Even amid a global pandemic, over a third of Americans see real estate as the top investment option, ranking it above stocks, savings accounts, or gold. But whether you’re setting off on the journey yourself, or you want to help your clients score big, know this: Real estate investment is no game of chance.
Although the most triumphant investors are those who are patient yet passionate risk-takers, there’s more to their success – they’re well aware of the rules of play. So, if you’re looking to put money to work today to gain more tomorrow, what are the things you need to know?
Connections Above Everything
Whether we like it or not, the truth is that the entire real estate universe is extremely relationship-centric. Both agents and savvy investors heavily leverage their networks in order to access unique deals, engage in more productive negotiations, and stay on top of the latest developments in the market.
Developing a commitment to networking is undoubtedly the single most important habit an investor can adopt. Everyone knows that some of the most rewarding investment properties are those that aren’t publicly listed. When buying from a distressed seller, it’s possible to get a deal at up to 30% below the market price. But to make that happen, you need to have the right connections. So, remember that your contacts will directly impact the quantity and quality of the deals you find and will also shape the profit potential you can make.
With globalization, many barriers are breaking down, meaning that the horizon of profitable investment opportunities is even greater and more exciting than ever before. When investing overseas, for example, having an ally that is familiarized with common commercial practices and has access to great deals can be a gamechanger. So, never say no to networking events, meetups, conferences, or even chatting with someone on platforms like LinkedIn.
The Golden Percentages
Have you ever heard about the 70% rule? How about 50%? Or the 1% principle? All of these were set up to help investors and agents quickly determine the potential profitability of property and, therefore, decide whether a specific deal is worth pursuing. So, how do these percentage rules work?
The 70% rule applies to house flipping and determines the maximum price an investor can pay for a fix-and-flip project to secure profit. It states that you should pay 70% of the estimated After Repair Value (ARV) of a property, minus the repair costs. The 30% margin gives a solid pillow, and even if different administrative costs and realtor commission might bring it lower, it still makes for a lucrative investment.
The 50% rule is a great rule of thumb when assessing the profitability of a rental unit. It says that investors should always anticipate a property’s operating expenses at 50% of its gross income. This means that from the long-term perspective, roughly half of the generated revenue will be spent on overhead, including maintenance, vacancy losses, insurance, and property taxes – but excluding potential mortgage payments. By keeping this rule in mind, you can better judge the profitability of a rental or – when taking a loan – avoid the risk of negative cash flow.
The 1% principle is perhaps the best known. It is helpful when determining the cash flow potential of an investment property. It says that the monthly rent you charge should be equal to or greater than 1% of the total purchase price. However, remember that this should only be indicative; this rule doesn’t necessarily uncover the whole investment potential. Also, in some markets, meeting it might be impossible, but the overall return-on-investment still might be considerable.
The 3L Rule
One would hardly find a bigger cliché in real estate investment than the famous “location, location, location” rule. It’s obvious that historically, some areas have enjoyed much greater potential than others. But when sticking to this rule, you need to dig deeper. The whole potential of a project can be turned upside down with factors such as urban expansions, the execution of infrastructure plans, or the emergence of an industrial zone.
Throughout the pandemic, we have seen big shifts in what people perceive to be the optimal location. As factors such as distance to the office lose their importance, both investors and agents should look to expand their portfolios with properties that might have a home office space or a garden. This trend could even disrupt the traditional physical concept of Silicon Valley, with people now looking at areas that are a little more remote but still have great infrastructure. Whether it’s Greek islands, Colombian mountains, or Croat villages, look at the location from different perspectives and know that the network of real estate gems might be more decentralized than ever before.
While these are some great rules to follow, remember that at the end of the day, it’s you who sets the rules. By establishing clear goals, you will ensure that you don’t get swayed by the moment and succumb to unnecessary risks. So, do your homework, think strategically, make new connections, and you’ll be set for success.
Mateo Monsalve Molina is the Founder and CEO of Loyalty Property Advisors, a company facilitating investment in real estate in Colombia. He has participated in the launching and advisory for diverse startups and has vast experience working with both public and private entities. During his legal career, he built up a strong connection with real estate investment and continues to explore this field further.
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