1. Build a team
When you’re first starting out in investment real estate, you need to build a team to ensure you’re making a financially sound decision. So who should you have on your team? You should have a REALTOR who specializes in investment properties, a mortgage broker who can find the best options for your purchase and a property manager to manage your investment, which might be you! Your team will help you build a solid foundation to ensure you’re finding the best opportunities in the market that make the most sense for you.
2. Know your budget
Having a price in mind is crucial when purchasing an investment property, knowing what you’re pre-approved for, what your down payment needs to be and what the potential rental income needs to be to offset your expenses is critical in determining if a property is right for you. An additional rule of thumb is the 1% rule; your income should be at least 1% of your purchase or total investment price. Therefore, if you purchase a home for $500,000 for it to be a “good” investment, your monthly rental income should be $5,000.
3. Do a cashflow analysis
A cashflow analysis or “pro-forma” is also critical when purchasing an investment property. This analysis determines what your monthly income would be (positive or negative) based on all your expenses to offset your income. You need to ensure you are receiving an accurate rental income analysis for the cashflow to work. Do not rely on the current homeowner’s “past income” because our market fluctuates rapidly, and past rents represent past markets. Discussing your cashflow with your REALTOR and generating a cashflow positive outcome is ideal when it comes to investments.
4. Know your “out strategy”
There are multiple types of investment strategies:
1. Buy & hold
2. Flip
3. BRRRR
The most common type of investment is the buy & hold strategy. This is quite simple; buy a property, rent it out and maintain it as a long-term property in your portfolio. The second is the flip method. Again, very simple and what you often see on HGTV. Buy a property that is run down, renovate it and sell it (hopefully for a profit). The 3rd strategy is a combination of the first 2; the BRRRR method is Buy, Renovate, Rent, Refinance, Repeat. This method allows equity to build on a property so you can purchase a second property sooner. Knowing how long you want to keep the property in your possession, is important when choosing a property.
5. Buy properties with multiple income streams
Having 1 property with multiple income streams is ideal for investors. Whether it is a single-family home with a legalized basement suite, 4 plex or large commercial building; having more than 1 stream of income on 1 title is ideal to maximizing your income over the long term.
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