Real Estate Investing Tips
Owning real estate is more than having an investment; it’s a business like everything else. And like any business, there are certain foundational rules that should be abided by before jumping in. Seasoned real estate investors will recognize these suggestions as an everyday part of their world, but for those dabblers who are thinking about expanding into real estate investing, there are some fundamentals that must be acknowledged.
Many Sovereign clients fall somewhere between seasoned real estate professionals and novice investors. No matter where you place on the spectrum, these are important investment checklist items. While this may be new information to some, we have found that even long-standing property owners sometimes fail to heed these primary principles.
Time. It’s our most precious commodity. And because it takes time to research and complete a real estate transaction, we have the tendency to take it for granted. For example, investors anxious to invest money on a 1031 exchange might take too little time researching a property and miss important aspects of a particular opportunity. That’s why it’s important to always spend time continually evaluating properties. If you currently own a property and have the chance to sell it and would like to roll the funds over into another property, it’s far better to have options at your disposal than to start fresh and under the gun. If you’re serious about owning properties, knowing what’s available and what the market is bearing for certain property types can save you a good deal of time and money.
Money. If you have capital and are interested in investing it into real estate, make sure you have enough to both purchase AND maintain your property. Too often we see clients extend the limits of their investment potential to make a deal, only to leave themselves with little or no capital to invest into the property after the deal is done. Even the best engineers make mistakes. Things break. Graffiti happens. Regulations change. Tenants leave (residential) or go out of business (commercial). For these and myriad other reasons, it is wise to have excess capital to invest in your property once you take possession. The worst that happens is you have the funds to make improvements or weather vacancies. The best that happens is you have money set aside for your next deal. Lastly, if you’re just starting out start small. Developing your real estate portfolio is the exact opposite of building an actual parcel of land. When you build a home or a commercial property, you start with a solid, robust foundation and grow from there. When you’re building your portfolio, it’s wise to start small and leverage these bits of success into larger plays as you go forward.
Geography. We know it’s a tired phrase, but location, location, location is everything. If you believe a particular area is undervalued and underdeveloped, it might be reason enough to take a chance on investing in the area. But this kind of upside always carries risk. Likewise, if you have a long-term strategy and are willing to pay top dollar to be in a hot area, make sure you’re not the last one in. Just like another tired (but useful) adage professes: When you’re grandmother is in the stock market, i’s probably time to get out.
Municipal. How much do you know about the locality in which you’re thinking of investing your hard-earned money? Every city, town and village has its own zoning and requirements that you should be aware of before you invest. The principals and representatives at Sovereign excel at understanding the nuances of each municipality, which serves our clients well. Because, like it or not, the government is your partner, so it’s best to know who and what you’re dealing with before resigning yourself to a lifetime of frustration.
Environment. Real estate is more than what you can see. It starts with the dirt your foundation is poured into. Increasingly, we are becoming aware of environmental contaminants that date back decades but have latent effects. Doing a proper environmental analysis is mission critical when evaluating a property. Some properties might require a great deal of remediation, in which case you need to know what you’re getting into ahead of time. Lenders are becoming increasingly sensitive to environmental concerns as well, which is a factor that most investors didn’t have to deal with this extensively in decades past. These days, it’s a top priority.
Economic. As we write this, the economic environment is prime for real estate investing. Rates are low and lending requirements are beginning to loosen up. There is a growing demand for residential rentals and banks are looking to make secure deals with investors with a track record and solid strategy. That’s not to say getting financing is easy. It’s not. But it’s easier than it was three to five years ago, and improving, if you have the wherewithal to invest intelligently. The economic environment outside of real estate is something that is beyond your control, so conservative plays with modest returns will still win the day.