Three Key Elements of a Great Real Estate Investment
If you’re like most people, you’re investing in real estate in an effort to earn wealth. Ideally, you’ll accomplish this with minimal effort and risk. While this might sound like pie-in-the-sky thinking, it’s a very plausible proposition. However, the key thing to remember about real estate investing is rather than get-rich-quick, it is a get-rich-slowly strategy. With that in mind, here are the three key elements of a great real estate investment:
Positive Cash Flow
And right about now, you’re probably thinking; “Yeah? Please tell me something I don’t already know.” As basic as this might seem, it bears repeating here because too many people have a tendency to focus on market value at the expense of cash flow. Meanwhile, it’s very possible to own a property with an excellent market value that does not generate positive cash flow. So rather than being attracted to a property for how much it’s worth, always run the numbers to see if you’ll have a profit once the costs of owning and running it are satisfied every month. When you get into a property on this basis, even if its value diminishes, you will continue to make money.
In most cases, your safest investment will be a nice, established, positive cash flow residential property. Developments, private real estate funds, speculation, and flipping — while carrying the potential to generate fabulous returns when they work — typically entail more risk and potential downside than simply buying a property on your own and renting it. In each of those categories above, the potential for catastrophe is simply too high. Way too many things can go wrong that you can’t control. With a nice, safe, boring residential property, you have a lot more control over the way it works. Further, the return on such an investment will almost always be directly commensurate to the effort you put into choosing it.
This means low maintenance as in not demanding inordinate amounts of your personal attention. Of course, part of that is ensuring the properties in which you invest are well built, in great condition and fitted with reliable appliances. So to a degree, it does mean low maintenance in the traditional sense. But considered more broadly, it means making sure the property is in an area likely to encourage long-term residencies rather than transient tenancies. While investing in a property near a university absolutely guarantees you a steady stream of renters, you’re also likely to be looking for new tenants every couple of years, as well as spending a lot of time, energy and money getting it ready after each move-out. Vacation properties behave similarly, except on much shorter turnarounds. A far better investment is a property appealing to mature, responsible people with good credit who are looking for stability. You want something attractive to a couple, a family, or an individual likely to put down roots and pay you rent month in and month out for many years.
Does this sound too simple? Well, the most successful plans have a tendency to be quite simple. By ensuring a positive cash flow, minimizing your risk, and maximizing the length of your tenancies, you’ll make good money with minimal effort for many, many years.
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