If you’re considering investing in real estate, rest assured you’re in good company. Millions of Americans have successfully done so in the past, and countless others continue to do so each year. However, that’s not to say that being successful with real estate investments is guaranteed. Like all investments, real estate comes with its own set of risks, so it’s not a decision to be made without careful consideration and planning. Here are seven essential factors you need to consider before purchasing your first investment property.
You’ll Need to Do Your Homework — Before you decide to take the plunge into real estate investing, spend time talking with other investors, with your financial advisor, asset manager, or CPA. Seek out advice from those who have experience, and learn as much as you can through research. When it comes to investing in real estate, knowledge is power.
Running the Numbers is Necessary — Investing in real estate will require that you have an incredibly solid grasp on your financial status. If you intend to become a landlord, know roughly what rental rates the market will bear. Keep in mind that an investment is only lucrative if you earn money from it, either in the short term or long term. Basing your decision solely on an expectation of rapid appreciation can backfire.
Be Sure You’re Ready to be a Landlord — Being a landlord comes with its own unique set of challenges. Anyone who has been a landlord for at least a few years will confirm that things can and will go awry. Your property may be damaged, or your tenants may be difficult. They may pay rent late, or they may be noisy and disturb neighbors. Consider that these possibilities are very real, and determine whether you want the responsibility of handling these issues if and when they arise. Even if a property management company assumes the bulk of the responsibility for your property, at the end of the day, you are ultimately the owner, which means that you’ll be obligated to make tough decisions from time to time.
Weigh the Pros and Cons of a Live-In Property — For your first investment, it is more than worth considering the possibility of living in the property. You may find a home with apartment units attached, for example. Or you may invest in a duplex or triplex, and choose to live onsite in one of the units. First-time homebuyers often find this option to make a great deal of financial sense.
Lead with Your Head, Not Your Heart — Unlike buying a first home to live in, or upgrading to your dream home, purchasing investment properties should not be an emotionally driven decision. On the contrary, falling in love with the way a property looks doesn’t necessarily mean it’s the right property to purchase as an investment. Remember that real estate investing is by and large a business decision, rather than an emotional decision, and you’ll be more likely to save yourself time and money.
Take an Honest Look at Your Liquidity — As a real estate investor, you need liquid capital on hand. Appliances break, roofs leak, carpets need replacing, and rooms need to be repainted. You’ll need to make sure you have a reasonable cushion of cash on hand to be able to cover the costs of repairs, maintenance and cleaning of an investment property.
Have Realistic Expectations — Very few people get rich quick from real estate investments, and those who do are typically investors with years of experience. Furthermore, if you’re hoping to make a lot of money from a real estate investment, but opt for a low down-payment loan, chances are that you won’t see that dream through to fruition for quite some time.
Becoming a real estate investor has proven to be a dream come true for millions of Americans, and there is no reason why it can’t be the same incredible experience for you. However, it is not a decision that is best made spur-of-the-moment. Take time to explore your options, research the markets where you are hoping to invest, and ask for help from experts. You’ll find that the time you put into planning a smart investment strategy will prove invaluable over time.