13 Proven Principles for Making Millions on Rental Property
Without any doubt, real estate investing is an excellent business for most people since it reaps big financial benefits in short-term and long-term gains. Real estate investing offers investors financial freedom, and there is absolutely no profit cap on how much you are earning in the business. If you are an expert or a starter real estate investor, you can generate wealth in real estate and secure retirement.
However, it all comes down to how much effort and time you are willing to put into learning, adapting, and planning for the best profits. The most successful real estate investors usually have the right forethought in identifying real estate opportunities before others and see the potential in excellent investment property when others do not see it.
It takes the right experience, education, and skills to see the real value and potential of an investment property. To become a specialist in real estate investing, one should possess key principles to create a strong foundation of success. Learning is key to establish any skill and reap big success. Without hard work, you will not materialize big returns and big success. And this applies to anything you need to do in life.
So let us dive into thirteen fundamental principles in real estate investing in building prosperity and wealth in the long haul.
Buy from the right sources
Rental property is not similar to securities because you want to buy low and sell high. The main difference with real estate is that you are not selling as a landlord, but you are renting. Still, the principle is the same. You want to pay less for a new property and still rent it out of maximum value. You can’t do this if you are not purchasing from the right sources.
The last thing you should be doing as a real estate investor is looking at agent listings and the Saturday paper for accessible properties. Such retail sales are liable to current market value. In actuality, that market value is too much to pay. You need to pay a lot less.
As such, you should look around for off-market properties. Such properties are not showing up in your weekly real estate listings. They are short sales, foreclosures, and auction properties. Some are even private sales provided by motivated sellers looking to dispose of their property as fast as possible.
Invest in positive cash flow properties
Another principle of making money on a rental property is to invest in favorable cash flow properties and not so much on negative gearing properties. This is because you need cash flow to pay off your mortgage payments and other expenses. Rental income pays off the bills, so ensure you invest in a good rental property where rental demand is high to avoid foreclosures and bankruptcy.
Never invest on a whim
Real estate investing is all about strategy; ensure you have a business plan and set attainable goals along the way. Most fundamentally, conduct real estate market analysis and investment property analysis before you close any property seller deal. Do not make any investment decision without having the numbers add up.
This includes and is not limited to calculating critical financial metrics, approximating net ROI, and understanding what cash on cash return and cap rates are. Also, take into consideration current and carrying costs, interest costs, mortgage payments, and depreciation.
Capitalizing on a prime location is the main prerequisite
This one goes without saying; however, it is vital to bring up nevertheless. Location is key to profitable real estate business. Never undermine the significance of selecting the right location for your rental property. A good location comes with high demand, and demand attracts a bigger pool of tenants, and if you choose tenants diligently, they pay off the bills and put some extra cash in your pocket.
Always have leverage in the negotiation process
The best trick to gain an advantage in the negotiation process is to deal with a property seller who is motivated to sell. With a motivated seller, you stand a better chance to negotiate a better bargain. Note that emotional intelligence can get you far in closing better deals in real estate investing.
Understand the real estate market cycle
Understand that the real estate market is recurrent; it is ever-changing and never stagnant or static. With this in mind, real estate investors must understand the cycles in the market for a better strategy and higher rewards. In real estate investing, you make money through:
- Capital growth
- Cash flow
These by-products are mutually exclusive and not likely to be obtained simultaneously during a cycle. For instance, you cannot gain capital growth when the prices are reducing; however, it is wise to purchase below market value before prices pick up again.
Perfect your negotiation skills to influence anyone
To reiterate, build your communication skills, learn how to be a better negotiator, and learn the art of negotiation. Acquiring these communication skills is of great benefit when negotiating the price of a property, lease terms with tenants, and setting rents and mortgage rents with your bank. Bear in mind that these skills can make all the difference to your bottom line.
Borrow from the right sources
Just like you want to purchase cheaper houses from the right sources, you also need to borrow from the right sources. The worst thing you could do as a real estate investor is head off to your bank to get a traditional mortgage on your new property. Typically, choosing the traditional path is going to cost you a lot of money. You are better off getting a mortgage broker who has experience in rental property.
The general principle among lenders is that monthly rental income should be at least 125-percent of the monthly mortgage payment. However, remember that your monthly mortgage payment will be regulated not only by the principle you borrow but also by various factors inclusive of monthly fees and interest rates. Even your insurance will affect the payment. Consequently, it is in your best interest to get the cheapest mortgage possible.
If the mortgage broker says it is best to go with a buy-let mortgage, then it possibly is. If he or she says you are better off looking for a three-year bridge loan, you have to consider that as well. The point is that a mortgage broker with a lot of experience in the rental market will know better than anyone else how to finance your purchase.
Stay on a steep learning curve
Self-education is vital to making money in real estate investing. Learn and acquire education whenever you can. The more you know about the market, the better equipped you become to make wiser investment decisions. In a nutshell, real estate knowledge will set you apart from the other real estate investors and offer you the leverage to find the best, most profitable investments, respective to the market conditions and real estate cycles. The internet is filled with resources to assist you in becoming a real estate expert. So do not discount real estate podcasts, estate blogs, and YouTube videos.
Think big but start small
The best thing you can do is to start small and build your real estate business by setting achievable and incremental goals. It all begins with simple steps to accrue wealth in the long term.
Assemble a real estate team
Most successful real estate investors have a great team behind them. Before you even begin looking for your first investment property, have your real estate team in place. Note that this is not to say that you can not invest alone. Nonetheless, having a proficient and experienced team that you can trust to support, you can give you an edge over the competition. Some of the people to incorporate in your team include a real estate agent, contractor, financial advisor, accountant, lawyer, and mortgage broker.
Have a real estate mentor
Getting started in rental property investing can be overwhelming and challenging. Having someone who is experienced in this realm who can provide you advice and guide you in your journey is vital. Working with a good real estate mentor can assist you in cultivating your skills much faster. Surrounding yourself with likeminded people that you admire will also motivate you to work harder and push to greater heights.
When starting out focus on residential properties
Investing in residential properties is also one of the vital principles of real estate investing for beginners. Investing in residential properties is a good plan to follow when beginning since they are easier to understand, manage, and acquire. Most real estate investors only get into commercial real estate investing after having sufficient experience.
You can earn money in the real estate market as a landlord. Rental property is not the best investment for everyone; however, it represents an excellent opportunity for those who know how to make it work and are willing to invest their time and effort.