Real estate may be one of the most significant wealth makers in the economy. Andrew Carnegie famously said that 90% of millionaires got their wealth through real estate investment. Red Hawk Realty brokerage owner and real estate investment consultant, Donn Bree, has 4 basic circumstances to predictably make money in real estate. Here’s the basic outline – read on to see how each section is broken down.
- Opportunity to purchase a specific property
- Property search
- Ability to value property
- Comparable sales
- Cost approach
- Extrapolation of value from dissimilar properties
- Skills to improve property
- Capital to invest in property
You won’t find the perfect investment property right off the bat. Just like any investment venture, finding the best opportunity takes timing and practice. You may analyze several properties on your way to finding the perfect property. Your property search should include the following traits:
- Discipline – Opportunities can come and go quickly in a hot market – We have recently sold several properties that accepted offers in a week or less! Establish a routine, browse listings with your morning coffee or establish a report with your agent for regular updates. It is also important to remain objective during this process. You will see properties that may speak to your personal style and preferences but may not be the best deal. Conversely, you may find a property that doesn’t appear to offer much value initially but may be a very good investment opportunity.
- Research – Familiarize yourself with zoning and improvement restrictions. Understand what types of land uses there are. Think about access (easements) as well as environmental restraints.
- Analysis – What’s your profitability plan? See if you can get a pro-forma template to modify or build upon with your investment goals and objectives.
- Patience – Wait on the right property. Even in hot markets, turnover is inevitable. Don’t let FOMO overcome your judgement!
The potential for value is created when the property is purchased. A good understanding of value is the single most important factor in making money in real estate.
- History of value – Home value housing data is now public and easily searchable. Many public offices are staffed by knowledgeable personnel ready to help you find property deeds and encumbrances. Don’t rely on MLS data alone.
- Value trend – How is the market behaving in your area of interest? Many property aggregator sites have dynamic graphs of property value trends as well as comps for more accurate valuation.
- Elements of Value – Understand the property aspects that aren’t solely on the property report. Things like neighbors, local services, entry experience, topography, vegetation, improvements and versatility are a few examples of common elements of value.
- Timing to market – Timing may not be everything, but it can be. Also getting to know target residents and finding properties before they go to market.
Understand what elements of value exist and don’t exist – then make the necessary improvements! Develop skills or find valuable partners (more on that later) who know how to improve a property in terms of:
- Functionality – Including day-to-day operations
- Profitability – If it’s a rental or commercial property with a business
- Desirability – Marketing the property can go a long way
- Quality – Details, fit and finish and the various components that go in to an investment property
You’ll hear that “capital isn’t necessary to make money in real estate” – while that may be true, finding lower priced homes, distressed properties and flipping contracts can be risky. You’ll also need to find a hard money lender or other investor to help push a deal through. Here are the four main ways to find capital to make money in real estate
- Leveraged Funds
- Seller Financing