Real Estate Investing 101: The Bottom Line
There really is only one thing that matters when investing in real estate, especially if it is your primary source of income: the bottom line. You have to look at every investment and make smart financial decisions. You have to minimize your spending budget while maximizing your profitability. You have to analyze each property to determine its ROI (return on investment) potential.
It is easy to get distracted by other issues throughout the home buying, renovation and planning processes. Your bottom line must always be in the back of your mind and driving any important decisions along the way. Let’s take a look at a few key steps of the real estate investment process and how your strategies should be financially driven.
It all starts with a strong investment plan. Know your budgets inside-and-out. Your purchase price, renovation costs, selling/property management expenses, utilities, property taxes, insurance and other costs need to be factored into your overall plan. This way, you know what you can afford to spend and what you need to make on the back end to be profitable. You will also want to know what you are doing with the property, whether you are holding it as a rental, flipping it wholesale or renovating it and selling it on the open market.
Before you make any offer on a property, you should run careful property analytics and determine the budget for that particular property. Your investment should give you an overall budget to work with, but now you need to get much more specific. Understand how much it may cost to renovate the house (see “Renovation Budget” section below) and how much it may sell or rent for when complete based on market research. This will help you set a proper purchase price maximum.
This is where many inexperienced investors make mistakes. They look at buying an investment property similarly to how they would approach buying a primary residence. They end up making emotional decisions that lead to bad financial outcomes. Be careful not to fall in love with a house and then overpay for it in a bidding war. Your purchase budget and any offers you make need to make sense financially. If the numbers don’t make sense, then move onto something else.
This is another area that can derail many investors—even some of the most experienced home buyers. You’ll need to come into the renovation with a detailed plan and solid budget outline. You’ll want to be conservative in your cost estimates and build in some cushion for the unexpected. Anyone who has renovated a house before will tell you to expect the unexpected. Your renovation budget needs to account for extra expenses and construction delays. If everything goes on time and on budget, then you have more room for profit in the end. Just don’t make your budget so tight there is no room for error. That’s a recipe for disaster!
Whether you plan to buy and hold (rental) or fix and flip (resale), you need to approach this step carefully, as well. Your property analytics should help you know what kind of money you can make from your investment property, but things can change during the renovation stage and the market can shift for better or worse. If renting out the house, set a good rent price that will cover all your expenses and allow you to make a healthy profit over time. If reselling, you want to set a proper listing price. Don’t go too high or too low. Find the sweet spot that will attract quality renters/buyers and get the deal done quickly. Every month your property goes unsold or unrented is lost profit for you, so don’t price yourself out of the market!
The important thing to remember is that this is an investment. This is a business and you must treat it with a focus on the key financial aspects. Ultimately, it’s about how much you are spending and how much you are able to make in the end. If there isn’t enough meat on the bone to meet your target ROI, you need to rethink, replan and perhaps look at different properties.
For help with all your real estate investment needs, including access to great off-market investment properties that have already been analyzed for excellent profit potential, consider joining the PropertyLark home buying network. Contact us to learn more and to see if you qualify.