Successfully Investing in Florida Real Estate
In the long run, real estate has proven to be a reliable choice for investors. While no investment is without risk, these top ten tips will help you avoid some of the pitfalls of real estate investing.
Top 10 Tips for Florida Real Estate Investors
Knowledge is the new currency. Without it, you are doomed to follow other people’s advice without knowing if it’s good or bad. Educating yourself will help take you from being a “good” investor to becoming a great investor.
Setting clear and specific investment goals becomes your road map and action plan to become financially independent. You are far more likely to achieve financial independence by identifying specific and individualized goals than not doing anything at all. Your goals can include the number of properties you need to acquire each year, the annual cash-flow they generate, the type of property/location, and even the rates of return required.
Always invest with a long-term perspective in mind. Never speculate on quick short-term gains in appreciation, even in a hot market with double-digit increases. You never know when a market will peak, and it’s usually six to nine months after the fact when you find out. Don’t chase appreciation. Rather, only invest in prudent value plays where the numbers make sense from the beginning.
Invest for Cash-Flow
With few rare exceptions, always buy an investment property with a positive cash-flow. The higher, the better. Your cash-on-cash return is directly related to the before-tax cash-flow from your property. Cash-flow is the “glue” that keeps your investment together. Your equity will grow over time (through appreciation and loan amortization), while the cash-flow covers the operating expenses and debt service on your property.
Be Market Agnostic
The United States is a vast country made up of hundreds of local real estate markets. Each market moves up and down independently of one another due to many local factors. As such, you should recognize that there are times when it makes sense to invest in a particular market, and times when it does not. Only invest in markets when it makes sense to do so, not because you live there or you bought property there before. There’s an element of timing, and you don’t want to buck the trend.
Take a Top-Down Approach
Always start by selecting the best real estate markets that align with your investment goals. Most investors start by analyzing properties with little to no regard for their location, which can be a big mistake if you don’t consider the investment in light of the market and its neighborhood.
The best approach is first to choose your city or town based on the health of its housing market and local economy (unemployment, job growth, population growth, etc.). From there you would narrow things down to the best neighborhoods (amenities, schools, crime, renter demand, etc.). Finally, you would look for the best deals within those neighborhoods.
Diversify Across Markets
Focus on one market at a time, accumulating from 3 to 5 income properties per market. Once you’ve added those 3 to 5 properties to your portfolio, you would diversify into another prudent market that is geographically different than the previous one. Typically that means focusing on another state.
One of the underlying reasons for diversification within the same asset class (real estate), is to have your assets spread across different economic centers. Every real estate market is “local,” and each housing market moves independently from one another. Diversifying across multiple states helps reduce your “risk” if one market decline for any reason (increased unemployment, increased taxes, etc.).
Even if you don’t live in Texas, you can invest in the Houston Real Estate Market, which is becoming a hotbed of buyer activity that could be beneficial for real estate investors. Just ask the multitude of overseas investors who are choosing Houston as the city of choice to invest in for the foreseeable future.
Use Professional Property Management
Never manage your properties yourself unless you run your own property management company. Property management is a thankless job that requires a solid understanding of tenant-landlord laws, excellent marketing skills, coupled with strong people skills to deal with tenant complaints and excuses. Your time is valuable and is better spent on your family, your career, and looking for more property.
Be a direct investor in real estate. Never own real estate through funds, partnerships, or other paper-based investments where you own shares or other securities of an entity you don’t control. You always want to be in control of your real estate investments. Don’t leave it up to corporations or fund managers.
Leverage Your Investment Capital
Real estate is the only investment where you can borrow other people’s money (OPM) to purchase and control the income-producing property, which allows you to leverage your investment capital into more property than buying using “all cash.” Leverage magnifies your overall rate-of-return and accelerates your wealth creation. As long as you have the positive cash-flow and your tenants are paying off your mortgage for you, it would be foolish not to borrow as much as possible to buy more income property.