Real Estate Investing 101: 5 Simple Rules to Live By

by Joanna Stewart

Mon, Oct 1, 2018

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traditional custom home Photo via Norris Architecture

Want to get started buying and selling real estate? Use these 5 rules to improve your chances of success.

Successful real estate investors live by only a few basic principles.

In fact, the ultimate success of anyone buying income producing properties will come from the execution of these rules.

The primary goal of real estate investing is to use leveraged capital to build equity in an income producing property.

To put simply, that means to use other peoples money (a loan) to buy rental properties that generate cash flow.

Profits in real estate investing are the result of net operating income, equity and appreciation. New investors should follow our simple tips when purchasing their first piece of property for greater success.

The 5 commandments of real estate investing:

Rule #1: Only purchase bargain-priced properties.

spring home sales

In such a competitive real estate market the only way to uncover above average profits is to search out bargain-priced properties. Buying properties for less than market value will increase cash flow and equity for the creative investor.

Finding properties that are listed for below market values is difficult. Fortunately there are many sources to discover such deals.

For instance, many sellers are motivated to sell at a loss during a divorce or financial hardships.

Lender-owned properties such as REO’s are often bargain priced as well as foreclosures and tax sales. Almost 20 percent of all property sales come from these sources.

These bargains will typically give the buyer greater financial flexibility and higher operating income.

Rule #2: Buy properties that can be profitably improved.

new home construction

Building wealth with real estate investing is easy by adding value to existing properties. These improvements can be made with sweat equity, remodeling or renovation. Sometimes it takes only a little creativity to make profitable upgrades.

However, new investors should be cautious about making substantial upgrades in the beginning. Before having an adequate understanding of the market it may be difficult for inexperienced investors to accurately estimate their return.

In addition, capital is king in real estate investing. Minimizing the use of available capital can be the difference between success and failure.

Our real estate investing guide encourages investors to stay focused on creating maximum profits with minimal investments.

Rule #3: Look for properties with below-market rents.

real estate investments

Properties with below-market rents can become instant profit generators for intelligent real estate investors. Increasing rents to current market levels over 6 or 12 months can gradually increase net operating income with minimal work and no additional investments.

The added rental income will also help increase the margin above the mortgage payments and other expenses. Hidden opportunities like these can only be found by investors that deeply understand their markets and historical trends.

Wealth is built by identifying new opportunities to create profit without additional investment.

Rule #4: Use only low-interest financing.

hidden opportunities

Financing is one of the most expensive aspects of real estate investing. Taking the time to find low-interest financing options will pay off big for real estate investors with limited capital.

There are numerous creative financing options available on the market. Many investors take advantage of adjustable-rate mortgages, buy-downs and even seller financing.

Lower interest rates help improve net operating income by reducing monthly mortgage payments. Other more advanced financing options such as no money down real estate investing strategies should be considered as well.

Non traditional loans are often called creative financing options. Most real estate investors are experts at finding creative financing solutions.

Rule #5: Buy properties in under-valued neighborhoods.

women clothes shopping

Neighborhoods are constantly changing. Many factors go into determining the potential value of a neighborhood.

The condition of properties, vacancy rates, market values and rental price ranges all play a factor in determining the current condition of a neighborhood and the properties within it.

Areas where potential improvement could happen in the near future are great places to invest.

New shopping areas, office parks or schools can significantly add value to a neighborhood. Changes to an area within the next 5 years can also increase market demand, rental rates and property values.

In addition, homeowners associations can also help improve or maintain neighborhood conditions. Getting involved with or starting an HOA may be in the best interest of the real estate investor.

New real estate investors can become successful by relentlessly discovering potential profits in emerging neighborhoods and development trends.

The rules of real estate investing can be mastered with a keen eye for the local real estate market and only a few years of experience.


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