Ten Rules for Investing in Property
“Real estate is real it cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” — Franklin D. Roosevelt, U.S. president.
It’s been nearly a century since FDR made that statement and yet, in many ways it still holds true. And not just in the States but across the world, including right here in South Africa.
Pay close attention to that famous quote though, especially the second sentence. Investing in real estate can be truly lucrative, but only if you go about it in the right way.
With that in mind, here are the top ten rules successful real estate investors advise that newbies always keep in mind as they embark on their new adventure.
Ten Rules for Investing in Property
Knowledge is power. Without it, you are doomed to follow other people’s terrible mistakes. Knowledge will also help make you a ‘great’ investor instead of just a person who owns a couple of rental properties.
There are lots of great resources out there. Take the time to track them down. Ask experts for help. And never assume you know it all because when it comes to the ever-changing real estate market the simple fact is that no one ever does.
Set Realistic Goals
Goals and wishes are not the same things. You wish you were rich and that real estate investment could help you on your way to a big fat bank account. But just what will you be doing to achieve that? That’s where goals come in.
Without clear goals and plans for achieving them your hopes and dreams of becoming a real estate mogul will remain just that. You need to set goals that are real, tangible and achievable. These should include deciding upon a set number of properties you need to buy, the amount of annual cash flow you want to generate and what you want to be doing with your investments in five, ten and even twenty years’ time in order to maximize your investments.
Don’t Be a Speculator
You should always approach real estate investments as long-term commitments in order to be most successful. Don’t be tempted to speculate on quick short-term gains in appreciation, even in a hot market experiencing sudden double-digit gains. Such bubbles often burst quickly, leaving investors underwater with hard to shift properties on their hands.
Think Cash Flow
With very few exceptions you should always make real estate investments with positive cash flow in mind.
Cash-flow is the lifeblood that keeps your investment ticking over. Your equity will grow over time (through appreciation and loan amortization), but it’s the cash-flow that will cover the operating expenses and day to day costs associated with your properties.
Be a Market Agnostic
South Africa is made up of a lot of different local real estate markets and each of them has its own trends and quirks and they tend to change all the time. Don’t assume that just because you may have heard an area was a good buy years ago that it still is. Or just because you like an area – or even used to live there – that it would be a great place to buy investment property.
Choose a Market First, a Property Second
Rather than chasing odd properties begin your investment search by selecting the right market. This search should be based on the health of its housing market, its community and its quality of living. Determine what the most desirable neighbourhoods are and then, only then, should you begin an individual property search in earnest.
Begin in a Single Market
In your early days as a real investor, you should focus on building your investment portfolio in a single market. However, once you have your 3-5 properties there (or however many align with those goals we mentioned earlier) consider switching your attention to a different market for further investments.
The reason for this diversification is that each real estate market is “local” and each moves independently from all of the others. Diversifying across multiple areas helps reduce your “risk” should one market sharply decline for any reason (increased unemployment, crime, taxes, etc.).
Consider Hiring a Property Management Company
To earn cash from your properties you’ll need tenants. And tenants, even the really good ones, come with a lot of headaches attached to them. Do you really want to spend your time fixing things and driving halfway across town (or further) to mow a lawn or trim a hedge?
The fact is that being a landlord is a relatively thankless job that calls for requires a solid understanding of tenant-landlord laws, good marketing skills, and strong people skills to deal with tenant complaints and excuses. It is often better for your life in general, your finances and your sanity to hire a property management company to oversee your real estate investments rather than trying to do so yourself
To get the most out of real estate investment you need to be a direct investor in real estate. Real estate ownership through funds, partnerships, or other paper-based investments are difficult and can be hard to truly make any tangible gains in this way.
Leverage Your Investment Capital
Real estate is the only type of investment where you can borrow other people’s money to purchase and control income-producing property. This allows you to leverage your investment capital into more property than purchasing using “all cash”. Leverage magnifies your overall rate-of-return and accelerates the accumulation of wealth.
As long as you have positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property and therefore grow your real estate empire even faster! Want to know more about the ‘ Ten Rules for Investing in Property‘ get an experts opinion contact one of our Professional Investment Advisers and start your property investment journey today.