Everyone seems to know it. It’s on TV, it’s in the newspapers, and it’s on the radio: purchasing an investment property can do wonders for your financial future!
However, just because investing in real estate has a great reputation for delivering stellar returns and building great wealth doesn’t mean that all investments are created equal.
The secret to how to invest money in real estate and get those great returns lies in understanding the fundamentals of what makes a great real estate investment and focusing on buying only the best real estate.
- Are You Ready to Invest?
Investing in real estate is not for everyone. While you don’t need to be listed on the “Forbes Richest” list to start investing money in real estate, it’s still important that you have a firm grasp on your personal finances before investing in real estate. Real estate investing is not a “get rich quick” scheme, but an adventure that can span decades.
Only you can know if you are ready to start investing, so take a good inventory of your life, and if real estate can fit into your investment property portfolio – great! Take time to get educated. Read real estate books, blogs, websites, and forums to get a firm grip on just what real estate investing is and how the most successful investors use real estate to build wealth.
- Do You Have a Plan?
Perhaps the biggest reason many investors lose money – whether in stocks, mutual funds, real estate, or business – is due to lack of planning. You wouldn’t consider driving from Saskatchewan to Peru knowing only that the direction was “somewhere south.” A plan will help you get from where you are right now to the place you want to someday be.
- What Kind of Investment Property Should You Start With?
Real estate investing is an exciting field because of the many different niches and strategies you can use to customize your plan to fit your personality and position in life.
Perhaps you enjoy risk and would prefer a “fix and flip” business? Or maybe you are looking at long-term stability and would prefer investing in single-family rentals. Or, maybe you don’t want any involvement at all and would rather just purchase vacant land. There are hundreds of ways to invest in real estate, so find the strategy that best fits your lifestyle.
- How Will You Finance Your Property?
There are many different ways you can pay for an investment property. If you have the money, you can pay all cash and not deal with banks or loans. This is smart investing, not investing for dummies.
However, if you don’t have all the cash needed or you’d rather utilize greater leverage, you can supply just the down payment and take out a mortgage to cover the remaining cost. If you do use a loan, be aware of the term and interest rate on the loan you are taking, and stay away from adjustable rate mortgages as they may go up, causing your payment to rise dramatically.
- Should You Self-Manage or Hire a Professional Manager?
Whether or not you should manage your property is a personal decision largely dependent upon your plan, personality, skills, and availability. A typical property manager may cost between 7 and 10 percent of the monthly rent, but a good property manager should also decrease vacancy and have systems in place to make repairs less expensive. If you are undecided, always budget in management; if you decide you don’t like it, you’ve already planned for it.
- Can You Be Your Own Bookkeeper?
Of all the great benefits real estate investing has going for it, easy paperwork is not one of them. Are you confident in your abilities to do the bookkeeping, or do you need to budget for a professional to keep track of the numbers?
- Do You Have an Exit Strategy?
Finally, always start with the end in mind. This circles back to our discussion on “having a plan.” Know what you are going to do with the property before you buy it. Many investors, during the last housing boom, bought properties with only one plan – to sell soon for a higher price. When the market dropped, however, many of those investors lost their properties.
Always have multiple plans for your investment property, and know exactly how you plan on making money with the investment. Will you pay it off slowly over 30 years? Will you rent it out each month for cash flow and sell it when the market peaks? Know what exit strategies are available for you, and plan, from the start, how you will exit.
To learn more about purchasing an investment property contact the Asset Quest team at (239) 541-8448.