As with any investment, there is risk involved when a person decides to put money into real estate. However, lessening that risk is possible if an investor follows a few rules. Here are five factors that a person should know so that they avoid losing money in real estate:
Find Positive Cash Flow Deals
If a person wants to make money in real estate, they should really plan on holding the property for an extended period of time. Over the years, rental prices will usually increase and loans will get paid down. Finding a piece of property that has a positive cash flow each month is crucial for success. By buying real estate that has a positive balance of income, it helps create protection from times when the home market dips or prices stall.
Have Reserves Available
Another challenge that gets real estate investors into trouble is not having enough reserves to take care of unexpected expenses. These extra costs may be due to:
- A roof that is leaking
- Busted pipes
- A broken HVAC system
- Destroyed property
Whatever the cause, an investor needs to make sure that they have plenty of reserves available to handle unexpected expenses. A good rule of thumb is to have a minimum of six months worth of expenses for each property.
Typically, following the herd is the wrong move to make. Plenty of bad decisions have been made based on the actions of others. It’s human nature to join with the pack and do what everybody else is doing. This course of action is likely to get an investor in trouble if they buy real estate when everyone else is doing the same. Real estate purchases should be made when they are based on a long-term plan.
Assuming That Price Will Appreciate
Many amateur real estate investors make the mistake of believing that the property they buy will appreciate in price. A professional will purchase a property that’s undervalued, producing positive cash flow and located in a great area. Making a purchase that is solely based on price appreciation is a gamble.
Location Still Counts
While a home may look excellent on paper, if it isn’t in a solid location, it probably isn’t worth buying. When homes are purchased in bad neighborhoods, it’s likely that an investor will have to rent to tenants that have poor rental histories, unreliable incomes and average credit scores. Location is still one of the number one factors that should be considered when purchasing real estate.