The best piece of advice that I could give you if you’re starting your journey in real estate: On absolutely every transaction, on every single property, every portfolio that you are considering buying, always underestimate your income and overestimate your expenses.
When calculating your return on investment, I fully understand there are different formulas out there that you can use. I do not want to be the judge of whatever formula you use. I do not want to be the judge of what you use as an expense ratio from a maintenance or vacancy standpoint. I just urge you to include even the bubblegum that you buy from Walmart. When you’re thinking about your property, you should use that as a cost on the pro forma.
That’s the extreme I want you to go to. Because trust me, unexpected expenses will happen to you. You’re going to have to replace the roof, the furnace is going to go out, there’s going to be a hurricane, and a tree is going to fall on your roof. The list will go on and on. So it is very important that on every deal you are always basing your calculations, expenses, and pro forma on the worst case scenario. Underestimate your income and overestimate your expenses.
Build Your Portfolio With Purpose
Then, once you have done that and the numbers still make sense and suit your end goal, then it might be worth pursuing further. One of the first mistakes that I made in my journey in real estate was buying properties for the purpose of adding a property to my portfolio. So I just was building my portfolio for quantity purposes. I didn’t really have a goal or plan in mind.
Ask yourself why are you acquiring that property. You will know why you are acquiring that property if you figure out what it is that property is going to do for you. For example, I want to earn $10,000 in passive income per month. I want to generate $120,000 in passive income per year. By acquiring that property either via cash or via leverage, does the net result enable me to get a step closer towards achieving my end goal? What is the risk or reward ratio of that property? Is it in a C-class area where the cash flow might be a little higher than a B-class area but the risk and volatility are higher? Maybe that investment doesn’t suit me because I’m looking at more hands-off passive income and I do not want to be as active in a lower-end type market. These are things you need to take into consideration.
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