With the real estate market regaining some steam over the past few years, people are turning to the industry again as a viable investment opportunity. Although the inherent risks are still there, the potential for a strong return on your investment is present too. Here are seven tips for first time real estate investors:
Create A Plan And Stick To It
As with any investment, the first step is to make a plan and put it into effect. To start building your plan, answer these three questions: What do you ultimately hope to achieve? How much capital do you need to begin? How much do you plan on managing your property?
There are no correct or incorrect answers to these questions, they will just help you build a road-map. It’s important to forge the path that best accommodates your immediate needs, your long-term goals and your abilities within the real estate market. You don’t need a crystal clear view of the road to success. As long as you have a solid plan and outline to follow, you’ll be able to measure your productivity, gauge your own success and maintain forward momentum.
You shouldn’t shy away from taking the time to understand your goals and make sure each investment is a step toward achieving them. If you are unsure exactly how to create financial goals, meeting with a financial advisor is an excellent first step.
Find The Ideal Location
Don’t just go out and purchase the first property you look at. Too many investors buy properties because they like how they look or they don’t want to put the work in to find the right place. Remember, you won’t be living there, so don’t make your investment decision based on your personal preferences. While you shouldn’t fall into the trap of analysis paralysis, make sure you are thorough in looking through properties.
The old adage that “location matters” is most accurate when it comes to real estate investing. Before you pay a down payment and put yourself in a significant amount of debt over a property, ensure that it’s in a good location.
You want to invest in the worst house on the best street because it gives you an opportunity to build equity. It’s a property in a great neighborhood (“the best street”) that needs some work (“the worst house”). You can invest some money to fix it up and sell it to someone else who wants a ready-to-move-in house in a fabulous location.
Check your credit report to determine your ability to finance investment property. Most lenders today require 700 or better FICO scores from borrowers who want to buy investment property. Also, make sure that your total debt-to-monthly-income ratio is low. Often it makes sense to pay down outstanding credit card debt or car loans in order to improve your debt ratios. You’re entitled to one free credit report per year from the three major credit bureaus (TransUnion, Equifax, and Experian), but they’ll only provide your history, and not your score. Instead, try a site like Credit Karma to get both.
Long-Term Rental vs. Immediate Sale
Investing in a property for immediate sale, which is typically referred to as flipping, is one of the most common and quickest methods to see a return on your investment. There is typically a low amount of risk involved, at least in comparison to other investment avenues such as the stock market, and there is plenty of fortune to be made from flipping a house.
Conversely, buying and holding a house for long-term rental results in recurring income, which can be used to finance future investments, pad your savings account or even to pay your personal bills. Those who maintain multiple rental properties can make a comfortable living that requires relatively little in the way of career upkeep.
If you’re planning on buying a property that you’ll rent out to one or more tenants, use the “1% Rule” when you decide whether or not the property is worth the price you’ll pay for it. The 1% Rule simply states that an income producing property must produce 1% of the price you pay for it every month. For example, if you’re looking at buying a property for $150,000, then the monthly rental income should be 150,000 x 1% = $1,500.If you need help making the decision, don’t hesitate to consult with an investment specialist. Seeking professional solutions in long-term rental management, property preservation and short sale services can go a long way in protecting your investment and maximizing your return.
Take Advantage of Tax Breaks and Incentives
Every dollar saved on taxes is another dollar freed up to invest with. The best and most successful investors know how to utilize taxes to their favor, and the real estate market is no exception. Your exact tax breaks depend on a number of factors, including your city and state, but matters are complicated even further when it comes to capital gains and selling your investment property. As such, it’s best to consult with a tax professional before making any major moves.
Keep in mind that the IRS views your real estate investment efforts as a business so you also get to claim most of the deductions that business owners take. Most landlords of rental property can write off any mortgage interest, property depreciation, actual repair costs, insurance premiums, traveling expenses to visit your properties, supplies for your home office, and more. It’s a good idea to consult your tax advisor about specifics.
Protect Your Property
The very first thing you need to do to protect your asset is to get homeowners insurance. While this topic warrants an entire post on its own, I’m sure we all understand the importance of having a solid insurance plan.
As a real estate investor, depending on your risk tolerance and skill sets, you will have different preferred strategies for utilizing insurance. You can insure against pretty much everything today, from fires and natural disasters, to break-ins. Some even opt for an umbrella policies to increase liability coverages.
Regardless of your strategy, it’s important that you understand the many options that are available to you. And as always, it doesn’t hurt to consult an insurance professional that specializes in real estate.
Buy Wholesale / In Bulk
Investing in real estate is similar to investing in the stock market in that you’re always looking for the best deal. If you’re a savvy stock market investor, you’ll buy stocks that are down and make a fortune when they turn around.
That’s also what you want to do when it comes to real estate investing. Avoid paying full price for properties and instead look for so-called wholesale properties that are offered at a steep discount. They probably will need some work, but it might be worth it. Run the numbers and see if the investment in rehab is worth the ultimate selling price.
We are used to the idea of buying products in bulk, but it’s a strategy that is underused when investing in real estate. Often used with the idea of capitalizing on recent foreclosures there are benefits and disadvantages to the bulk real estate investment strategy. Although savvy investors have the potential to make more money in a shorter time frame, the practice of wholesaling still includes the typical risks of the real estate market. Purchasing numerous foreclosure properties through a bulk deal is a great way to get started in the industry, but a series of bad investments could easily place you in significant debt.
Real estate investing offers the potential for fabulous returns. However, people have also bankrupted themselves investing in real estate. Be sure that you know what’s involved before you start and follow these tips!