There is not a more powerful source for successful investing than real estate. It is the only investment that allows you to use favorably structured debt to build your own wealth in the form of equity and cash flow. There are plenty of reasons real estate investing has been the number one wealth building tool since the 1960s.
Real estate investments are unique. From the tax benefits, the monthly cash flow from rental properties, and the potentially large profits of a flip, there is an option for any investor in the real estate market. Even still, it is not a get rich quick scheme, and there are plenty of risks, especially if you dive in uneducated. Below are four key areas every real estate investor, especially the new ones, should focus on before purchasing an investment property.
Have a Plan Before You Dive Into Real Estate Investing:
A wise man once said it is foolish to act without a plan, and this adage applies to real estate investing. Owning a property is not like purchasing a stock where you buy it and then sit back and watch your money grow. While real estate offers many advantages to the investor, it should be treated like a business. Below is a list of items you must consider and address before you eye a property you’d like to buy.
- What is your overall aim or goal for real estate investing? Are you doing it to build up retirement savings while continuing with your day-to-day job, or do you want to accumulate enough cash flow to make real estate your full-time work?
- How much money are you willing to invest? Even more relevant, how much can you invest? We will touch on the financial aspects of investing later in this article, but it’s important to understand, that no matter how small your first property, any bank will require you to have some skin in the game.
- Real estate investing is a business, and every good business has a good business plan. Before you take your hard earned money and jump into the real estate game, sit down and really think about what your plan of action will be.
- There are many ways to make money in real estate. Decide if you want to be a landlord, a house flipper, or even both. There are great advantages to both, and each can be very effective wealth building tools.
Show Me the Money:
While real estate investing is one of those rare opportunities that allows you to make money off of other people’s cash (the bank’s and possibly tenant’s), you will still need to have a decent nest egg to get you started. In addition, banks don’t just lend anyone money for investment properties. Before marching into the bank asking for money, consider these few steps.
- Know before you go, and check your credit score with one of the major credit reporting agencies. You should receive at least one free credit report from each per year. If there are issues of non-payment, or even mistakes, correct them immediately. Most banks will expect investors to have a credit score of at least 700.
- Typically, banks require a 20% down payment for loans on investment properties, so make sure you are ready to write that check. If your credit is stellar, they might offer you a lower down payment, but it’s still a good rule of thumb to bring at least 20% to the closing table.
- Besides the cash it will take to close, a smart real estate investor always has an emergency fund to cover a potential loss of a tenant, a large and unexpected repair, or anything that might come up. Most experts agree that tucking away 6 month’s worth of rental payments will be enough to get you through any dry spell.
- While we are discussing finance, also keep in mind there are tremendous tax benefits that come with owning an investment property. Make sure you have a great accountant to consult regarding your real estate investments.
Research, Read, and Realtors:
While it can be fairly easy to enter the real estate market, it is not as easy to succeed. The wealth-building power of real estate investing makes it a very appealing avenue, but it is one that should never be taken blindly. If you are going to invest your future in real estate, make sure you understand the market and the risks. Below are some definite steps you should not skip. Your future success might depend on it.
- Become a student of real estate investing. Before investing a large nest egg into a down payment, spend some time learning the trade. There are many great books available about the subject, and tons of great information on the Internet.
- Find people locally who have been successful and glean from them. If you don’t know a successful investor, search for real estate investment groups in your area and attend some meetings.
- Do the homework to find a great realtor. It seems like everyone we know knows a realtor. We would advise not choosing just anyone. Call around, read reviews, and find a realtor that knows the real estate market where you will invest like the back of their own hand.
Remember That You Make Your Money on the Buy:
While you may know where you want to purchase your first investment house, you will regret it if you didn’t do your due diligence. Below are some must do steps to finding the perfect property.
- In purchasing real estate, it truly is all about location. Make sure you know the neighborhood where you are buying well. Drive through the neighborhood several times at various times of the day. Also, a lot of your potential equity will be generated from buying low. Look for the worst house (needs work) in the best neighborhood. That work that needs to be done will turn into your sweat equity.
- Look for properties you can get for a bargain. It’s kind of like buying wholesale. You will save money if you purchase homes that need work or updating. If you buy high, there will be no room for you to make money from the deal. This means you need to do your homework and research recent sales in your desired location.
- Always get an inspection and an appraisal. While banks will require this if you seek financing, you need them even if you are a cash buyer. An appraisal will give you fair market value for the investment, and the inspection should give you a good idea of how much money you will need to invest in the property after the purchase.
- If you are planning on turning your investment into a rental, research rent in the area. A good rule of thumb is the 1% rule. You should be able to charge 1% of the home’s value in rental income per month. For example, if you purchase a home for $150,000, you should be able to charge rents of $1,500 per month. If all the homes similar to yours in the neighborhood are only bringing $1,300 in rent, then there might be a problem with the property’s assessment.
Once you’ve considered these points, you are armed and ready to go. Investing in real estate is fun and will definitely be worth your while in the long run. But it is never a sure thing. If you treat it like the business operation it is, there’s not a greater wealth builder out there that is as accessible for so many investors. So get your homework done and go make that first buy.