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Building your real estate portfolio by investing in rental properties is a good way to guarantee steady passive income and consistent returns on your investment. But first-time investors will soon realize that the path to success is paved with potholes, and knowing the difference between a cash-cow and a money pit can sometimes be harder than expected. Like any other business, the more experience and knowledge you bring to the table the more you’ll be able to invest with confidence. Here are a few key principles you should keep in mind to avoid risk and increase your chances of a successful career as a real estate investor.
1. Don’t let your emotions get in the way.
It’s easy to lose focus when shopping for an investment; either by getting overly attached to a property, or by lowering your standards out of impatience instead of waiting for the perfect opportunity. Working with a partner increases the risk of this happening, because you may be pressured into closing a deal even when you know it’s risky. The key is to let the numbers do the talking: set very rigid financial goals and benchmarks before starting your search, and accept that it’s better to hold out than to compromise on your margins.
Use a detailed investor’s calculator, like our free downloadable ROI worksheet, to plug in your operating expenses, loan amount, interest rate, and expected rental income, and determine whether a property will be an asset or a liability. A good investment will generate positive cash flow, or will come as close to it as possible. This means that the income made through renting out the property is greater than the carrying costs of the loan and the maintenance expenses. Higher downpayment amounts, low interest rate, and low monthly fees will make it easier for you to break even on a monthly basis.
2. You make your money when you buy.
You may have have heard this adage before, but what exactly does it mean? When seasoned investors say money is made at the purchase not the sale, they mean that the most crucial aspect of a real estate investment is acquiring the property under market value. You can’t rely solely on an appreciating market, instead you should look for deals that will guarantee a profit from the get-go, because they were purchased well below what they are worth. These types of properties are called BMV properties, and there are several places investors go to find them:
- Repossessed properties sold at break-even by banks and other lending institutions.
- Properties with highly motivated sellers, who are prepared to sell at a loss just to cash out as quickly as possible.
- Handpicked selections for investors, such as this list of top 10 properties for sale under municipal value.
- Deal of the Week mailing lists.
- Property Alerts set to receive notifications for deals in affordable yet developing neighbourhoods.
Finding deals below market value takes a pretty solid understanding of the market, but in most cases your real estate broker will do most of the heavy lifting for you, which takes us to the third point:
3. Work with a team you trust
As a first-time investor, you’ll want to align yourself with a knowledgeable and experienced real estate professional who can raise the red flags on risky investment deals. Working with a broker is free on the buying end, so it makes perfect sense to turn up accompanied and represented during your property visits, rather than relying solely on the listing broker for guidance and information. Having a buying agent on your side will also be helpful when it comes to negotiations, legal counsel, and sourcing historical sales data to determine fair market value.
Aside your broker, you’ll want to connect with a reliable mortgage broker, an inspector, a notary, and a real estate lawyer if you plan to invest in a commercial property.
4. Shop around for a low mortgage rate
Shopping around for the best interest rate can save you thousands over the course of your mortgage, and can mean the difference between a mediocre investment and a highly lucrative one. To benefit from the lowest rates possible, make sure your credit score is above 700, and negotiate your terms with several banks before settling on a lender. You might also consider seeking the help of a mortgage broker, who will shop around at several lending institutions to find you the lowest interest rate.
5. Location is key
As with any real estate acquisition, location is one of the most important factors determining your investment’s success. While the search for a primary residence is restricted by your personal preferences and lifestyle choices, your rental property need not be located in one of your favourite neighbourhoods. However, you’ll want to make sure that you invest into an area where vacancy rates are low, and where you won’t have too much difficulty finding a good tenant to occupy your rental. Ideally, you would be looking in developing neighbourhoods close to the city core, where prices are low but property values are appreciating at a healthy rate. Moreover, you’ll want to check that the location you invest into has a high walk score, and easy access to greenery, schools, amenities, and public transportation.