One rule that can help prevent you from taking on too many risky ventures in real estate is to keep it simple. When analyzing an investment opportunity, maintain an objective evaluation of the cost and the expected return. By keeping only easy-to-understand assets in your portfolio, you will have greater control over the financials.
The Essential Tool for Your Real Estate Portfolio
When you are on the search for a new investment opportunity, make sure to allow for a healthy margin of safety to minimize your risk. If, for example, you have $10,000 per month to pay for a multifamily mortgage, then the lender will insist that you ensure at least $12,500 in return. This is a Debt Service Coverage Ratio (DSCR) of 1.25, or a 25 percent debt coverage margin of safety. This is known as the minimum standard. There are many experts who suggest adding an even larger cushion margin of around 1.35 or more. It can be difficult to secure such a high DSCR at times, especially when dealing with multifamily homes. The majority of the investors in this sector are financial institutions that have plenty of know-how. They can manage the tight margins and the ultra-competitive environment.
A Smart Option for Small Real Estate Investors
Multifamily homes do not allow for enough of a margin of safety for an individual or for small investors. If that is the case, are there any real estate options that are available for small investors? Definitely! In fact, the self-storage and mobile home park sectors are dominated by individual small investors. These investors have a substantial 76% ownership. This sector allows for margins that are wide enough to welcome small-time investors.
To ensure your chances of success in a real estate venture, be sure to keep the margin of safety or Debt Service Coverage Ratio (DSCR) in mind during the evaluation. Many hidden sectors such as the self-storage or the mobile home park sectors can offer alluring perks to small investors.
