The Importance of Planning In Real Estate Investing
Texas enjoys a robust real estate market at present as well as a seller’s market. But the market’s health is never guaranteed and things are constantly changing. The market can stall or drop at any time and it’s those who use long-term strategy to plan ahead, preparing themselves for potential hurdles and preserving cash flow and equity stake, who manage to weather complications and market volatility. What are the cornerstones of planning for real estate investment? We go over the important elements of planning ahead for success in real estate investing.
Plan your financial goals — Do you want to completely replace your earned income with real estate investing? Do you want to keep your job and real estate invest to earn extra cash? What is the monthly income you would like to see now or in retirement? How much money do you have to invest? How much money do you have in the rainy day fund? How much money can you lose if you never make it up?
Answering these questions serves two purposes: directing your investment strategy and avoiding financial pitfalls. Regarding the former, if you are not prepared to leave your current job to pursue real estate investing full time and want to guarantee retirement income – owning multiple rental properties might be your strategy. If you are looking to start a real estate investment business, you will likely want a longer-term property or two for stability, but primarily look for properties that can be turned for a profit which can then be reinvested or used as backup funding.
Regarding the latter, if you overspend with the assumption that you’ll make it up on the next deal, you can be left with unmanageable expenses and/or no income. You must ensure that you have sufficient reserves to float potential vaccines or ride out turbulent markets. Use the following analysis to generate a realistic plan that makes financial sense based on previous tax returns, property tax bills, maintenance records, etc. Additional important figures for analyzing a viable and/or good real estate investment are:
- Net income (income/expenses)
- Cash flow (net income/debt financing payments)
- Return on investment (cash flow/investment)
- Cap rate (net income/property price)
- Cash-on-cash return (cash flow/investment)
- Total ROI (total return/investment)
Identify the worst case scenario/Plan an exit strategy — It’s imperative to plan for the worst and create a backup plan in real estate investing. Ask yourself what is the worst case scenario? What can derail your timeline, plan and ultimately success along the way? Real estate projects and sales are both apt to run less smoothly than anticipated. If you anticipate obstacles and setbacks and have a mitigation plan in place, when things go awry you won’t be caught off guard scrambling in a position of weakness
Research your purchase — Several factors impact the success of your investment. Proper planning means conducting relevant research into the property and the potential purchase. What factors are these? Look for the following:
- Property taxes differ across residential districts. Exorbitantly high property taxes might dissuade buyers from paying a premium for your finished property.
- School district zoning is a critical deciding factor for families looking to relocate. Understand the pros and cons of the school district your property is zoned for.
- Demographic trends strongly indicate real estate appreciation/depreciation trends.
- Cost of living considerations should be made both when purchasing the project and listing the renovated home. Home value can be viewed as a correlative of cost of living and average income in the region.
- Sales and rental rates in the area can help potential landlords determine a positive or negative investment. Review the area comps carefully and touch base with property managers in the area to get an idea what rental rates are feasible if you intend to be a landlord.
- Public transportation increasingly becomes a factor in home sales. Millennials are demanding alternative transportation options, whereas families might want to budget miles and commute time. What options are available in the area?
Plan your marketing approach to real estate investing — For career real estate investors, a strategic amplification of your marketing efforts can greatly impact your real estate business. We recently outlined ideal strategies in our Marketing Strategies for Real Estate Investors blog. These include targeting motivated sellers, online adverting, using direct mail campaigns and looking for off-market properties. It’s equally important to strategize for marketing and selling a finished property – plan ahead for the additional costs incurred by staging, photography, advertising, etc.
Punch list the project — Though you might go over on time and money, having a set timeline, punch list and cost spreadsheet for your project’s expenses will keep you on track, give you the opportunity to addresses issues as they arise and give you an idea of any overage costs for which you will be responsible.
Though nothing in life is permanent or promised, planning properly can alleviate headaches and preserve your financial freedom as a real estate investor.