So, you’ve decided to go for your first real estate investment, or maybe you are already a seasoned investor but need something quantifiable to back your decision. It goes without saying that the real estate market is a tricky horse to break, so here are ten essential rules for successful real estate investing that you must follow to steer clear from a loss. Let’s find out what these rules are.
Rules for Successful Real Estate Investments
The ten basic rules for investing in real estate are as follows:
- Understand that knowledge is power
- Set your own investment goals
- Make long-term investments
- Search for properties with a positive cash flow
- Choose your location wisely
- Take an organised approach for your property search
- Diversify your investment portfolio
- Consider outsourcing property management
- Manage your own investments
- Invest your money smartly
We will now elaborate on each of these in detail.
1. Understand That Knowledge is Power
Knowledge is power. The more you know, the better choices you’ll be able to make in life, and that doesn’t just apply to real estate investing. Don’t let others make your decisions or push you into taking the wrong path. Discover the truth for yourself, arm yourself with knowledge, and follow your instincts. With regards to educating yourself, you can categorise education into three broad categories. Academic education is learned in school, professional education is practical knowledge that helps us do better in our careers, and financial literacy is about using your money wisely.
It is this last category that is the most important when we talk about investing in real estate and unfortunately, although it is crucial to have this education, considering the state of the world’s economy, it is not taught to us in schools or our professional lives. For you to differentiate good deals from the bad ones, you need to independently educate yourself financially as it will help you go from being a good investor to a great one. This form of education demands a good understanding of assets, income, and expenses, as well as their classifications to determine what can benefit you financially and how.
2. Set Your Own Investment Goals
We all know the importance of setting goals and how it helps in achieving our targets, but how many of us actually end up following those goals to the letter? The biggest problem with this particular rule for successful real estate investing is that while setting goals is necessary, few of us make those goals practical enough to be achieved in the near future. While long-term goals are essential, it is vital to break them down into short-term steps that will eventually help you hit the long-term target.
With regards to real estate investing, consider how many properties you want to invest in for a particular year, what cash flow they should generate, what types of properties you’d be most comfortable investing in, and which city or location you’d prefer in this regard. Set practical and short goals to attain financial benefits in the long run.
3. Make Long-Term Investments
A temporary hike in the market is undoubtedly going to tempt you to invest in real estate for the short-term, but every seasoned investor knows this: real estate investments are always made with the long-term appreciation values in mind. Aiming for short and quick gains in a volatile market can actually work against you.
Study the real estate market and the numbers, figure out where investing makes the most sense and invest accordingly. Ideally, consider cash flow, equity in the property, and the appreciation potential of any real estate venture before you jump on-board the investment wagon. However, if you’re flipping houses, which is almost always done for short-term returns, then it’s best to keep your eyes on the current market.
4. Search for Properties with a Positive Cash Flow
Cash flow refers to the amount of money moving in or out of a business venture. When you’re investing in real estate, you must always look for properties that ensure positive cash flow or the rate of return in the long run. A positive rate of return can be ascertained when you consider the equity on your property, which will grow over time, due to an appreciation of property values backed by inflation.
5. Choose Your Location Wisely
Every city in Pakistan has its trends with regards to the real estate market. A quick overview of the H1 reports for Karachi, Lahore, and Islamabad would tell you just how differently each market has performed in comparison to the other during the first half of 2019. Keeping that in mind, one of the major rules for investing in real estate is that you should not let emotional ties dictate your investment decision.
You might live in Karachi and have strong ties to the city, but if the property market in Lahore is more profitable, you should base your decision on the returns you can reap from your venture rather than staying emotionally loyal to the real estate of any particular city or area. The timing of your investment and the current market trends are important considerations that will help you pick the best location for investment.
6. Take an Organised Approach for Your Property Search
One of the rules for successful real estate investing is to start your property search from a wider scope and to narrow it down to specifics as you go along. Start at the top of the geographical chain and determine which city would be best for your future investment based on its current trends and your risk appetite.
Once a city is finalised, study its neighbourhoods and select the best one for your particular investment requirements. Finally, narrow it down to the property investment options available in that specific neighbourhood with respect to amenities being offered, proximity to public transport, schools, hospitals, and real estate trends. )
7. Diversify Your Investment Portfolio
Diversification generally means investing in more than one market to safeguard your interests, but as a real estate investor, you might wonder how to make it work in your favour. Diversification, in this case, is location-specific. For instance, Lahore’s market was favourable, and you’ve made a couple of investments there. For the next few, avoid dedicating all your funds to the same geographical location.
Discover if there are untapped real estate opportunities in Karachi, Islamabad, Multan, Faisalabad or Quetta and find some ventures there that are worthy of your investment. In this way, even if one market goes south, you can rest assured that returns will be coming in from the other markets. You can also diversify with regards to the types of properties, focusing on residential options in one city and on commercial ventures for the next. This practice helps reduce the risk involved in making an investment in real estate.
8. Consider Outsourcing Property Management
You’ve bought and rented a property out. Now, you have a choice. You can either manage your portfolio of rentals on your own or hire a firm to do it for you. While many of us would choose the former method, seasoned investors often go with the latter because this delegates the task of rent collection and property maintenance to a third-party while the investor is left with plenty of free time to find more properties to expand their portfolio further.
There are certain traits that a good landlord must have in order to retain their tenants and while small efforts can keep most tenants happy, tackling tenants’ complaints as well as finding the right tenant for every property is a job that is best left to a professional property manager, unless you have the expertise and experience required to handle such matters.
9. Manage Your Own Investments
Always invest in a property directly and maintain physical control over it. You should decide whether you want to rent it, sell it, or wait for a turn in the market. Do not lean towards the ownership of real estate via funds, shares, or partnerships. Paper-based investments often make you the owner of a property with none of the rights and authorities of an owner. Be actively involved in your real estate investments and make your own decisions with regards to the ownership of a property.
10. Invest Your Money Smartly
While investing in real estate, you often have the option of either buying a single property for its total worth or putting in a down payment for a fraction of the cost on multiple properties for that same amount. While the first option gives you the chance to own one property, the second option allows you to own more of them. What about the remaining instalments though? Well, if you’re renting out all the properties which you need to pay instalments for, your tenants will end up paying you for owning the house over time.
Let’s explain this with an example: You have PKR 1 crore and can buy one property for that total value or put a 20% down payment on five properties of the same value, which means spending PKR 20 lakh for each. In this way, you’re the partial owner of five houses. After you rent them out, the rent can directly be used to pay off the remaining amount in instalments.
Over time, your tenants will help you own not one, but five properties with a total worth of PKR 5 crore, with a starting balance of just PKR 1 crore. This is how you can invest smartly into more properties with limited capital.
These are ten fundamental rules for successful real estate investing that are followed by all seasoned investors, all the while acting as guiding principles for novice investors wanting to venture into the real estate market.
We wish you the best of luck for your investments! Keep following Zameen Blog for more property investment tips!