Everyone knows real estate is a good investment. Ask anyone — from the stoic retired man down the street who is living comfortably to the man asking for handouts on the street — and they will all tell you the same. Investing in real estate is wise because it is profitable… if done correctly.
Investing in real estate correctly doesn’t require you to crack a secret code. It just requires common sense. Whether it’s on a small or large scale, there are only a handful of objective truths with respect to investing in real estate.
1) Location, Location, Location
The notion that location is everything when investing in real estate is so cliched that this idiom often isn’t fully understood. A more appropriate way to convey the implicit meaning of “location, location, location” would be to say, “convenient location.”
The value of a property is directly proportional to the convenience it affords the person who lives on it, whether that be you or a tenant.
Convenience is not necessarily a synonym for proximity. And, convenience does not necessarily pertain to access to supermarkets, movie theaters and schools. A property could be convenient if it is isolated or because it provides access to open space or public lands.
Regardless, convenience is the essence of location.
2) 1% Rule
A property used as a rental should generate at least one percent of the purchase price each month. This means a rental property should produce a return on investment (ROI) in 10 years or less, and that includes the interest on a loan.
If you aren’t going to see an ROI within a decade, the real estate investment is not a wise one.
The one exception is equity. If, for some reason, you are convinced that the equity of a property will grow at a rate equivalent to one percent monthly for a decade — something that generally only happens if there is major development around a property — even if the real estate does not generate one percent monthly, it is worth the investment.
3) Buy Inexpensive Properties, Not Cheap Ones
There is a difference between inexpensive and cheap. When it comes to real estate, inexpensive properties are those which are a good deal. Cheap properties are those that are inconvenient and do not have an upside apart from the price.
The easiest way to buy an inexpensive property is to find someone who needs to sell. The easiest way to end up with a cheap property is to become impatient because you want to buy.
4) Study Tax Code: Ordinary and Necessary Expenses
When filing for taxes, property owners have the right to fill out a Schedule E form, the means by which real estate owners apply for a tax write-off. Some expenses incurred — maintenance, landscaping, home improvement, etc. — can be written off if they are ordinary and necessary expenses.
Code pertaining to ordinary and necessary expenses (O & NE) is found in Section 162(a) of the Internal Revenue Code.
5) Check Your Credit Report and Shop for Loans
Before you even consider a real estate investment — if you are going to require a loan to make it — check your credit report. Your credit score will not only determine if you can get a loan, it will also determine at what interest rate. Once you know what your score is, start shopping for a lender.
Especially if you have a poor credit score, it is critical that you are patient when looking for the right lender. With respect to interest rates, even a difference of one percent can amount to a large sum over the term of a loan.