Although real estate can be an excellent way to create enduring wealth and diversify your investments, it isn’t one size fits all when buying and managing investment properties. As with any other important investment decision, you need to be on a real estate investment model that works for you, especially when you’re just getting started.
A good place to start is to take notes from successful entrepreneurs. Once you get acquainted with their best practices, you can develop a real estate business model specific to your needs, which has a plan for acquiring, managing, and disposing of real estate profitably.
In this article, we have gathered the best practices from some of the industry’s heavyweights as well as the habits of other successful real estate investors
When buying real estate
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When getting started in real estate, there’s one thing everyone will insist you put a LOT of your attention on location.
Your property’s location is the one thing you won’t be able to directly change yourself, so it’s worth the time and effort to choose wisely. Since every local market is different, you will need to do a little research so you can find out if the location is indeed ideal for your objectives down the line.
Even investors in the same exact city may have a different target area based on the money you have to invest or the goals you’re trying to reach.
Factors to consider
- When choosing target locations for your real estate development, consider job growth in the area or proximity to favorable landmarks, services like public transportation, and shopping/entertainment areas.
- Consider the demographics of the neighborhood. Since the homeownership rate among the 25-34 age group has dropped from 43.6% to 35.3% over the past decade, this is a group likely to rent. If you’re looking to hold rentals for the long term, areas with high concentrations of this age group could be favorable places to own rental properties.
- In most cases, you’ll want to focus on buying properties in areas where rental demand is growing faster than supply as the general rule of thumb. For example, if your asset is close to a major university with a student population growing faster than the number of available housing units and you plan on managing the property yourself, this could make for an excellent place to buy a rental property.
When managing real estate
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In a perfect world, your investment properties would always be occupied, evictions would be a rare sight, and nothing would ever break. Unfortunately, the reality is different and sometimes things don’t go as planned.
Pretty much all types of real estate business models will benefit from having a good landlord insurance policy. And if you plan to have more than a few properties, an umbrella insurance policy might also be a good idea to protect your assets in case a tenant decides to sue you.
It’s important to be prepared for unexpected expenses across the board. Whether you target low-income multifamily housing or blue-collar single-family homes, there will always be higher costs during rehab than expected or important maintenance activities that pop up every few years.
Plan to set aside 10% of the rent to cover maintenance expenses as a rule of thumb. This should be adjusted upward depending on the age of the property. Another 5-10% should be set aside for a vacancy reserve. That way, if the property sits empty for a couple of months between tenants, you can still cover your expenses.
Factors to consider
If you have decided to hold your property rather than flip it, the next step is finding a tenant. For many real estate investors in addition to a credit check, some important factors to consider and verify might include:
- Stable employment.
- More than enough income to cover the rent.
- A solid rental history.
However, everyone needs a place to live, and this is when each person’s real estate investment model can really start to differentiate. You may personally choose to focus on high turnover rentals or perhaps long-term stable rentals — both of which can be lucrative. Remember that one person’s sage advice may be for a specific niche or desired outcome, which may not necessarily apply to your goals or approach.
When disposing of real estate
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One effective real estate investing strategy is “buy, rehab, rent, refinance, repeat,” also known as BRRR. Investors often try to acquire distressed properties, which have solid structural integrity, some cosmetic issues, and a lot of value-add potential.
By doing some minor renovations, investors have the potential to quickly and easily improve the property’s appeal. This could make it an easy property to rent out with very little spending. On the other hand, you may go into a property with the intention of rehabbing it then waiting for the appropriate time to sell, which could be right away or a couple of years down the road.
Let’s say you bought a property for $100,000 with 25% ($25,000) down five years ago and that the property is now worth $150,000, meaning you could collect a check for $75,000 or more by selling. Instead of continuing to collect a stream of rental income, you could potentially sell that property and take the proceeds to use as a down payment on two or three more properties.
Many REITs, syndications, and other similar associations use this as a part of their value-creation strategy, and it is rather effective. For example, We recently sold a multifamily complex with around 250 units. Since Beilke Investments is a Syndication, our investors got a nice piece of the pie and the proceeds enabled us to invest in a new multifamily asset in Texas
Closing words
The best real estate business model is the one that works for you and achieves your desired financial goals or returns profitability. This means that the approach you decide to go with based on your goals, income, time, age, risk tolerance, knowledge base, location, and connections will probably look completely different than the next real estate investor.
To sum it up: Don’t assume you have to follow a cookie-cutter process. When getting started in real estate investing, find the real estate investment model that works best for you.