Investing in real estate is a tried and true method of building wealth over time, and many people make a very handsome living doing it. But like any other type of job, there’s some training involved that is necessary to ensure that the investments you make are profitable ones.
If you’re new to the real estate investing game in California, keep the following tips in mind.
Conduct an In-Depth Financial Analysis
Like any other type of real estate, it’s important to check out a number of different properties before choosing just one. And when it comes to investment properties, you’ll want to select the one that makes the most financial sense. The only way to do that is to crunch some numbers and only make a purchase that is in line with your calculations.
While there are plenty of financial figures that you should look at, the most notable ones include the following:
- Net income (your income after you’ve paid your expenses);
- Cash flow (any income coming in after all expenses have been paid);
- Return on investment (the profit amount as a percentage of the cost of the investment);
- Cap rate (your net operating income relative to the current market value of the property).
After you’ve come up with these numbers, you’ll be in a better position to look at properties that fall within a price range to make your calculations come to life. Never purchase a property at a higher price than what your calculations dictate.
Don’t Include Anticipated Appreciation in Your Calculations
Sure, housing prices across the Golden State have skyrocketed over recent years. Take San Francisco, for example, where the average home sale price is now over the $1 million mark. But even though prices may still be expected to rise somewhat, it can be dangerous to assume that prices will continue to climb at the same rate, especially if you plan to hold onto your investment property for a few years. When making your calculations, leave anticipated appreciation out of the equation or you could potentially land yourself a bad deal.
Consider Rent Prices
If renting is what you’ve got in mind, do your homework on what you can realistically expect to rent your unit out for. While you’re conducting a comparative market analysis on similar properties in the area to come up with a sound offer price, you should also be looking at what rental rates are going for as well. This important number should be included in your overall calculations in order to make sure the rent will adequately cover all expenses.
Never Compromise on Location
You can always make changes to a structure, but there’s nothing you can do about the location that it’s in. You may come across a great deal on a property, but if the location is less than desirable, keep looking. When it comes to real estate investing, location matters. Make sure that the property you purchase is in a solid neighborhood that is able to maintain property values and is even forecasted to increase in value in the near future. This will ensure a better ROI.
Consider areas that have not already reached their peak, but appear to be on the up-and-coming list of areas to buy in. Pay attention to factors such as population and job growth, how high home prices are, and prices relative to rent.
Buy the Worst Property on the Best Street
Regardless of why you’re buying real estate, it makes financial sense to buy a property that’s in rough shape but is located in a desirable spot. That way you can put in plenty of sweat equity in the property instead of paying for it. You can add a great deal of value to the property within a very short time if you’re willing to invest a little time and effort to fix up a place that needs some work. Of course, if “flipping” is your investment goal, then this is a no-brainer.
Have a Tax Strategy in Place
When investing in real estate, you may have your sights set on profits and might not necessarily want to deal with the taxes you have to pay on the property. But a sound tax strategy plays a key role in your profits and can determine how much you actually get to keep in your pocket every year.
It’s important to have a tax strategy in mind and understand the tax benefits that come with owning real estate investment properties. There are several benefits that real estate investors can take advantage of, and you’d be well-advised to find out what these are even before you make an offer on a property. Make sure to speak with your tax advisor about any tax breaks you may be able to get as well as any tax obligations you will have that could eat into your profits.
Come Up With an Exit Strategy
You may have certain plans today, but things can change in the future. As such, you should have an exit strategy planned in case you need to bail out of your investment. Make sure you know when to hold on to your property and what the signs are that point to the need to sell. Having a sound exit strategy in place can help you pinpoint the right time to sell your property for a certain profit and minimal losses.
Use Leverage Wisely
Some investors are able to pay all-cash for their investment properties, but many times it might not necessarily make sense to do so. Sometimes leveraging other people’s money can help you make more, if done properly. This is especially helpful if you plan to invest in more than one property, or simply want to free up some money to invest in other industries.
The Bottom Line
The number of renters continues to increase in California given the inflated price of homes across the state, pushing many residents out of the housing market. With the increased demand for rental units, investors can fill a need while filling their pockets at the same time. If you’re considering investing in California’s real estate market, be sure to keep these tips in mind and team up with a seasoned real estate agent who can walk you through the process seamlessly.