“If you’re so smart, how come you’re not rich yet?” It’s a common adage that many budding entrepreneurs hear during the course of their everyday conversation. The usual retort, of course, is “ I’m getting there!” And hopefully? You are. But if you’re a real estate investor, all you really have to do is show doubters your property portfolio. Typically, that puts such cynicism to rest. And with good reason. After all, shelter is of the great vital necessities in life—even in commercial real estate. And opportunities are in plentiful demand. But it’s a high risk gamble. It’s been estimated that 28.1 million Americans consider themselves real estate investors. And with that number, the obstacles facing entrepreneurs can be relatively high. It’s no longer enough to seize what looks like a great opportunity when 2018 reported a decrease of approximately 7.7 percent in sales of new single-family homes and 10.3 percent in existing homes. That’s the bad news. The good news? With a strategy emphasizing foresight and care, you can eliminate the chance of loss and increase the chance of return. Here’s some of the best tips for entrepreneurs looking to invest in real estate.
Know Your Target Market
It’s one thing to have a general understanding of how real estate markets operate. But it’s another thing to have an understanding of market performance in specific metropolitan cities. And market performance can be predicated on several factors, in addition to historical sales:
- Socioeconomic growth or decrease
- Development and urban planning
- Proximity to major schools, highways and businesses
- Changing demographics
- Crime risk
- Employment rates
If you’re just beginning to look at real estate investment, it’s important to remember that historical sales are never constant. They don’t just change annually, but month to month. What might seem like an ideal opportunity in a buyer’s market could turn out to be the result of high risk potential in any of the preceding factors. Review your targeted neighborhood carefully. Sometimes even high opportunity zones can yield negative returns if businesses choose to invest elsewhere.
Know Your Metrics
In particular, both vacancy rates and construction rates. A general rule to keep in mind is the higher the construction rate, the higher the price range. Frequently, this is a result of a higher demand in up and coming neighborhoods. But the opposite holds true for vacancy rates. Generally speaking, more vacancies in a neighborhood means lower rates. More often than not, this can be due to a large amount of foreclosures—as witnessed in the 2008 housing crisis. And while it might be tempting to take advantage of low priced properties in distressed neighborhoods, keep in mind the sustainability of your investment. Higher vacancy rates exist for a reason, and you won’t necessarily find many interested buyers regardless of the refurbishment you may have conducted.
Do You Always Get What You Pay For?
One area that many beginners in real estate investment frequently overlook is the cost of auxiliary materials. That can include marketing, construction, attorneys, inspection services and title insurance. All of which can wind up costing you more than the bargain you initially anticipated if you’re not careful.
“Early on, I made the mistake of hiring a home inspector who later turned out to be less than reputable,” explains Alex Forrest, an investor from Salt Lake City. “And unfortunately, he recommended some area contractors who ultimately billed me for renovations and repairs which turned out to be entirely unnecessary. Not only unnecessary, but entirely too lengthy. By the time they were finished, I was out $30,000—in addition to legal fees. All on top of a home I thought I was only paying $175,000 for!”
Work With A Team You Can Trust
While disreputable contractors are unfortunately not an anomaly, that doesn’t mean you won’t find ones who are not only trustworthy but consistently deliver craftsmanship. You’ll want to review their portfolio. You’ll want to see examples of their work. And you’re definitely going to want to ensure they’re registered with the Better Business Bureau and have necessary certification for residential property renovation.
More importantly, you should look for a mentor who can guide you through the process of investing—particularly if you’re just beginning a career as a real estate investor. Not only can they provide invaluable advice on what to prepare for, they can act as a referral service for brokers, realtors and attorneys who are both reputable and can find you ideal properties at an ideal price.
As we said, shelter is a vital necessity and ideal investing opportunities are in high demand as a result. So are risks. But with some forethought, you can minimize the pitfalls and wind up not only on top but on your way to being a successful real estate entrepreneur. Here’s hoping you simply don’t stumble more than you have to.
Are you serious about a future in real estate investing? The Colorado REIA is the state’s premier investment association, providing coaching, guidance, workshops, networking opportunities and a host of other exclusive member benefits. To find out more, visit us at https://coloradoreia.com/ or call (303) 816-3653