ROI is one of those buzz words in real estate investment. People say it all the time but no one really seems to know what it means or how to actually measure it, do they? ROI, or return-on-investment, can generally be summed up as the profitability of any given investment.
You’re putting money in but how much are you getting out? That margin, high or low, is your ROI. There are formulas for calculating your ROI accurately—but when it comes to real estate investment, cash-on-cash returns aren’t all there is.
It just tends to be all investors look for.
When it comes to what makes an investment worthwhile and what makes you wealthy, sometimes you have to think less about your returns and more about your strategy. Building a stronger portfolio depends on far more than just buying low and renting high.
5 Tips on Transforming How You Think About Your Real Estate Investment Portfolio
Realize that no time is bad to acquire new properties.
In the world of real estate, there’s a lot of talk about timing. A lot of weight is put on the when of buying and selling, when is ideal, and when you should jump in. We’re always waiting for the right moment with the belief that if we seize the market at the right time, we'll get an incredible deal that will maximize our wealth.
Unfortunately, people use that as an excuse and they wind up never jumping in at all. We can’t allow ourselves to do that! The truth of that matter is timing isn’t all that important. Sure, certain times of the year will lend themselves better to buying and selling. You may get a better deal in the winter than in the summer and you may find the overall market in better conditions one year than the one before it.
You can find properties anytime and anywhere that will provide you cash flow. While some seasons may demand more work from you, no season is bad if you're always working on improving your financial future. What matters is that you’re doing your part in due diligence and moving forward.
Think more strategically about your investments.
As previously mentioned, when we talked about ROI in the industry, it tends to mean cash-on-cash returns. While that’s certainly an important part of real estate investment (cash flow is king, after all), it’s not the only part. When you buy a rental property, there are some other considerations to be mindful of where your strategy is concerned:
Can I use my tenant’s rent payments to effectively pay for my property? If you are not immediately concerned with leveraging your cash flow to purchase another property or with relying on your investments as your sole source of income, you can, over the course of a few years, allow your rental income to feed into your mortgage payments, pay it off relatively quickly, and then free up that property so that you eliminate your debt as soon as possible.
While it may diminish your leverage in one respect, if your priority is to be debt free, it may be the strategy you prefer. You will be sacrificing your cash-on-cash returns because you will be spending the bulk of your cash flow, but your tenant will be effectively paying for your property for you. Then you will have pure profit!
You are sacrificing your cash flow in the short-term to maximize it in the long-run...not to mention untangling debts and obligations you have with lenders.
Equity is your key to the kingdom.
Equity in real estate investment helps investors finance and further their investment opportunities and expand their investment portfolios. In real estate, equity is also known as the “real property value.” It’s the difference between market value (what the property would sell for) and what is owed on the mortgage. It is what you would make on the property if you sold it right now.
As a buy and hold real estate investor, you can still factor in your equity as part of your strategy. You won’t always hold every property all the time, so that equity can, in turn, be used to finance more opportunities. As investors, because we often renovate and are diligent in maintenance in upkeep, our properties always have great potential for growth in equity!
Diversity shields your portfolio against risk.
As a real estate investor, you should be casting a wide net to maximize the diversity in your portfolio to hedge your investments against risk. That means owning properties in different neighborhoods, cities, and even states! Don’t be afraid to invest remotely with the help of turnkey investment companies (like Memphis Invest). If you practice due diligence, there is nothing to fear. When you take advantage of a diverse range of opportunities, you protect yourself from economic downturns and isolated market conditions that can harm your investments.
Consistency keeps your cash flow strong.
Lastly, there is the issue of consistency to consider. As passive real estate investors, there is nothing more valuable to our cash flow and the strength of our portfolios than our systems. Things have to move like clockwork! We need smooth operations and teams that work with not just competence, but excellence in all that they do.
If you want your cash flow to be consistent, look for managers and teams that are consistent.
At Memphis Invest, excellence is the top priority. Whether the task is big or small, we're dedicated to providing the best client experience and outcomes so that your portfolio is the best it can be.
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