If you’re looking to invest in today’s housing market, you might be in for a rude awakening. It’s not that investing in real estate is any less feasible or capable of generating long-term wealth. It’s more that building the right portfolio for the right price is more challenging than ever thanks to the combination of an inventory shortage, increasing property costs, and tough lending standards.
If you want to succeed in building your portfolio this year, here’s what you need to know.
1. Don't Compromise
Because inventory is so tight, you can almost guarantee that the properties left on the market for very long are going to require buyers to make compromises. It might be the condition of the property or its location, but if it’s still on the market there’s going to be a reason for it. As an investor, you’ve got to know what you’re looking for and what you are and are not willing to do to make it work.
Investors are used to doing renovations to a degree but beware of fixer uppers that will blow your budget. Note what you can and cannot change about the property. Determine your deal breakers.
But before you evaluate any property, know where you stand. What exactly do you want for your portfolio? Being specific may mean waiting a little longer for the right fit, but it also means avoiding additions that don’t serve your long-term goals.
These calculations help us understand our position (or the position of companies we want to partner with) and thus, our acceptable risk tolerance.
2. Protect Your Credit
Lenders learned their lesson are the financial disaster that was the Great Recession. Standards have tightened significantly, particularly as mortgage rates skirt around all-time lows. There are two big reasons to protect your credit:
First, you want to get approval. You don’t want lenders to regard you as a risk. Second, you want to secure a good interest rate. Although rates are still relatively low, even a fraction of a percentage makes a difference when property prices are as high as they are.
3. Go Where the People Are
Have a laser-focus on your investment market. Selecting the right market, where there is growing and persistent demand for rental properties, is key to your success. Pay attention to migration trends. You’ll find that the Midwest and South are growing, largely due to their lower costs of living and lower population densities.
Targeting the right markets means that every acquisition will really count. When you properly assess the market, you reduce the overall risk of the properties acquired within it.
4. Learn the Art of the Competitive Offer
A competitive offer isn’t always the highest offer. Bidding wars have cooled some, but you still want to have an edge over the competition. All-cash offers, pre-approval, waiving professional cleaning, paying for the movers, etc., can all help you make your case. Sellers want their transaction to go quickly and smoothly. The more you can facilitate that, the better chance you have of coming out on top.
5. Explore Alternatives
The traditional method of buying investment properties isn’t your only option. You can go through a turnkey provider or target the up-and-coming build-to-rent model. We’ll always recommend actually owning real estate versus crowdfunding or REITs, but even in doing so there are ways to buy without being stuck in the market pool competing with the average homebuyer.
If you’re having trouble winning the bid, look to your alternatives.
6. Check and Double-Check the Numbers
Just because you successfully buy a property doesn’t mean you’re a successful real estate investor. After all, owning property and banking on appreciation isn’t enough. You need the numbers to work. Will you have an appropriate debt-to-income ratio?-4.gif?width=300&name=giphy%20(3)-4.gif)
It is key that you set your standards and limits before you submit any bids. You must know what numbers work for what you could realistically rent the property for while also accounting for ongoing expenses. Having this number in mind (and remembering that it may vary from market to market and may not be a universal limit) will keep you from overpaying for a property.
Overpaying means a constant struggle to make it an asset rather than a detriment to your portfolio. Don’t wind up with a purchase you regret – keep your sights set on precisely what you want and need in a passive real estate investment portfolio.
