Shaking In Your Boots To Suicidal Missions – Deadly Mistakes In Real Estate Investing, Part 2
by: Matthew Trainer
Failing to Plan is Planning to Fail
Real estate investment is an excellent choice for those who want to slowly build up their personal wealth over a number of years. The return on investment (ROI) is so much better than stocks and bonds, and the tangible asset of owning property means that you always have liquidity when you need it.
But, and this is a BIG but, you have to have a strategy. That strategy involves a well-thought-out plan that must be adhered to. There is never a week that goes by anymore without me hearing from a real estate investor that jumped out there and bought a property, paid too much, had no exit strategy, etc., etc., etc. Now they are stuck and the pie-in-the-sky “guru” promises of overnight riches crashed headfirst into the real world. You MUST have a plan and it MUST be written.
No idea how to get started? Here’s a very quick rundown of a basic real estate investing plan.
Start with a single investment property: This can be either commercial or rental. You can use the equity of your current home to finance the new purchase. Starting with one property is a good way to test your real estate savvy and get comfortable with the process. If you are considering a rental property, start small with a 2-3 unit property. Do not purchase an apartment complex on your first one. You will be totally overwhelmed.
Do a few flips to boost your cash position: If you want to jumpstart your real estate investment plan, purchase one or two rundown houses, hire a contractor that you trust to renovate and remodel the property and then flip it quickly for a profit. This will leave you with accessible cash to use for other real estate investments. (More about this in Part 3 of this series.)
Diversify your real estate portfolio: Once you are at ease with your real estate dealings, diversify your portfolio. Perhaps add a commercial property like a small community strip mall with half a dozen rental stores, or perhaps a small office building. Keeping your portfolio diversified protects your investments overall. At certain times, one area will do better than others. Diversification allows you to have the luxury of selling off dogs that are not performing and using that cash to purchase new real estate investments.
Watch the market – know when to sell: As a savvy investor, you must watch the real estate market so that you know when to buy and when to sell. Ideally, you want to buy when interest rates are low and the market is soft. You want to sell when both the market is hot and you can realize top dollar when you sell a property or when you feel there is going to be a significant downturn in the market. If that occurs, it will be more difficult to sell a property.
There is much more to planning than this but this will at least give you a start. Think of how you want to progress your real estate investments. How much property (in either number of properties or total dollar value) do you want to have at one time, or ultimately acquire.
What is your exit strategy? You must have one! If you don’t you may get caught in a bind if you encounter financial problems and need to liquidate assets for cash. Make sure that all of your mortgages are based on different terms such as fixed rate loans, adjustable rate loans, balloon mortgages and bridge financing. This means that at any given time, you have at least one mortgage that you can close out without penalty. This gives you the opportunity to pay for your properties outright once you have the cash, and the interest goes into your pocket instead of the banks.
The old saying goes, “If you fail to plan then you are planning to fail.” It’s not the fun part of real estate investing but you have to do it. Even if you don’t need outside financing, a written business plan will do wonders for your success.
Plan to succeed!
Yours in profits,
Matt
In Part 3 of this series we will discuss common but deadly mistakes made with contractors.