Are you someone who is starting to dabble in real estate investments? If so, you should ensure that you learn everything possible about the industry before you start betting on it. Lack of knowledge about how the real estate market works can empty your savings in no time and leave you penniless. To help you make correct real estate investment decisions, the below tips will come in handy.
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Ways of Profiting From Real Estate
The first thing you need to understand is the various ways in which you can profit from real estate. Basically, there are three options. The first one is to buy a property, wait for its value to appreciate, and then net a profit by selling it at the higher value. The second way is to use the property to generate regular cash flow. For example, if you buy a home, you can rent it out and earn rental income on a monthly basis. Or if you invest in a large plot, then you can rent it out for exhibitions to generate revenue. The third way is to use real estate as an ancillary income source. For example, if you have a prime plot in a region with heavy traffic, then you can install a soft drink vending machine and earn revenues through it.
You should always have clear exit strategies in mind. And it should not be just one strategy, but many. If you only have a single exit strategy, then you run the risk that you may not be able to implement it when the market conditions are not favorable to close the deal. In contrast, having multiple exit strategies allow you to adapt to the market conditions in a way that you are able to sell off your property no matter what the situation is.
Don’t Judge With Your Emotions
The number one thing that novice real estate investors need to keep in mind is to learn to control their emotions. You should never get emotionally involved in any real estate property since it can warp your perception of the deal and make you take illogical, stupid decisions that will only harm you. For example, you might find a property attractive and may decide to invest in it thinking that its value will double in three years. Now, if after one year, the property value is down by 25%, then you should try to evaluate whether your expectations will still hold true or not. And if not, you need to quickly sell off the property and avoid any further loss. However, some people might be too emotionally attached to their expectations of doubling their investment that they will refuse to accept the reality. And eventually, they will end up with a property that is valued far less than their purchase price and will have to sell it at a huge loss. So, make sure to only judge a property purely on the basis of reason and logic.
Minimize Own Money
Real estate is an area where you use other’s money to make profits. Here, ‘other’ primarily refers to third party funding sources. You should never invest all your savings in a property. That is very risky. Instead, use a certain part of your savings for the down payment, and fund the rest of the purchase price through a mortgage. This will ensure that you will still have a healthy savings balance left that can be used for other purposes in life.
If you are investing in a rental property, then keep the 1% rule in mind when deciding on the rent. The rule simply states that monthly rental amount should be at least 1% of the property value. So, if you plan on buying a $100,000 home and rent it out, then you should never set your monthly rental amount anything less than $1000. And if the location of the property is excellent, you can bump up the rental amount quite a bit.
Less Than Market Value
When buying homes, never be too complacent that you blindly accept their stated market value. Many newbies make the terrible mistake of buying properties at market value, thereby missing out on underpriced properties. One of the secrets of high return real estate investing for beginners is to focus on properties that are valued at a discount of 20% or more and to invest in them. This will give you a better chance at ensuring that your investment actually returns a profit. You can also look out for foreclosure properties of the banks to invest in cheap, yet valuable properties.