More investors than ever are choosing to invest in real estate right now. It’s no surprise considering values are incredibly low, interest rates are at historical lows, rents are strong and most people agree that prices will recover over the coming years.
With so much investing activity from a diversity of experience levels, I have noticed that many investors simply want to “invest” without taking the time to really map out a strategy.
While there really isn’t a right or wrong strategy in today’s market, it is important to determine your ultimate exit strategy from a real estate investment. Some investors are buying with the hopes of selling for an immediate profit. I would classify this as “flipping” and consider it more of a business than an investment (In my experience, this type of business is tough to do unless you are working at it full time). However you choose to classify this model, the principle of planning ahead definitely holds true. Choosing the right properties, paying the right amount and doing the right level of rehab is of utmost importance if you want to be successful in this type of business.
These days, most real estate investors are buying and holding rental properties for cash flow and equity build-up. While most investors will tell you this is their plan, many still don’t have a clear exit strategy in mind when making the investment decision.
Here are a few questions to think through when deciding how you truly plan to invest:
1.) Am I planning on selling this property in 5 years, 10 years, 30 years or never?
2.) If I plan on selling the property at some point in the future, who will be the likely end-buyer?
3.) Am I buying a property strictly for cashflow or am I more concerned about buying in an area that will have strong appreciation?
4.) Do I want to pay this property off as quickly as possible or do I want to stay as leveraged as possible for as long as possible?
5.) Does the market I am investing in match my long term goals?
6.) Should I use conventional financing, cash or retirement funds to purchase the property?
Again, there is no right or wrong answer to these questions, but formulating your own opinions and goals using these questions should help guide you in your investment decisions. If your goal is to buy a property to sell in the next five years, it probably wouldn’t make sense to buy in an area with little chance for appreciation. Or, if you are really only concerned about generating income through high cash flow properties, perhaps it makes more sense to invest through a self-directed retirement account.
Investors intuitively know that now is a great time to invest in real estate. However, keep in mind that it is still possible to make bad investments in this market – especially when the property doesn’t align with your ultimate investment strategy. Bear Bryant once said, “Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s is easy to beat most folks.” Make sure you have a plan before you invest in real estate!