Earning an average return as a real estate investor is not necessarily a bad thing. Most investors would be happy with an 8% to 12% return invested somewhat passively. But why settle for average when you can earn more?
These five secrets will help you beat the average investor and earn more in the long run.
1. Take advantage of market opportunities
Falling markets can be a challenging time to invest. Lending tightening makes capital less available and low demand can increase vacancies. Depressed markets may not seem like a good time to buy, but they are actually the best buying opportunities.
Buying low and selling high is a key principle for achieving above-average returns. And falling markets often mean low prices. Don’t stand by when the market is volatile or demand is weakening. Use it to shop strategically.
2. Use leverage to your advantage
One of the best things about investing in real estate is the ability to leverage your money with a mortgage. Mortgages can affect the cash flow of a rental property, but it also requires less money to invest, which increases your return.
For example, if you bought a property for $200,000 cash and rented it for $2,000, you would earn a return on investment (ROI) of about 8% assuming about 30% of the rent goes to operating costs. holding. Now, if you have a 5% 30-year fixed-rate mortgage on the property, you’ll lose an extra $1,098 in cash flow each month, but your return increases to 9% because you only invested $40,000 instead of $200,000.
Leverage can help increase returns and opens the door to growing a portfolio faster. If you take the extra $160,000 you saved by not buying the property with cash and buy four additional properties earning 9% or more, your return can compound exponentially.
3. Diversify your holdings, but stay niche focused
The saying “don’t put all your eggs in one basket” exists for a reason. Diversification is extremely important in any investment portfolio. But if your goal is to earn superior returns, there are advantages to focusing on a single type of real estate investment—at least for a while.
The most successful real estate investors I know were experts in a particular investment industry before they began diversifying their real estate portfolios. This means they invested almost exclusively in fix-and-roll, rental properties or land before moving on to other asset classes such as apartments, self-storage or mortgages. Owning a niche makes it easy to maximize profits because you can analyze opportunities, get new leads, and manage day-to-day operations quickly and efficiently.
Once you have accumulated some profits and have a steady cash flow, then you can diversify your holdings.
4. Do the work to find the deals
Buying properties at market value will rarely bring you above average results. Buying at a discount with the opportunity for increased growth is what leads to better results. This means you may have to work harder to find real estate opportunities that can offer superior returns.
Finding difficult opportunities where the seller needs to sell or is unable or unwilling to do the work to improve the property often leads to superior yields. Send mailers to out-of-state landlords who don’t pay their taxes, contact homes that recently went into foreclosure, market zombie properties in foreclosure, or possibly bid on properties at a foreclosure auction.
It also helps to put some sweat on the property. Learn how to maximize your return by outsourcing certain skills, but also use the cost savings of doing it yourself to improve your return.
5. Carefully manage your portfolio
Investors who receive higher than average returns know that they must carefully manage their holdings. Poor management of a real estate portfolio can lead to excessive operational costs that weigh on revenue.
I frequently attend local real estate investor meetings and am constantly learning new strategies that help me more efficiently manage my portfolio and ultimately earn more. Things like free background checks and tenant screening services, free online rent collection tools, and marketing strategies to get my property rented faster are small changes that can go a long way.
It’s also important to shop for savings on things like property insurance, maintenance and repairs, and operational fees associated with ongoing management. Remember to keep the long-term investment in mind. Returns often increase the longer the investment is held, as long as you carefully follow these investment principles.