As a real estate investor, it is important to create business goal for each real estate investment as well the entire real estate portfolio. To be successful, the 3 most common used metrics when deciding to invest could be summarized as:
1.) Determine your investment goals.
Start with the WHY. Why do you want to be a real estate investor? Scrutinize your knowledge and become more educated. Know the money you have to invest, the percent you want for return and what options you have for achieving these goals. Evaluate potential using leveraged money verses CASH. Understand conventional lending and hard money lending. Decide milestones for your adventure and create a plan.
2.) Evaluate the market
The three most common tools include ROI (return on investment) and Cap Rate (Capitalization Rate) for big picture valuations. If the property is a FLIP, then understand the market dynamics, the cost to hold, re-hab, remodel, and sales costs. If the property is a BUY and HOLD, the third metric, NOI (Net Operating Income) is key and it will be instrumental in setting realistic expectations for any rental. For any market, know the demographic inflow and outflow as well the employment projections to help determine if this is the right area to invest in.
3.) Plan an Exit Strategy
Managing any investment is understanding the tax consequences and all options for continuing profit and portfolio building through tools like the 1031 exchange. Understanding legacy decisions and how any real estate may be transferred to heirs is a key decision point for any investor. Divide the portfolio into risk/return buckets, and know which will be used for cash flow, and which will be used for long term capital gains.
Unlike a “home”, a real estate investment is an investment that requires more evaluation, planning, and strategy to tilt the balance to success. The reality, not all investments pay off. Make sure your plan has clear goals, utilize strong evaluation tools, and create a definitive plan to insure your success.
Want more tips? Check out this excellent post from 11 top experts at JacobGrant.com.