It’s on T.V, it’s the topic of the water cooler at work, and almost everybody knows somebody who has made some money with an investment property. Real estate has a great reputation for returning profits and generating a positive marginal gain, but not all investments are created equal.In this post you will learn how to properly plan financially, strategically and rationally to avoid the pitfalls of poor investment property planning.
Step 1 - Making the decision - Is it the right time for YOU to invest?
Just because your aunt or neighbor was profitable on an investment doesn’t mean you are ready to make that financial commitment as well. But if you discuss with a mortgage professional and real estate specialist who works in your area and really understand market trends, investing into property can be the best financial decision you make. First make sure your personal finances are in order to make the investment.
Step 2 - Developing Your Investment Plan
The number one reason investors do not succeed in being profitable is because they lack a proper business plan. An investment property is exactly that, an investment. A business plan is the most detrimental attribute to a profitable investment. Think of everything you do with money as if you are CEO and CFO of your own corporation. Where can you cut costs? Where shouldn’t you cut costs? Where is your money is best invested to generate revenue? Make a plan to be profitable, seek professional help and be meticulous in your financial planning. Make sure you know all your investment expenses. Water/sewer, Garbage, Utilities, Legal fees, Accounting, Evictions, Vacancies, Office supplies, Fuel, Scheduled maintenance, Capital improvements.
Step 3 - Finding the Right Property for Your Investment
There are mainly three types of property investors. Fix and Flip: Find a home in a good neighborhood that isn’t new and needs a moderate amount of work done.You are looking for a home in a neighborhood approximately 50-70 years old and has recently started to show signs of potential for growth. Old homes are being knocked down and new ones are being built in their place. If you can find a home that is well maintained but dated, the probability of the investment has greatly increased. With the fix and flip you want to focus on floors, bathrooms kitchen and always paint. Floors kitchens and bathrooms are then most expensive and always keep in mind the point of diminishing returns. In economics, diminishing returns is the decrease in the marginal output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant. In other words, do not invest $50,000 into bathrooms if the renovation on the bathrooms only brings up the property’s value by $20,000.
The second type of investment property is a turnkey rental. In this scenario you are buying a home that is ready to move into in order to immediately rent it out to a single family or other type of tenant. The tenants pay the mortgage and a marginal monthly gain on top of the mortgage payment. Thus you have created a monthly revenue stream as well as a long-term investment which pays for itself.
Third and last you could bankroll. Bankrolling is being a partner or silent partner, by simply providing the capitol (money) for the property venture and leaving the work and decision making to contractor or professional. Your profit margin will decrease as you have outsourced most of the responsibility and work involved to another party along with some of the profits.
Step 4 - Developing Your Financing Strategy
There are many different ways to pay for a property. If you have the funds ready, you can pay cash. You could simply put a down payment and have a mortgage cover the bulk of the property price with monthly payments on the mortgage. Be aware of the interest rates when speaking with lenders and take into consideration the positive and negative effects of fixed or variable interest rates at the time and the implications the current and near future economy could have on financing ability of the investment property.
Step 5 - Developing and Ensuring You Have an Exit Strategy
From the beginning it is important to have an end game plan. Make sure you have a plan from the beginning and follow through with it to the end. Have multiple plans in case of varying outcomes in case the market suddenly drops off.This is rare but has shown in the recent housing bubble south of the border to be a very real outcome. Canadian markets are much more stable but anything can happen and this shouldn’t worry you as long as you plan and have steps in place to succeed no matter what the time frame or circumstance.
Real estate is the safest investment in Canada to date. If you follow these 5 simple steps and work hard, you can make it look just as easy as the TV shows do, except this time you’re the one keeping the profits!