Real estate can potentially be one of the most lucrative investment opportunities around, but only if you fully capitalize fully on its potential. While almost all real estate tends to appreciate over time, what you do with it while it is appreciating will go a long way towards determining just how much profit you make […]
Real estate can potentially be one of the most lucrative investment opportunities around, but only if you fully capitalize fully on its potential. While almost all real estate tends to appreciate over time, what you do with it while it is appreciating will go a long way towards determining just how much profit you make from it. Here are 5 keys to making sure you are making the most of your real estate investments.
1. Empty property does not generate income
While there are exceptions to every rule, for the most part real estate investments only make money if they are occupied and generating income. Some exceptions to this are properties that investors buy early in anticipation of gentrification or other high value changes to areas, such as a new roadway or other transportation feature or a new business requiring a large land mass to build on. In that case, you may know going in you won’t be able to rent the property out, but just need to sit on it until it becomes valuable enough to sell or build on. Otherwise, the longer a property sits empty, the more it costs you. If you borrow money to invest in a fix-and-flip, then every day you spend renovating is costing you interest. The longer it takes you to remodel and sell it, the less profit you make. Rental units still cost you every day they sit empty. Thankfully, these days there are ways of making money on property that sits empty for even a few days, such as renting it out as Airbnb accommodations. Bottom line, however, is that empty property is not generating income and whatever is not generating income is costing you.
2. Smaller parcels often generate more income than larger ones
If you buy a 2,000 square foot 4-bedroom house, you will generally make less in rental income than buying a 2,000 square-foot townhome divided into 4 separate units. Similarly, buying a giant 10,000 square-foot commercial property will generally generate less income than buying a 10,000 square-foot strip mall with 5-6 units. Once again, it is important to keep these units filled, but the beauty of having multiple units is that if 3 out of 4 are filled, then you have 3 units still generating income while you fill the 4th. When you only have one property, if it is empty it is not generating income. Conversely, when buying real estate, a property that is already parceled down into smaller units will generally cost you more than the same size property that is a single dwelling or unit. One of the best investments you can make is in a single unit that can be parceled down into smaller units.
3. A good manager can be worth their weight in gold
While purchasing rental units can be one of the most lucrative ways to invest in real estate, it is also time consuming and doesn’t come without risk. A good property manager or management service, however, can help minimize both the time investment and the risk. Needless to say, hiring a manager or management company can eat into your profits, but they can also help you offset losses as well. One of the largest concerns for landlords is the growing number of rental properties being used as meth labs or other illegal activities. An onsite property manager can keep an eye on things 24/7 and alert you if there are any issues with tenants or suspicious activities.
4. Partners help minimize risk
Every investor knows that higher risk investments generally produce the highest rewards – when they pay off. The less risky an investment is, the less of a reward it tends to produce – but it is more likely to pay off. The beauty of real estate is that while $100,000 in stocks can become virtually worthless overnight, it is rare for $100,000 property to lose value that quickly. That being said, real estate investment is also not completely without risk. Smart investors always look for a sweet spot between risk and reward. One way to spread the risk out is to partner with other investors. There are also a number of ways to partner with other investors besides with a large outlay of your own cash. If you have $20,000 or more to invest in real estate, you can partner with one or two other investors, but if you don’t have a large sum of money to invest, there are other ways. Real Estate Investment Trusts or Real Estate Investment Groups are pools of money that are collected for the purposes of investing in real estate. While the ROI may not be as high as individual investments, they also offer a fairly low risk means of investing while still keeping your asset fairly liquid.
5. Make sure you are making enough of an investment to garner a legitimate return
While you can certainly buy a run-down property for a minimal investment and rent it out, you will often cause yourself more headaches and hassles than it is worth. It is an unfortunate fact of life that more often than not the lower the rent, the more likely you are to attract bad tenants. A much better course of action is to purchase property in a median income area and charge a fair rent. Keep in mind, the less you charge in rent, the less working capital you will also have for repairs. If you keep your units clean, neat and in good repair, you will be more likely to attract good tenants who will also take good care of your property. This doesn’t mean you can’t make money on even the most run-down properties, but just like everything else in life, you get out of it what you put into it. The more time, money and energy you put into caring for and maintaining your properties, the better of an ROI you are likely to get from them.