It is common to think that all profit is “made” when someone sells a property, however, this statement is only partially true. In reality, whether an investment property is profitable is largely determined at the time when the property is purchased, and not solely when it is sold. Simply put, the easiest way to make money when you buy real estate is by purchasing property at the right price, at the right time, and with the right investment potential.
But how do you do that?
In this article, we will explore exactly that. We’ll delve into the factors that are crucial in analyzing an investment property, e.g. location, timing, expenses, and macroeconomic factors. By the end of this article, it’s my hope that you’ll be equipped with some knowledge and tools to help you easily identify winning properties and be able to say ‘no’ to undesirable opportunities with confidence.
So, whether you’re a first-time investor or a seasoned pro, let’s dive into the world of real estate investing and discover How To Make Money When You Buy Real Estate.
Disclaimer: Throughout this article we will discuss how to make money in real estate with long-term buy-and-hold rental properties. This article does not focus on short term vacation rental, flips, etc.
1. Time The Market Correctly
Just like the stock market, the real estate market is cyclical and it fluctuates based on constantly changing market conditions. The economy, interest rates, consumer confidence, and government policies can all have an impact on market movement in one way or the other. It is a very basic but often overlooked concept, but as an investor your goal is to ALWAYS own profitable investments. You would be surprised by how many real estate investors I know that actually pay money into their investments every month.
While it’s impossible to know for sure in the moment that you’re buying the bottom, keep the following in mind:
- It is extremely important to know where we are in the real estate cycle before you make a purchase. E.g. Is the market trending up or down? Is it a buyer’s market or seller’s market? Talk to an agent who is familiar with the local market. Don’t just rely on national trends because real estate is hyper-local!
- The best way to create a profitable, cash-flow positive investment is to buy the property with the numbers producing the return you desire and not hoping it will get there in the future. Appreciation is a speculation, and there is no guarantee a property will appreciate. Always buy the property with the income that meets your criteria.
- Real estate is a long-term investment. There is always higher risk in the short term due to market fluctuations.
- Think like a contrarian. Acting against the crowd will often give you an advantage because you will have less competition - “When there is chaos there is opportunities!” But it is important for you to know what your investment criteria is so you can spot a good opportunity.
2. Know The Fundamentals of a Good Investment Property
While pricing, demand, and market conditions will always be constantly evolving, the fundamental qualities of a good investment property will never change. Knowing and recognizing these fundamentals will help you make better investing decisions and allow you to take advantage of great deals in the midst of market uncertainty when other investors aren’t looking for them.
Fundamental characteristics of a good investment property include:
- Location - The property is located in a safe, clean neighborhood where people want to live. If the neighborhood has decent schools, it will attract families with kids, and they will likely rent for a longer term. Turnover for rental properties are costly so stable, long-term tenants are preferable.
- Amenities - Check out the local schools, parks, and amenities such as restaurants and grocery stores, freeway access, public transportation etc. Is it a location that is easy for people to live here and work nearby? If the answer is yes, then the property will likely be easier to rent out and experience shorter vacancy when one tenant moves out.
- Jobs - What are the typical jobs in the area? Are the nature of the jobs long-term or short term? Keep in mind that the economy can have an impact on job security and knowing the types of job available in the local market can help you predict how likely you will be in collecting rent, on-time.
- Macroeconomics factors - Is the general population in the area growing and or is it shrinking? How many major employers are in the area? Factors such as if big industries are entering or leaving the surrounding area can also be helpful to predict growth or decline over time.
- Type of property - What are the characteristics of the home that would be the easiest in renting out? Homes that are too big or too small for the typical renter profile in the area may be more difficult to rent out.
- Landlord friendly or tenant friendly - Is the local jurisdiction tenant or landlord friendly? If the area has strong tenant laws, landlords may have a much harder (and more costly) time resolving disputes with tenants.
These fundamentals help ensure that the property you’re investing in is as ‘recession-proof’ as possible. The idea is that they will continue to produce a return on investment, despite changing market conditions, because they possess fundamental qualities and characteristics that will always be desirable.
Here are some resources to help you with your research -
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- Learn more about investments from books, investment podcasts (e.g. Bigger Pockets) or other like-minded investors who are investing in the same general area.
- Consult with an agent who is savvy in investing, and he/she should own in the area you want to invest in so they have first hand information.
- Visit the locations yourself. There is no better way to learn about an area than by visiting it yourself. Make a vacation out of it!
- Talk to property managers - I often cross check information I get from the realtor with several property managers in the area for my due diligence. Doing it this way means you can also interview a good property manager to help manage your property.
3. Hire A Real Estate Agent That Understands Your Goals as an Investor
While it may be tempting to try and navigate the market alone, having a knowledgeable and experienced agent who understands the ins and outs of real estate investing can be the difference between success and failure. The agent should have local connections to help you identify potential investment opportunities, the skills to negotiate deals on your behalf, connections with trusted vendors of various trades to assist you during and after the transaction, and relevant, up-to-date knowledge of the market to make sure your purchase and your investment is a successful one.
But not all real estate agents are created equal. When looking for an agent to help you with your real estate investments, it’s important to find someone who truly understands your goals.
Part of the reason why I can be an asset to my clients interested in real estate investing is because I myself am an investor. family homes, townhomes, multiplexes, and syndications. Every investment is unique and I have over 10+ years of experience in investing and have owned property in many states including California, Washington, Idaho, Utah, Texas, Wisconsin, Minnesota, Michigan, Ohio, Florida, and Indiana. I have also owned many different types of property - experiences that are valuable in formulating my best-practice investment philosophy. I have grown a lot from my own investment journey and I have a lot of lessons/best practice to share.
A good agent should also have these qualities -
- A strong network of connections and resources to help you find properties that may not be listed on the market yet, giving you a competitive edge. I have been a part of a national realtor group for the past 10 years and I am well connected with agents all around the country and Canada who can assist me and my clients with their real estate investment needs.
- A deep understanding of the local market and its trends, allowing them to help you make informed decisions about when and where to invest. I only work with agents who invest in the same market and the same type of properties I want to invest in, because they will be paying attention to market forces that will impact the profitability. E.g. changes in rent control policies, changes in the job market, gradual changes of the neighborhood, etc.
- The tools to help an investor analyze the opportunity. Sometimes an opportunity looks good but once you put all the information together (e.g. expenses, interest rates, fees etc), the numbers may paint a different picture.
- A deep understanding of the investor mindset and the patience to explain things. Not every agent has the patience to work with investors and especially those who are from out-of-state. Find someone who will take the time to explain things to make sure you have all the information you need to make an informed decision.
How do I start?
Whether you're a first-time investor or a seasoned pro, it's important to equip yourself with the knowledge, tools, and people needed to make confident and informed real estate investment decisions. This being said, I’ve created a free checklist below that goes into detail on exactly what you should be looking for when purchasing a profitable long-term rental property.. Market conditions, neighborhood trends, the local economy, and laws are constantly changing, so it is important to evaluate your investment portfolio on a regular basis to make sure the properties you own are still desirable and you are getting the passive income you are expecting.
Otherwise, it is time to make some adjustments!
Click here to download the “Long-Term Rental Profitability Checklist”
