Investing in real estate isn’t complicated, but you can find a multitude of books, seminars, and college courses on the topic. This wealth of information is needed because there are many opportunities and ways to succeed in real estate investing.
According to Realty Biz News, 60% of all assets (and by all we mean all assets on earth) are tied to real estate. The total value of real estate exceeds that of virtually any other asset that exists. This multitude of opportunities can also create confusion about where to start. Real estate covers commercial properties, residential homes, private mortgage financing, tax lien investing, and much more.
However, real estate investing can become easy if you learn two fundamental philosophies.
- The positive Cash Flow philosophy simply means that you generate more cash each month than you spend on a property. The owner knows at the end of the month they will be able to put cash in their pocket.
- Buy and hold philosophy is all about buying and holding. These properties don’t necessarily come with a positive cash flow, but they need to have an upside that will be profitable with time. This often comes about by improving the property to create positive cash flow.
Every investing strategy is based on one of these philosophies. For example, “turn-key rentals” lead to positive cash flow, and “flipping properties” is an example of a buy and hold strategy.
No matter which philosophy you follow, real estate investment comes down to money. It doesn’t necessarily have to be your money, but it will involve money. This money could be a small fee for the “option to purchase” or an “all cash deal.”
Understanding these fundamental ideas doesn’t mean you’re ready to invest. Think of this understanding as the foundation for analyzing a potential investment. Before you take the plunge, you need to ask a few questions to determine if the property you’re looking at is a “cash flow” or “buy and hold” opportunity. This may be as simple as asking the current owner, or it could involve some serious research.
Typically, before you buy a property, you need to perform a due diligence and financial analysis. If you’re an experienced house flipper, you should be able to do this easily by simply walking through the house. Your experience should quickly help you note if new carpet is needed. However, performing a more thorough due diligence is the best way to ensure your investment is safe. A due diligence is needed to determine if the house is on a flood plain or has hidden defects.
If you’re planning on applying a turn key philosophy, there are more things to consider. To determine if your property will generate positive cash flow you need to consider the revenue you receive minus taxes, insurance, general maintenance, mortgage, and a property manager. You may also want to consider having an emergency reserve to pay the insurance deductible in the case of a natural disaster.
If you’re trying to get started in real estate investing, start by becoming familiar with a few strategies before deciding on a specific strategy. Once you know your strategy make sure it’s based in one of the two fundamental philosophies above. Look for a potential property conduct due diligence and financial analysis based on your personal situation.