Ambitious investors should take a cautious approach to scaling their real estate investments. Though they might have enjoyed success with smaller, more manageable single-family properties, they’ll need to reevaluate their strategies moving forward. The transition isn’t always smooth if they’re not ready.
As real estate investors find and purchase properties to add to their portfolio, certain parts of the industry that were less important will gain new relevance. Knowing what to expect will help these investors avoid potential pitfalls. To maximize profit and minimize loss, they need to prepare for the challenges ahead.
We’ve compiled everything investors should study as they begin to scale their real estate investments. While much of the industry remains the same, investors need to review some small, no less significant details. If they plan to expand their business in the near future, they should consider the following three factors.
1. Maintenance & management
Real estate investors who are familiar with single-family properties aren’t accustomed to many of the difficulties of multi-family investment. Naturally, managing a smaller property with fewer tenants entails lower maintenance costs and less conflict. Managing an apartment complex is markedly different.
An apartment demands more of the investor’s time and resources, both for maintaining the property itself and settling disputes between tenants. It’s often taxing on those who are new to real estate to handle these issues, and the pressure can prove too much. Fortunately, there’s a relatively simple solution.
Hiring the right property management service can ease the stress on an investor, allowing them to take a passive approach to their properties. They can delegate their responsibilities to an experienced professional, who can handle evictions, renovations and maintenance among other essential duties.
Of course, property managers aren’t free, but most investors find their services are worth the extra expense. The fee for a property of 10 units or more typically falls between four to seven percent of the property’s gross monthly income, though pricing will vary depending on the individual or management service.
2. Financing & loan options
Investors should set aside time to evaluate their financial situation as they browse their properties of interest. As they grow their investment portfolio, they’ll need to consider the potential cash flow from a property, cash-on-cash returns
After they’ve calculated the returns on a property, an investor still has to assess their financing options. This involves finding and organizing the relevant financial documents and information, saving enough for a down payment and meeting with different lenders to see which programs the investor qualifies for.
To simplify this somewhat complex subject, investors can choose between government-backed apartment loans, bank balance sheet apartment loans and short-term apartment loans. Depending on the investor’s situation and plans, they might find one of these three types more appealing than the other two.
Prime borrower investors often choose government-backed apartment loans for their low down payment and affordable rate. The Federal Housing Administration offers loans with the highest loan-to-value ratio with financing up to 87 percent of the apartment’s purchase price. Investors should study all their options.
3. Healthy market indicators
While this same rule applies to smaller properties, the stakes are higher when scaling real estate investments. Investors should exercise caution in the selection process. While hesitation can harm as much as it helps, it’s essential to take time and do the proper research. The time spent is money saved.
To find properties with strong potential, investors have to learn to identify the signs of a profitable market. Inventory levels, days on the market, year-over-year appreciation and the number of new builds are all informative to investors on the lookout. If these indicators are healthy, it’s often wise to invest.
For example, a low inventory of houses for sale indicates housing prices could increase soon, as high buyer demand often reflects in higher prices. Investors can examine these details and others like them to inform their purchasing decisions and enjoy greater success. Again, research is key.
Investors hoping to expand their portfolio should also set up online notifications and alerts to send them updates on sales and price changes. It’s important to take advantage of all available resources, from articles like this one to sites that provide up-to-date information on opportunities in an area.
4. Scaling your real estate investments
Real estate investors need to show ambition, but they also need to show good judgment. As long as they assess details like maintenance and management, financing and healthy market indicators, they can move forward feeling optimistic for the future and confident in their purchases.
It’s true that real estate involves risk, and to some extent, that risk is unavoidable. But through close examination and careful research, investors can scale their real estate investments without stress — only excitement for the opportunities available in their chosen market.
(Featured image by Grand Warszawski via Shutterstock)
DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.
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