.
Knowing what type of investment opportunities are out there can seem overwhelming at first glance but developing your own approach starts with knowing which points matter most when acquiring them as well as understanding both the benefits and drawbacks they come with. Keep these rules in mind:
- Start with your exit strategy.
- Gauge a property’s potential.
Start With Your Exit Strategy
The first rule of real estate investing is to start with an exit strategy. What this means is that you need to determine the factors that will cause you to sell your property in the future. You could sell because you want a little more money because it’s not performing well and investment opportunities are better elsewhere, or because you’ve changed your mind about what kind of investments work best for you. Once you’ve determined your exit strategy, it will be easier to make decisions when the time comes because all of your decisions will be made within the framework of that strategy.
When you start with your exit strategy, you’ll be less likely to make costly mistakes when it comes to choosing properties. For example, if your strategy is that you will only hold vacant land for a few years and then resell it, you’re much less likely to buy something that requires expensive maintenance that will eat up all the profits. Holding property for resale means that you can’t afford to have any major problems come up after a certain amount of time, so you’ll generally be better off avoiding anything with major maintenance issues.
No matter what kind of exit strategy you decide to go with, there are a few key questions that you should be able to answer very clearly when you’re getting started. For example, what exactly do you consider to be a success? Will it mean making more money than your home is worth after five years? Making more money than you spent on the property? Or will your definition of success really just mean when the property has reached its highest value?
Focusing on your exit strategy first might seem backward, but it’s a sound approach to take in determining real estate as an investment. This is because creating an early game plan and understanding the property’s potential for resale can lead you to decisions about whether or not this type of buy-and-hold investing suits your portfolio and style.
Gauge a Property’s Potential
Doing a market analysis of the area is helpful to gauge a property’s potential, as is researching comparable properties sold & rented in the previous six months. It’s important to note that these current comparable properties should be similar in type, size, age, and condition.
After creating a list of potential properties, you need to determine if they are profitable enough. You will do this by collecting as much information about these properties as possible and using the data to create a pro forma. A pro forma is a comprehensive budget outlining all expenses involved in making an investment. It helps you calculate the profit or loss of a certain venture.
A cash flow analysis is also a useful tool in determining the profitability of a property. To perform this calculation, you need to evaluate how much money will be moving in and out of the property. This includes all expenses such as mortgage payments, maintenance, insurance, taxes, and utilities. Next, you need to account for all incoming sources of income such as rent and any other income generated from the property. The difference between your outgoing payments and your incoming sources of revenue determines the cash flow for that period on that property.
Click here to read the article on Rental Property Cash Flow Analysis.
When it comes to exploring investment opportunities, you may be overwhelmed by the number of choices available. You’ll want to remember that developing your own approach starts with knowing which points matter most when acquiring them as well as understanding both the benefits and drawbacks they come with. Keep these rules in mind for a successful real estate acquisition process: Start with an exit strategy before making any decisions about what type of property you should buy or how much money you will need to have on hand in order to purchase one; gauge a property’s potential based on its size, location, amenities; and lastly, analyze properties using Dynamic.RE so that we can help guide you through each step of this.