Making 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 outperform the average investor and earn more in the long run.
Table of Contents
1. Take advantage of market opportunities
Down markets can be a difficult time to invest. Tighter lending is making capital less available, and low demand could boost job openings. Depressed markets may not seem like the best time to buy, but they are actually the best buying opportunities.
Buying low and selling high is the key to achieving above-average returns. And low markets often mean low prices. Don’t sit on the sidelines when the market is volatile or demand weakens. Use it to buy strategically.
2. Use leverage to your advantage
One of the best things about investing in real estate is the ability to use your money with a mortgage. Mortgages can eat into the cash flow from property rentals, but require less money to invest, increasing your profits.
For example, if you bought a property for $200,000 in cash and rented it for $2,000, you would get a return on investment (ROI) of about 8%, assuming about 30% of the rent goes towards maintenance costs. Now, if you get a 5% 30-year fixed-rate mortgage on real estate, you will miss out on an additional $1,098 in cash flow each month, but your profit will rise to 9% because you only invested $40,000 instead of $200,000 .
Leverage can help increase profits and open the door to faster portfolio growth. If you take the extra $160,000 you saved by not buying real estate for cash and buy four additional properties that return 9% or more, your profits could increase exponentially.
3. Diversify your holdings but focus on your niche
The adage “don’t put all your eggs in one basket” exists for a reason. Diversification is extremely important for any investment portfolio. But if higher returns are your goal, there are benefits to focusing on one type of real estate investment—at least for the time being.
The most successful real estate investors I know were experts in a particular investment industry before they began to diversify their real estate portfolios. This means that they invested almost exclusively in rental properties or land before they started investing in other asset classes such as apartments, warehouses or mortgages. Mastering a niche makes it easy to maximize profits because you can analyze opportunities, generate new leads, and manage day-to-day operations quickly and efficiently.
Once you have accumulated some profit and have a stable cash flow, you can diversify your holdings.
4. Work to find offers
Buying real estate at market value rarely produces above-average results. Buying at a discount with the possibility of additional growth is what leads to better results. This means that you may have to put in more effort to find real estate opportunities that can offer higher returns.
Seeking problem opportunities when the seller must sell or cannot or is not interested in doing the job of improving the property often results in excellent returns. Send mailing lists to out-of-state owners who are in arrears, contact homes that have recently been probate, trade zombie real estate in foreclosure, or perhaps bid on real estate in a foreclosure auction.
It also helps to invest some capital in real estate. Learn how to maximize your profits by outsourcing certain skills, and use the cost savings of doing it yourself to increase your bottom line.
5. Manage your portfolio carefully
Investors who earn above average returns know they need to carefully manage their properties. Poor management of a real estate portfolio can lead to excessive operating expenses that eat into profits.
I often attend local real estate investor meetings and am constantly learning new strategies that help me manage my portfolio more effectively and ultimately earn more. Things like free background checks and tenant screening services, free online rent collection tools, and marketing strategies to let my property go faster are small changes that can make a big difference.
It is also important to save on things like property insurance, maintenance and repairs, and the operating costs associated with day-to-day management. Don’t forget to think about long-term investments. Returns often rise the longer an investment is held if you carefully follow these investment principles.