Making money in real estate is easy, right? Not so fast. Maybe you saw some late-night infomercial explaining how easy it is to get rich with property and never invest your own money. Don’t buy it. There is money to be made in both commercial and residential properties, but you can lose it just as easily.
Real estate has proved itself the most consistent and profitable investment over the last several decades. Property will always be in demand. Given enough time, it will always appreciate in value. Still, a wise investment approach is needed. Jumping in recklessly and without regard for market fundamentals is a recipe for disaster.
With that in mind, here are five key things every real estate investor must learn one way or another:
1. Cash Flow Is Critical
Property investing requires a level of cash flow not necessary with traditional securities. If you own commercial property for example, you know that cash flow is critical to address maintenance, repairs, taxes, etc. Tie up all your money in acquisitions without leaving yourself adequate cash and you will only cause yourself problems.
2. Financing Matters A Lot
Property investors need to be incredibly careful about how they finance properties. Paying cash is usually a no-go for obvious reasons. So how do investors finance? According to Salt Lake City’s Actium Partners, hard money and bridge loans are one option. Conventional loans are another, but they are harder to come by for real estate investments.
The most important thing to remember is that lenders will only lend so much. Investors need to have significant downpayments. Also, they need to be careful not to pay too much. Too high a price tag coupled with costly financing could turn an attractive property into a loser.
3. Anticipating the Market Helps
Property investing is a long-term proposition. You make your money over time. To succeed, you need to be able to anticipate the market to some degree. No one knows exactly where the market will be a few years down the road. But the best of the best are pretty good at predicting general trends. If you are able to anticipate future markets, both short- and long-term, you’ll be better off.
4. Exit Plans Are Lifesavers
When Actium Partners takes on a new client, they expect that client to have a viable exit plan. An exit plan is a plan to pay off the loan, in full and on time. No exit plan usually means no approval.
Exit plans vary based on an investor’s strategy. A long-term investor looking to purchase commercial rental property might be planning to hold it for 10 years before selling. He will have to pay back his loan long before then. So what’s the plan?
On the other hand, a developer might purchase a property with plans to renovate and sell it once the property is fully occupied. If he thinks he can pull that off in line with the terms of his loan, the final sale might be his exit strategy. One way or the other, a property investor needs an exit strategy for every deal.
5. There Are No Guarantees
Rounding out the list is the reality that there are no guarantees in property investing. Property may be one of the most stable investments around, but it is not perfect. A series of bad investments strung together could leave the investor with nothing.
If you are new property investing, do your homework. There is a lot to love about it. Yet there are also risks that could leave you regretting your decision.
