Man with a title like “Sure fire way to make money in real estate” you are probably eager and looking for the get rich quick formula: to simply put a little If any) money down on a piece of property and suddenly collect massive checks.
After all there are a number of people that illustrate this. Let’s face the facts,
investing money in large ticket items should require diligence, this may not be easy, but it does not have to be difficult either.
The good news is however, you can create wealth and even massive wealth with real estate by being purposeful. There are things you can do that will help insure that you do indeed make serious money in this real estate business.
Must do activities to insure you make money on an investment:
• Identify your niche (start with 1 and master it before moving on)
• Write down a detailed plan as to how, where, what you want from your
investment (most ignore this critical step) but you need this to share with
all your real estate professionals so they can help you obtain it.
• Find the best markets to invest in
• Perform proper diligence on the market
• Perform proper diligence on the path of progress within that market
• Find the sweet spot in that market
• Perform proper diligence on the property for sustainable returns
• When evaluating a pro-forma insure you have in it vacancy loss and
This last one is huge and separates the money makers from the non-money
makers so let’s look deeper.
The difference in making money or not or perhaps losing money is often hidden in this little missing piece of a pro- forma. Insure you have factored in some kind of vacancy loss and monthly allocation for repairs. Most sales people and promoters conveniently leave this out of a pro-forma. The property must provide positive returns even after ALL expenses fixed and variable expenses. Do not assume that your property will never have a repair or a few days or week or two of vacancy. A simple week of vacancy during a tenant rotation can cost you 25% of a month’s rent. This can be the difference between a profitable rent and a month of loss. So factor in something. There is no exact number here but anything is better than nothing.
Rule of thumb for establishing vacancy loss and repair loss is to check with a local realtor or perhaps the local newspaper where they post these. The vacancy rates will vary by location. If in doubt start with a number you are comfortable with. Many like to use 5% as a vacancy loss. The same goes for repair. It goes without saying that an older property will require more maintenance that a newer one so you can adjust your repair allocation according to the age and or condition of the property. Many like to buy 40k properties and grab huge monthly cash flows and when suddenly they need a new roof they have no money for repairs or suffer a loss as they have no cash flow.
Seasoned investors master these principals and make it look super easy. It is easy for them because they understand the difference in doing proper diligence versus simply chasing the shiny object. In fact I would suspect most people who fail to make it big in real estate do so because they are distracted by chasing the shiny object. They hear of one way to make money and pursue it. Then they suddenly hear of another way to make good money and they pursue it. As they are so busy pursuing the different opportunities they simply never (or rarely) actually make an investment.