3 Basic Rules in Real Estate Investing

1) Know your Budget and Organize your Finances

Most realtors would say that location, location, location is the number 1 consideration in real estate investing.  I partially agree.  I support that it is one of the most important factors, but it comes second to having a budget and finance in place.

With my real estate background, I often get asked "Where is the best place to invest in real estate now?"  I answer back, "It depends how much you are willing to invest?"

Before you buy a property, it pays to have a budget in place.  The two worst scenarios you could be in real estate is foreclosure and negative equity.  Some people plunge into real estate investment, maximizing their buying capacity.  It is good to be aggressive in real estate investment.  However, if you fight the battle unprepared, you might end up losing. An interest rise leading to an increase in repayments, vacancy of your rental property, unexpected maintenance costs could leave you out of pocket.  In the end, you might end up losing more from your real estate investment.

Thus, it pays to have a budget and organized finances.  If you have a budget, you know what is a comfortable amount for your repayments, irregardless of your loan capability.  You can factor in, a contingency amount for interest rise, rental vacancy and the like.  You are the best gauge of what you can really afford. The bank and mortgage broker’s assessment should just be your guide.  You might have spending or saving patterns that could affect the amount you can realistically afford to invest.

2) Choose a Good Location

Once you have your finances in place, you’re off to your next challenge; choosing a good location. 

For residential developments, this is a quick guide on choosing a good location:

BEST HOUSING MARKETS =

Availability of Good Jobs + Good Income Trends + Population Growth + Limited Development

I discussed this in detail in my previous article, "A Review : America’s Best and Worst Housing Markets".

Other factors worth considering are:  infrastructure developments, schools, shopping centres, parks and other community facilities.  Take note as well of the peace and order situation because this could affect the type of tenants you will have and the value of  your property.

For Office rentals, it is best to stick in the Central Business Districts specially if you can only afford a small office unit.  Consider the factors I mentioned for the housing market and add locating in the Central Business District.  There is less risk of vacancy if your office is located in an area where there is a high concentration of businesses.  There will always be expansions, emerging businesses, support businesses that would set-up an office near their clients.  The professional environment also affects the type of tenant you will have.

In the end, your choice of location will greatly affect you rental income and the capital growth of your investment.  Next to your finances, this can make or break your real estate investments.

3) Have a Plan in Place

To boost your real estate investments, it is best to have a plan in place.  Establish short and long-term goals that will build-up your rental income and property portfolio.  Don’t forget to include your lifestyle changes too.  It is no good to earn money and deprive yourself from life’s pleasures or things that could make you happy.  But, make sure you don’t over indulge that you will end up worst from where you started.

This is an example of a plan:

Short-term goals : From the rental income and tax incentives, I would save a deposit for my next investment property.  I would use no more than 25% of my investment income to buy a new laptop.  I will allocate the remaining 75% to increase my property portfolio.

Long-term goals: I would use the equity of my property, to purchase a residential apartment building.  I would save the rental income for my future plan of renovating the apartment units to resell it individually.

Lifestyle:  I can enjoy life’s simple pleasures now by dining in a good restaurant, having a good massage and buy myself an item or two of something I’ve always wanted to buy (as long as it won’t blow my budget).  The more expensive leisures, I will set-aside when I have a good steady cash flow from my investment.  I could use the accrued rental income to finance my travel plans in the future.

With these basic rules, you’re off to a good head start on your real estate investments.  I’ve seen it happen to other people… and I grew up practicing these rules.  May you achieve your real estate investment goals, to comfortably finance your lifestyle dream or whatever plans you have!