Investing in real estate is a great way to generate passive income, build long-term wealth, and diversify your portfolio. However, there is no such thing as a one-size-fits-all approach to real estate investing. However, this article outlines some of the tried and true methods that savvy investors use to increase cash flow and maximize their returns.
Choosing the right market
Find good cash flow
Passive income is one of the most attractive benefits of a real estate investment. To generate passive income from your property, you will need to find a solid cash flow market. Cash flow is the profit collected from monthly rent after deducting all monthly operating expenses.
Ideally, you want a market that offers positive cash flow and strong appreciation for maximum ROI. However, desirable markets are highly sought after by investors, which means you need to be proactive in your search. Learning to look for areas with the ingredients for strong growth potential will allow you to stay one step ahead of the competition.
Look at other markets
Many people prefer to shop close to home when buying an investment property. However, limiting yourself to a single market also means limiting your earning potential. Real estate markets vary greatly from state to state and even from neighborhood to neighborhood. Sometimes it is necessary to look beyond geographical boundaries to find a more favorable market.
Don’t let the idea of investing remotely intimidate you. Thanks to an abundance of online resources, it’s easier than ever to buy and manage an investment property remotely. There are a number of apps that allow you to visit properties and have face-to-face meetings without ever leaving your home or office.
Stick to a strategy
Determining cash flow potential requires more than simply crunching numbers. First, you want to set a strategy and set incremental goals that align with your long-term vision. A well-defined plan will ensure a more calculated approach to decisions and reduce the risk of costly mistakes.
Do your research
Due diligence is the fundamental difference between gambling money and investing it. Appropriate due diligence focuses on both macroeconomic and microeconomic factors.
Always start by focusing on the macro economy of your target area. These are the “big picture” things, such as population growth, the employment rate, property taxes, and government policies. By evaluating macroeconomics, you will gain a better understanding of whether a market is worth studying.
After evaluating the macro, it’s time to zoom in on a neighborhood or small region. Consider the various elements that could affect the desirability of the area, such as demographics, median household income, proximity to recreation, jobs, shopping, and anything that could affect the quality of life of the people who live and work in this area.
Assessing all the complexities affecting your target market can seem daunting and time-consuming. Fortunately, much of the information is available online. Almost every city has a website with complete plans, ordinances, special projects and zoning information. Other online resources, such as social media and community bulletin boards (like Nextdoor.com), can provide an insider’s perspective of locals in the area.
Another resource is local real estate agents. An experienced agent familiar with your target area can provide valuable information that may not be available online. They can also connect you with local businesses and tools you need.
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Consider multifamily investing
Although multi-family properties tend to be priced higher than single-family properties, they are more likely to produce a high ROI. If you want to generate passive income from your rental property, multifamily is by far your best bet.
What is a multi-family property?
A multifamily property is any residential property that contains multiple units occupied by separate individual households. A unit must provide at least one full bathroom and a kitchen. Units may be contained within a single structure (duplex, triplex) or multiple buildings within the same complex (apartments, townhouses, condominiums). The word “family” in this context refers to any household, including single tenants, couples, roommates, etc.
It is important to note that a single-family home occupied by multiple tenants does not constitute a multi-family home. Although it can technically house multiple families, it would still be considered a single-family home by definition.
Pros and cons of multi-family properties
Multifamily properties are excellent investments for many reasons. However, as with any investment, multi-family properties are not for everyone. Here are some of the pros and cons.
Consistent cash flow – Multi-family properties are known to generate reliable cash flow and higher rental income compared to single-family properties.
Tax reliefs – There are several tax incentives available for multi-family properties. Depreciation and operating costs such as maintenance, property management fees, utilities, advertising and insurance are considered tax deductions.
financing – A multi-family property will probably come with a bigger price tag, but believe it or not; it is much easier to find a bank to meet the bill. Lenders consider multifamily properties a low-risk investment because of their consistent and predictable cash flow, even during periods of high inflation and recession.
competition – Multi-family properties are highly sought after. Strong competition in a favorable market can increase the already high price of properties. Inflated markets can create a substantial hurdle for new investors trying to enter the multifamily real estate market.
cost – Multi-family properties require a significant initial cost, substantially more than a single-family home. Many banks require a 20% down payment to finance a multi-family property, which can be a significant barrier for investors with little capital.
demanding – With more tenants comes more responsibility. Taking care of all the needs of the property, as well as the needs of the tenants, is a full-time job. That’s why many owners choose to outsource management and maintenance tasks to property managers, which include their own costs.
All in all, if you have the resources to cover the high upfront costs and the ability to outsource some of the responsibilities, a multifamily property is a great way to generate passive income and increase your ROI.
Skip the Fixer-Upper
Thanks to popular home renovation TV shows, many people think that real estate investing is all about finding a fixer-upper and magically transforming it into a dream home. Don’t get me wrong. It is possible to make a profit with a fixer upper. However, the trash-to-treasure approach isn’t practical when it comes to maximizing income potential.
Reality vs expectation
An obvious draw to buying a fixer upper as an investment is the bargain price. It is common for properties that need substantial work to be priced below market value. The down payment is intended to offset the cost of repairs and upgrades that the property will need.
However, it is easy to underestimate the full magnitude of the project. This is especially true if you don’t have the experience or guidance of an expert to help you make informed decisions. Time and time again, fixer-upper projects are abandoned because buyers are in over their heads.
A little sweat equity goes a long way
Choosing a property that needs major renovations may not be your best option when it comes to maximizing your ROI, but that doesn’t mean you should avoid renovations altogether. Instead of looking for a diamond in the rough, try to find a property that just needs a little facelift. Sweat equity can increase the value of your property and can even increase your monthly rent. Here are some minor improvements that can make a big difference to your return:
- Updated light fixtures
- New hardware in the cabinets
- A new coat of paint
- Add a kitchen backsplash
- Update your sink and bathroom fixtures
- Modern and durable flooring
- Increase the scenery
Consult a professional
Having experience in property renovations can be an added advantage when deciding which property to invest your time in. However, if you don’t have the experience to make an informed decision, it’s best to ask a professional. It’s better to pay a small fee for a professional opinion than to find yourself on top after closing.
When it comes time to start your remodeling projects, it’s essential to know your limitations. While DIY projects can save you money in the short term, if you don’t have the experience or skill to do the job right, it can end up costing you more than it’s worth.
Keep your personal preferences at home
Assembling the design elements of your property should be done with your potential tenants in mind. Style elements should be neutral and versatile. While it is possible to incorporate certain unique or creative design features, this should be done with caution and perhaps with professional guidance.
It doesn’t matter if you are an experienced homeowner or just starting your journey, real estate investing is a reliable way to increase wealth and generate additional income. By staying informed about various markets and property types, you open the door to endless opportunities. With calculated risks and intentional actions, you can get the most out of your real estate investments.
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Note from BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.