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 will outline some of the tried and true methods 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 appealing 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 subtracting all monthly operating expenses.
Ideally, you want a market that offers both positive cash flow and high appreciation to reap the most ROI. However, desirable markets are highly sought after by investors, which means you have to be proactive in your search. Learning to look for areas with the ingredients for strong growth potential will allow you to stay a step ahead of the competition.
Look into other markets
Many people prefer to shop close to home when purchasing an investment property. However, limiting yourself to a single market also means limiting your earning potential. Real estate markets vary widely from state to state and even from neighborhood to neighborhood. It’s sometimes necessary to look beyond your geographical boundaries to find a more favorable market.
Don’t let the idea of investing remotely intimidate you. Thanks to the abundance of online resources, it’s easier than ever to purchase and manage an investment property remotely. There are a number of apps that allow you to tour properties and have face-to-face meetings without ever having to leave your home or office.
Stick to a strategy
Determining cash flow potential requires more than simply crunching numbers. First and foremost, you want to lay out 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 mitigate the risk of costly mistakes.
Do your research
Due diligence is the fundamental difference between gambling your money and investing it. Proper due diligence focuses on both the macro and microeconomic factors.
Always start with focusing on the macroeconomics of your target area. This is the “big picture” stuff, such as population growth, employment rate, property taxes, and government policies. By assessing the macroeconomics, you get a better understanding of whether a market is worth looking into further.
After assessing the macro, it’s time to zoom in on a neighborhood or small region. Consider the various elements that could impact the area’s desirability, such as demographics, median household income, proximity to recreation, jobs, shopping, and anything that could impact the quality of life of those living and working in that area.
Assessing all the complexities that affect your target market can seem daunting and time-consuming. Fortunately, much of the information is readily available online. Nearly every city has a website with comprehensive plans, ordinances, special projects, and zoning information. Other online resources, such as social media and community bulletin boards (such as Nextdoor.com), can provide an insider perspective from locals in the area.
Another resource is local real estate agents. An experienced agent familiar with your target area can offer valuable insight that may not be available online. They can also connect you to local businesses and tools you may need.
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Consider Multifamily Investing
Although multifamily properties often come with a higher price tag 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 multifamily property?
A multifamily property is any residential property containing multiple units occupied by separate individual households. A unit must provide at least one full bathroom and a kitchen. Units can be contained within a single structure (duplex, triplex) or several buildings within the same complex (apartments, townhomes, condos). The word “family” in this context refers to any household, which includes single tenants, couples, roommates, etc.
It is important to note that a single-family home occupied by multiple tenants does not constitute multifamily housing. Although it may technically house multiple families, it would still be considered a single-family home by definition.
Pros and Cons of Multifamily Properties
Multifamily properties are excellent investments for many reasons. However, as with any investment, multifamily properties are not for everyone. Here are a few of the pros and cons.
Pros
Consistent Cash Flow – Multifamily properties are known for generating reliable cash flow and higher rental income compared to single-family properties.
Tax Breaks – Several tax incentives are available for multifamily properties. Depreciation and operation costs, such as maintenance, property management fees, utilities, advertising, and insurance are considered tax deductions.
Financing – A multifamily property will likely come with a more significant price tag but believe it or not; it’s a lot easier to find a bank to front 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.
Cons
Competition – Multifamily properties are highly sought after. Steep competition in a favorable market can drive up the already high price tag on properties. Inflated markets can create a substantial hurdle for new investors trying to enter the multifamily property market.
Cost – Multifamily properties require a significant upfront cost, substantially more than a single-family home. Many banks require a 20% downpayment to finance a multifamily property, which can be a major barrier for investors low on capital.
Demanding – With more tenants comes more responsibility. Taking care of all of the property’s needs, as well as the tenants’ needs, is a full-time job. This is why many landlords choose to outsource the management and maintenance duties to property managers, which come with their own set of 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 T.V. shows, many people think property investment is about finding a dumpy fixer-upper and magically transforming it into a dream home. Don’t get me wrong. It is possible to turn a profit on a fixer-upper. However, the trash to treasure approach isn’t practical when it comes to maximizing earning potential.
Reality vs. expectation
An obvious appeal to purchasing a fixer-upper as an investment is bargain pricing. It is common for properties that need substantial work to be priced under market value. The initial discount is meant to make up for the cost of repairs and updates that the property will need.
However, it’s easy to underestimate the full magnitude of the project. This is especially true if you do not 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 find themself in over their heads.
A little sweat equity goes a long way
Choosing a property that needs major renovations may not be your best choice when it comes to maximizing your ROI, but that doesn’t mean you should avoid renovations altogether. Rather than looking for a diamond in the rough, try finding a property that just needs a little facelift. Sweat equity can increase the value of your property and may even increase your monthly rent. Here are a few minor upgrades that can greatly impact your return:
- Updated light fixtures
- New hardware on cabinets
- A fresh coat of paint
- Add a kitchen backsplash
- Upgrade sink and bath fixtures
- Modern and durable flooring
- Spiff up the Landscaping
Consult a professional
Having experience with property renovation can be an added benefit when it comes to deciding what property to invest your time in. However, if you don’t have the expertise to make an informed decision, your best bet is to ask a professional. It is better to pay a small fee for a professional opinion than to find yourself in over your head after closing.
When it comes time to start your renovation projects, it’s essential to know your limitations. Although DIY projects can save you money in the short term, if you don’t have the experience or skill to carry out the tasks properly, it can end up costing more than it’s worth.
Keep your personal preferences at home
Putting together the design elements for your property must be done with your potential tenants in mind. Style elements should be neutral and versatile. Although it is possible to incorporate certain unique or creative design features, this should be done with caution and perhaps with professional guidance.
Conclusion
No matter if you are a seasoned landlord or you’re just starting out on your journey, real estate investment is a reliable way to increase wealth and generate additional income. By staying informed on various markets and property types, you open the door to endless opportunities. With calculated risks and intentional action, you will be able to get the most out of your real estate investments.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.