The Risks Involved In Real Estate Investing

Investing in real estate can really be a rewarding experience once you do your part well. And when I say do your part, it means putting some time and effort in looking for the best deals out there, incorporating some due diligence, and continuously increasing your knowledge about real estate investments.

Here we discuss some of the common risks involved in real estate investingand steps we can do to minimize them.

1. Interest Rate Risk

The interest rate at any given time fluctuates, depending on local and global economic conditions. Therefore, your monthly amortization may either increase or decrease after the set lock-in period. It is therefore advisable to go for the option with a fixed interest rate for the longest period of time possible. This is to hedge you from the cost of sudden increase in interest rates that may leave you unable to pay for monthly dues. After all, you don’t want your property to end up in the foreclosures listing right?

2. Tenants From Hell

This is one of the most common problems that owners encounter when renting out their properties. And this is why due diligence is very important in screening your potential tenants. Always check for their capacity to pay and if possible, do a background check on their lifestyle to see how well they handle their own finances.

3. Going All-in

As investment gurus always say, never put all your eggs in one basket. This is also applicable in real estate investing. Don’t put all your life savings in one property, especially when you haven’t done your due diligence yet. Go for properties that suit your budget and won’t leave a hole in your pocket. Think about what will happen if you suddenly lose your job and can’t pay for your mortgage. Therefore, it is vital that you manage your finances well and invest only what suits your risk appetite.

4 Simple Tips In Getting Started With Real Estate Investing

If you had been planning on making your very first real estate investment for some time already but haven’t put them into action yet, then you’ve come to the right place. Here, I’ll give some simple tips and things you need to consider before making the big move.

1. Ask yourself what your objectives are.

Always begin with the end in mind. Why do you want to invest in real estate? What goals do you want to achieve in doing so? Is it for passive income and eventually for financial independence? How much do you want to earn from real estate? These are just some of the questions you need to answer before starting your search. Concrete goals translate to a concrete plan of action, and with this, the odds of succeeding increases.

2. Knowledge is power.

Before getting your feet wet, try to learn as much as you can about real estate investing. We are lucky to be living in a world where a vast range of information is available over the world wide web for free. Learn the taxes involved in acquiring and selling a property, research on the different financing options available, read about real estate laws that may affect your decision in buying a property. Practically everything you need to know can be found on the net, you just have to be diligent and patient enough to learn.

3. Find your niche.

There are several ways of making money from real estate investments. Renting, flipping, rent-to-own are just among the most common practices. There are people who have built expertise on finding foreclosed properties. Whatever niche you choose, just remember to be an “expert” in that category so that when an opportunity comes, you’ll be more than prepared to grab it.

4. Start building your network.

Finally, you can accelerate your chances of finding good deals by increasing your visibility in the real estate market. Make the properties come to you and not the other way around. How? Join clubs and communities that share your passion in real estate investing. Participating in auctions is also an option.

With these tips in your mind, I’m sure it won’t take long before you acquire your first ever real estate investment.

The Importance of a Property’s Net Operating Income

In the previous article, I showed an example on how to compute the net operating income (NOI) of a property. Expenses such as property insurance, property managament, taxes, and repairs have to be considered. In addition, some allowance for vacancy and collection loss have to be accounted for. Some properties, which may look very attractive at first, may have a low, or worse, negative NOI and may not be a good investment after all.

If you are buying a property thorugh bank financing, then computing the NOI is also important to see the net cash flow the property generates while you are still paying off the loan. This is also a great tool in comparing a property investment versus alternative instruments such as stocks, bonds, and mutual funds.

Note however that the NOI is just a rough guide that you can use in determining if a property is a good investement. The soundness of your decision is highly dependent on the accuracy of your assumptions. It is therefore important to make your assumptions as accurate as possible. How?

Go to the municipality and ask for the latest tax rates of properties located in the area. Get several quotes from insurance companies to get a rough estimate of annual insurance premiums. Ask the neighborhood or property owners nearby how often the units are vacant. Also, make sure to screen your tenants well to ensure a worry-free collection.

As mentioned in previous articles, reaping off the rewards from your real estate investment may take a long time and will involve lots of effort. Nevertheless, I’m sure that by the time you get there, you’ll never regret that you chose to take that first step towards having your own real estate investment.

How To Find Good Properties

In any business, the net operating income (NOI) is a vital measure of a company’s performance and is a clear indication of whether the company has made profits from its operations. The net operating income is defined as the company’s income after all expenses related to operations such as cost of goods sold and employee’s salaries are deducted.

Similarly, real estate properties that are used to generate rental income such as multi-door apartments, duplex, and condominiums also incur operating expenses like real property taxes and maintenance costs. Below is an example of how NOI is computed.

Example. You have found a beautiful 8-door apartment where the monthly rent per unit is $125.

Assumptions:

• Real Property Taxes = $750/year
• Property Management = $120/month
• Property Insurance = $300/year
• Allowance For Repairs and Maintenance = $70/month
• Vacancy Rate = 10%
• Collection Loss (assume not all tenants will be able to pay) = 3%

For this particular example, you will be earning a little less than $600 per month net after paying off your mortgage. Therefore, this looks like a good deal for you as it will put additional money in your pockets. Of course, reaping the benefits will take some time as you have to finish paying the monthly amortizations first.

In the next article, I will show why it is vital for you to compute a prospective property’s net operating income.