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Real Estate Investing: 5 Secrets to Beating the Average Investor

Earning an average return as a real estate investor isn’t necessarily a bad thing. Most investors would be happy with an 8% to 12% return invested somewhat passively. But why settle for average when you could be earning more? 

These five secrets will help you beat the average investor and earn more over the long run.

Image source: Getty Images.

1. Take advantage of market opportunities

Down markets can be a challenging time to invest. Tightened lending makes capital less available and low demand can increase vacancies. Depressed markets may not seem like a great time to buy, but they are actually the best buying opportunities.

Buying low and selling high is a key principle to achieving higher-than-average returns. And down markets often mean low prices. Don’t sit on the sidelines when the market is volatile or demand is weakening. Use it to buy strategically.

2. Use leverage to your advantage

One of the best things about real estate investing is the ability to leverage your money with a mortgage. Mortgages may eat into a rental property’s cash flow, but it also requires less money to be invested, which increases your return.

For example, if you bought a property for $200,000 cash and rented it for $2,000, you’d earn a return on investment (ROI) of around 8% assuming around 30% of the rent goes to holding costs. Now, if you got a 5% 30-year fixed-rate mortgage on the property, you’d miss out on an additional $1,098 of cash flow each month, but your return grows to 9% because you only invested $40,000 instead of $200,000.

Leverage can help increase returns and it opens the door to growing a portfolio faster. If you take the extra $160,000 you saved by not buying the property in cash and buy four additional properties that earn 9% or more, your return can compound exponentially.

3. Diversify your holdings but stay focused on your niche

The saying “don’t put all your eggs in one basket” exists for a reason. Diversification is hugely important in any investment portfolio. But if your goal is getting superior returns, there are advantages to focusing on a single type of real estate investing — at least for a while.

The most successful real estate investors I know were experts in a given investment industry before they started diversifying their real estate portfolios. That means they almost exclusively invested in fix and flips, rental properties, or land before they started investing in other asset classes like apartments, self-storage, or mortgages. Mastering a niche makes it easy to maximize profits because you can analyze opportunities, get new leads, and managing day-to-day operations quickly and with efficiency.

Once you’ve stockpiled some earnings and have a steady cash flow coming in, you can then diversify your holdings.

4. Do the work to find the deals

Buying properties at market value will rarely get you above-average results. Buying at a discount with the opportunity for added growth is what leads to better results. That means you may have to work harder to find real estate opportunities that can offer superior returns.

Finding distressed opportunities where the seller needs to sell or is unable or uninterested in doing the work to improve the property often leads to superior yields. Send mailers to out-of-state owners behind on their taxes, reach out to homes that recently went through probate, market to zombie properties in foreclosure, or possibly bid on properties at a foreclosure auction.

It also helps to put a little sweat equity into the property. Learn how to maximize your return by outsourcing certain skills, but also use the cost savings of doing it yourself to improve your return.

5. Manage your portfolio carefully

Investors who receive higher-than-average returns know they have to manage their properties carefully. Poor management of a real estate portfolio can lead to excessive operational costs that eat away at earnings.

I frequently attend local real estate investor meetings and constantly learn new strategies that help me more efficiently manage my portfolio and ultimately earn more. Things like free background checks and tenant screening services, free online rental collection tools, and marketing strategies to get my property rented faster are small changes that can go a long way.

It’s also important to shop around for savings on things like property insurance, maintenance and repairs, and operational fees related to ongoing management. Don’t forget to keep long-term investing on your mind. Returns often grow the longer the investment is held, as long as you follow these investing principles carefully.