Many people today have flocked towards investments, whether it’s stocks, cryptocurrency, or real estate investments. If you’re one of these people, you should know that real estate investment is still one of the most profitable investment options on the market. With real estate investment, the sky is the limit, and contrary to popular belief, you don’t even need to have a lot of investment capital.
The key to understanding real estate investment depends on how many options you have, the strategies you use, and how you can maximize profit and minimize risk. Although risks are a non-negotiable part of an investment, there are certain strategies you can use to reduce risk when buying multiple properties. Here are some of these strategies.
1. Consider Below-Market Rental Properties
If you find a rental property that has a significant percentage of rents below the current market rates, then investing in it will help reduce the risk in your investment. You’re probably wondering how this will be done. This can be done by getting the rent values up to the market rates which increases cash flows. The properties’ ability to be remodeled into a better-valued place is also a good indicator of whether or not you should invest in it.
2. Reduce Cash Outflow
If the property you’re purchasing isn’t overpriced, a good strategy would be to work with a financing solution that reduces the interest rate. A decrease in interest rate will lower your payments and increase cash flow. This will also result in a reduced real estate leverage risk. Moreover, if you’re sure that you won’t own the property you’re purchasing for more than 10 years, then opt for an adjustable-rate mortgage. This way, you will get a lower interest rate and a higher cash flow.
3. Make Higher Down Payments
It’s pretty easy to make an investment mistake with all the hype about low-down or no-down financing. Although the profits are huge, there is a potentially high-risk factor involved in this approach. A better solution is to lower your return on the cash investment. This will secure you against a high debt backfiring, especially when you’re dealing with credit loss. You should always be wary of your investments though, as many people face investment issues and frauds on a daily basis. Although increasing your down payment will require more cash upfront, it will also reduce the financed amount, and hence lower payments. When payments go down, cash flow increases. Plus, you can always refinance later.
4. Buy Value
The obvious tip is to buy properties that have value, or that you can bring value to. The time and effort taken to research before you invest in a property will be well worth it. Even if market rents decrease, later on, equity infusion will give you a headstart and reduce risk in investment by a lot.
You should also look towards diversifying your investment portfolio within real estate. Implement a few different strategies to ensure you don’t have all your money riding on one investment. Look towards investing in different areas, and locations. The different strategies you can try include:
- Fix and flip
- Short term buy and hold
- Long term buy and hold
- House hacking
- Turn-key properties
- Live-in then flip
- Trade up
- Hard money lending
5. Look For A Property You Can Improve
Properties that offer the chance for improvement are always better to invest in. By making small home improvements, more commonly known as home flipping, you can easily increase the equity and hence maximize the profits. Even with decreasing interest rates, the increased value of the property can be used to finance other projects and investments. Plus, the correct improvement decisions can also attract better tenants and increase the rent. The return on investment will thus be justified.
6. Search For The Hot Areas Of The Future
Invest in a location that is about to become a hot area or good neighborhood in the future. You need to identify an area that’s at the forefront of growth and development and invest in it. This will increase your return on investment tremendously, and significantly reduce the leverage risks involved. Many surveys show both older and younger home buyers and tenants want to live near city centers. These are often near old neighborhoods, and so, investing in old homes, and improving them can be incredibly profitable for you.
Real estate investments are no doubt very profitable, but they also come with a level of risk. Although there are many techniques, and strategies to reduce said risk, some factors of it will always remain. Therefore, to succeed in this market, you’ve to understand the workings of maximizing profit while also keeping in mind the risk of each investment. The best option is to diversify your investments and hope for the best.