Top 7 Real Estate Investing Tips

When it comes to investing, real estate’s one of the best long-term investments. But if you’re new to real estate investing, it can be hard to know where or how to start. This article will give you seven tips that you can use to help make sure your investment property is a success.

1. Understand Your Market Before You Start Investing

There is no way to overstate the fact that markets matter. In fact, investing in a bad market is one of the top reasons why a particular investment doesn’t perform well.

A common mistake that newbie investors make is to invest locally for convenience, instead of relying on market fundamentals to guide their decisions.

At Prosperity CRE, we apply over 25 different metrics to measure a market’s strength. It’s got to be a top performing market in order for us to invest there.

Some of the factors that we consider include: Population Growth, net population migration, job growth, diversity in the economy, including whether medical, science, tech companies are building out a hub in the area, attracting high paying employees who are willing to relocate to the area.

Another important consideration is landlord-tenant laws. We prefer to invest in areas thar are landlord-friendly, which can make a big difference when it comes to evicting non-paying tenants.

2. Understand Your Neighborhood

Once you’ve chosen a market, you need to drill down into the submarkets. Keep in mind that renters want to live in clean, safe neighborhoods. Renters with kids also want to live in areas with good schools. We look at crime statistics, school ratings, and the specific socio-economic demographics for the neighborhood.

Check out the types of retail stores in the area. Upscale grocery store food chains like Whole Foods, pet food stores, like PetSmart, retail stores like Dicks Sporting Goods, do a lot of research before they go into a neighborhood. If these types of business are in areas you’re evaluating, that’s a good sign.

On the other hand, you may want to be more cautious if you’re seeing pawn shops, check cashing services, and a lack of branded restaurants and retail stores.

3. Set Basic Property Characteristic Criteria

Now that you’ve figured out where you want to invest, the next thing you need to do is figure out what you want to invest in. You need to identify the type of property you’re interested in owning, and create a set of criteria as your initial screen.

For instance, if you’re looking for multifamily properties, you may decide that you only want to target garden style properties built between 1980 and 2000, that have between 70 to 125 units.

4. Look to Add Value

Next, you should look to see if there are ways to add value to the property. At Prosperity CRE, we don’t want to be entirely dependent on the market to be able to increase the cash flow that our investors receive and the overall value of the property. We need to be able to identify ways to increase the rents, and other revenue streams, and potentially reduce the ongoing expenses. For example, in apartment buildings, we look for opportunities to upgrade apartment units and common area amenities to attract tenants willing to pay higher rents, we identify and eliminate management inefficiencies, and we look for opportunities to create additional revenue streams, like renting in unit washers and dryers. All of these can significantly improve ongoing cash flow and the value of the property.

5. Underwrite all potential properties

It’s absolutely vital to analyze the financials of the property. At a minimum, you need to review the trailing 12-month profit and loss statement and the most recent rent roll. Remember, you’re not just buying a piece of property, you’re buying a business, and you need to verify that the business is performing at the level the seller claims it is.

Underwriting a property is really time consuming. So, here’s a trick that will save you tons of time. Before you start delving into the numbers, make sure that the property meets the first four requirements I went over: Is it in the right market, is it in the right neighborhood, does it meet your basic property characteristic criteria, and does it at least at first glance, look like it as some type of value-add component? If it doesn’t, dump it. Your time is valuable, so don’t waste it underwriting properties that don’t meet these requirements.

One last point on underwriting. You need to do this yourself. Don’t rely on the projections in the listing broker’s offering memorandum. Remember, brokers are salespeople trying to get the most money for their client’s property, and the offering memorandum is marketing material. Remember, caveat emptor, and trust but verify.

6. Asset Protection and Leverage

Next, to protect you and your assets from being sued for something that might happen at the property, make sure you take ownership via a separate legal entity like a limited liability company. Also make sure you have sufficient insurance coverage, both for liability coverage, and damage to the property.

You’ll probably want to finance the purchase of the property to lower the overall dollar amount that you’ll be investing, and to increase thereby increase the return on your investment. Again, to minimize your personal risk, you should use non-recourse debt. So if worst case scenario, the property goes belly-up, and declines in value below the amount of the loan, the bank can’t come after you for the difference.

7. Use tax saving strategies

Lastly, real estate is one of the most tax advantaged investments. Make sure you’re taking full advantage of the tax benefits. You should be depreciating the property to offset your annual taxable income. If you plan on holding the property for a period that is more than a could years, but less than the full depreciation period for your property, consider conducting a cost segregation study to accelerate the depreciation write off in the early years of ownership.

If you’ve built up a lot of equity in your property, consider harvesting that equity through a non-taxable cash-out refinance. And, when it’s time to sell the property, consider a 1031 exchange to defer paying taxes that might be due when you sell the property.

We hope you found these tips helpful. If you’d like to learn more about Prosperity CRE’s approach to real estate investing to generate ongoing cash flow and building long term wealth, you can receive a complimentary copy of our real estate investment book by clicking the link below.

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