Real Estate Investing – Eliminating Risk
What would it be like to create business plans so clever that they are virtually infallible? A lofty goal but an attainable one for real estate investors willing to take the time to create a series of safety nets for their investments.
The premise works as follows: no matter how long term your investment goals are investors are wise to consider and allow for contingencies forcing them to extend their ownership exposure for the property. In plain English that means that you should invest with backup plans in place in case you have to hold onto the property.
From a practical perspective how is this done?
If you flip real estate contracts and your ownership exposure is ideally none you probably are only concerned with how cheaply you can acquire a real estate purchase contract and how expensively you can sell it. But what happens when your buyer bails out at the last minute? Or you can’t find a buyer? You’re stuck settling on the property yourself which means the next fastest way to turn a profit is to sell the property. But of course you now had to pay all those settlement expenses and you’ll have even more expenses to sell the property. How do you recover that profit?
The answer is that you’ll have to create value in the property. The easiest way to create equity in the property is to improve it so when you’re scouting for houses even if only to flip the contract look for fixeruppers because they’re easier to scrape a profit from if you’re forced to settle. As a bonus you’ll be selling to a homeowner instead of a fellow investor which means they’ll be buying retail instead of wholesale improving your sales price further.
What’s the next safety net if you can’t sell the property? You probably have a mortgage that you’re carrying every month which means you’ll have to do something to cover that hefty expense and fast. This means renting the property to a tenant so that someone ELSE pays that monthly bill. So the trick here is minimizing your monthly costs i.e. mortgage and maximizing your monthly income i.e. rent. Some neighborhoods lend themselves far better to rental properties than others so consider the market rents when you buy a property or put a contract on a property intending to flip it.
Neighborhoods that tend to make for good rental investments are college neighborhoods immigrant neighborhoods gentrifying yuppie neighborhoods and stable bluecollar working neighborhoods. Each of these has their own pitfalls but they make for a good place to start looking.
Once the property is rented out you can sell to a fellow landlord or real estate investor at your leisure if you so choose. If that fails to offer the profit your books need what’s the next safety net?
The final safety net is to limit your exposure to neighborhoods that you feel are appreciating in value. Thus if you can’t flip the contract can’t renovate and resell and can’t sell after renting out you can always simply allow the property to appreciate on its own after which you can refinance for cash out or finally! sell the damn thing for a profit.
Just as with each of our previous safety nets our last one has certain indicators to bear in mind. Areas that are likely to appreciate must first and foremost have some sort of intrinsically valuable location. This could mean anything from an urban neighborhood close to a body of water or close to the site of planned sports stadium or an area with access to existing or planned transportation or any number of other factors. Keep an eye on demographic patterns and if you see a neighborhood that starts appealing to young professionals it’s a strong sign as they tend to be the first in the door of a gentrifying neighborhood.
The next time you consider buying an investment property or contract consider all of these safety nets and look for fixeruppers areas with strong market rents relative to pricing and neighborhoods likely to appreciate. Don’t assume your first plan will work because it may be your last real estate investment if it fails.
About the writer: Petra BrinkmannWulf is a real estate professional and an expert in Collingwood real estate. Petra can also provide services for the Blue Mountain real estate market and will be happy to assist answer any questions you may have.
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