Opinions expressed by entrepreneurial contributors are their own.
Instead of spending all your time making money, you need to start making your money work for you. You will never build passive income if you don’t start making strategic investments. Passive income means you can invest your money from savings into assets that will generate a risk adjusted return without spending time on your earnings.
Real estate is one of the best investments you can make because you can earn double-digit returns with the right deal. Once you find the right deal, you’ll have a superior asset compared to stocks and other alternative investments. There are many segments of real estate that you can invest in, but one popular segment that has seen a huge change in popularity is multifamily real estate.
Times have changed with fewer people wanting to buy homes and take care of maintenance, especially with rising interest rates. Seniors are also choosing apartments and senior housing to have less to worry about.
I strategically take advantage of real estate investing by finding deals that I can buy below market value. This enabled me to make money on the first day of buying the property. When I look for real estate deals, I search for apartment buildings and vacant land for development. These assets are low-risk investments that can be recession-proof if you choose the right location.
The goal of your investment in real estate should be to replace all your earned income from the work you do with passive income from your real estate investment. Real estate is a powerful tool to multiply your money.
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1. Finding assets below market value
When I look at new real estate deals, I focus on buying them below market value. This means that you’ll find off-market deals with less competitive bidding on the property, or it could mean that the current owner of the property is charging less than market rent. You can achieve this by reaching out to property owners and real estate brokers within your market.
Relationships are a huge key to achieving success in real estate. Research which companies own real estate in your market, drive around the areas of your city with the most traffic, and see what opportunities are available. There are dozens of opportunities to put your money in real estate.
The property you buy should be well located. The location of the property will determine the value. If you go under contract to acquire a building, make sure you do a thorough due diligence. Ensure that replacement of property capital expenditures (pavement, roof, exterior) is not neglected or delayed.
2. Increase property value
Once you have acquired the property, the first thing you need to do is implement your investment strategy. If you buy a piece of land, decide how you will add value to it. Would you rezone it, build a building on it, flip it or all three? Maybe you’re buying an existing building and your goal should be to raise rents or spend money to increase the value of the property.
Before you buy a property you need to see an opportunity and have a gut instinct about what you are going to do very quickly. Find ways to add value to your investment that will return your money with profit. Determine how much you need to spend to improve quality and what the return on investment will be.
Related: 5 Surprising Tips to Turn Real Estate into a True Fortune
3. Optimize costs to increase profits
One strategy to increase the value of your property quickly is to review third-party contracts for vendors providing property services. Depending on who the previous owner used, you may be able to find a better-priced seller that makes the same value for your property. When you take possession of a property get quotes from other people so you can compare prices.
Find other options that might work for a better price. If you can reduce your costs and make them more efficient, while achieving the same quality, you will increase your return on investment.
Look at your maintenance costs and determine what the biggest repair costs are. When you have the right information, you can use it to your advantage and improve your investment performance Find out what costs the most money to maintain the property and try to value-engineer it.
4. Review the upside potential
This is my favorite part about real estate investing. After you purchase a property, you need to make an investment plan for how much money you will spend on improving it. You need to carefully review the costs and compare them side by side.
Say, for example, you’re renovating an apartment complex. Your renovation plan may include new kitchen cabinets, granite countertops, modern paint colors, new appliances, and new flooring. It could cost you between $10,000 and $20,000 per unit, but you could potentially increase the rent by $400 per month. If you can do this at scale, you will generate massive returns.
Before you begin this process, you should create a budget to determine how much your improvements will cost. Your rental or property appreciation should pay off your expenses within a three to four year timeline or generate at least $80,000 if you spend $20,000.
Related: How to start investing in rental property — your step-by-step guide
5. Property Maintenance
Once you have assets under management, make sure you take care of your tenants to increase your retention rate. After you’ve created an attractive place to rent, keeping your tenants happy is your ultimate priority for long-term success. The less turnover you have, the fewer new tenants you will need to occupy your property each year.
Ensure that capital improvements are kept up to date including roofs, sidewalks, parking lots and common areas. Property maintenance is often an overlooked aspect of investing. If you don’t maintain, you can lower the price when you decide to sell in the future.
Maximizing your earning potential by investing in real estate is one of the best routes to take. Your money will become useless if you spend it on things that don’t give a return or if you don’t make it work for you. When you focus on these five steps I’ve outlined and stay on track, it’s only a matter of time until you find success!