11 Rules for Investing in Real Estate

rulesSingle family homes have consistently been a good choice for long-term investments.

Investor Benefits of Single- Family Homes:

  • High loan-to-value mortgages at fixed interest rates for 30 year terms on appreciating assets
  • Tax advantages
  • Reasonable control not found in other investment choices

Last year, Warren Buffet said that if he had a way of buying ‘a couple hundred thousand single-family homes’, he would load up on them. Blackstone group L.P. (BX) has now purchased over 30,000 homes and American Homes 4 Rent (AMH) has more than 19,000 for rental purposes.

Individual investors actually have an advantage over the institutional investor. If you aren’t familiar with rental real estate, keep these basic rules in mind.

11 Rules for Investing in Single Family Homes

  1. Invest now to get more in the future. Whether it is time, effort or money, the prudent investor is willing to forego immediate gratification for a greater benefit at a later date.
  2. Real estate is an IDEAL investment. IDEAL is an acronym that stands for Income, Depreciation, Equity build-up, Appreciation and Leverage. 
  3. Invest in single family homes in predominantly owner-occupied neighborhoods, at or below the average price range for the area. This strategy should involve homes that will increase in value, rent well and appeal to an owner-occupant in the future who will pay a higher price than an investor.
  4. Location, location, location. Homes in different areas will not increase in value at the same pace. You can improve the condition, modify the terms or adjust the price, but the location can never be changed.
  5. Understand your strategy – (1) buy and sell, (2) buy and hold or (3) buy, rent and hold. These three distinct strategies involve big differences in acquisition, management and taxation.
  6. Know where to expect your profit before you invest. The four contributors to profit are (1) cash flow, (2) appreciation, (3) amortization and (4) tax savings. They don’t contribute equally in all investments.
  7. Profit starts with purchase. Buying the property below market value builds profit into the investment initially. It is said that you don’t make the profit when you sell a home, you make the profit when you buy it.
  8. Risk is directly proportionate to the reward involved. An investment that has a high degree of upside often has considerable downside possible.
  9. Avoid functional obsolescence unless you have a plan before you buy. The lack of usefulness or desirability of a home that exists when you buy it will still be there when you sell it. Unless it can be cured, it will affect future profit.
  10. Good property + good tenant + good management = great investment. These are three solid components for a successful investment.
  11. Problems left unresolved have a tendency to get worse. It is generally cheaper in both time and money to fix a problem earlier rather than later.

If you’d like more information about the opportunities in our market, please contact me, or Start your San Diego Home Search here.

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