If you’re thinking of investing a large sum of your own personal wealth in real estate investment then you’ll want to know what the ideal opportunity looks like.
When you break it down to the simple fundamentals there are three things you need to consider – your time, your money and your tolerance for risk. There are plenty of good real estate investment opportunities to be found but what’s right for someone else might not be right for you. It all depends on what you want and your strategy for getting it.
When you know the big picture, you have a target to hit. Make every decision with this in mind and you’ll be a successful real estate investor in no time.
Let’s take a look at the three fundamental areas in more detail:
1. Acceptable Risk Tolerance: Investment OpportunitIes That Aren’t A Big Gamble
Let’s face it. No other investment opportunity can match real estate investment for its potential for capital appreciation, cashflow income and risk management, but no investment is risk-free.
Your tolerance for risk is likely to be based on a number of factors including age, net worth, income, ambition and purpose for investing. If you’re ambitious you’ll likely take bigger risks that could cause your empire to crumble. When you buy real estate looking for big, short-term gains, sudden market changes can devalue your property and, unlike other investments, you’re not on the hook for a small amount, you’re on the hook for $100,000s.
Certainly, when you’re first starting out and learning the ropes, you want to look for properties in a market you know and understand that don’t require lots of money to improve. Build a portfolio of careful winners and, if you want to take more risk, do so with a portfolio behind you.
It’s not always the case, but when something seems too good to be true, it often is.
Don’t try and run before you can walk. Have patience and know that in time you can build a profitable empire in real estate. But one false move can put you back a very long way.
2. Time: Properties That Don’t Need Too Much Fixing Or Managing
Some properties, however profitable they seem on paper just aren’t worth your time. Don’t estimate this. It can be easy to be blinded by numbers and glory but time is a real consideration. It’s limited and nonrenewable. Student housing, vacation rentals and low quality housing might be appealing when you look at the numbers but they’ll take up more time than you might want to spend managing them.
The same is true for some properties that require a lot of work to fix up. The worse the state of a property, the more chance you have that things can go wrong. A property that needs a complete re-wiring might set you back one whole month and cost you more than you expected to invest. Not only is your margin reduced but you lose one month’s income and it’s another month until you’re likely to see any returns.
This is all time you can be scouting other investment properties and putting to better use elsewhere.
Boring properties with long-term tenants are the most reliable, the least stressful and the safest way to build wealth if you’re patient.
3. Money: Financial Analysis On A Number Of Potential Investment Properties
You know what you, you’ve assessed the risk and you value your time. So now it’s time to cover the reason you want to invest in the first place: to turn a handsome profit.
In real estate investment you’re putting significant money on the line. There are cheaper ways to invest that require less effort. This means you want to make sure that your investment pays a better annual return than you could otherwise achieve elsewhere. The stock market may be more volatile but, over time, in an index, you could expect a 4% annual return with the added bonus that you can sell at any time.
With real estate you’re tying up a lot of money in illiquid assets so make sure you get your reward for that risk. Always run the numbers and leave room to spare for unforeseen costs.
Know your tolerance for risk, take your time into consideration and always run the numbers. Stick to these three principles and you’ll be well on your way to building a profitable real estate empire.
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