What to Consider Before Investing in Real Estate
Wouldn’t it be great if you could grow your net worth, and your monthly income, in a passive, hands-off way? Don’t you want to build wealth every month without having to work extra hours?
That’s exactly why so many people start investing in real estate. It’s one of the most stable, most consistent, and most profitable investment classes in the world. And it’s the asset class the creates more millionaires than anything else.
And the best part? You don’t need to be rich, or a high-income earner in order to get started. That’s right, you can have a regular old job and still get started with real estate investing right now.
Wondering where to even get started? Want to know if you have what it takes to become a real estate investor? Keep reading below to see what it takes to launch a successful property investment.
What Type of Property Investor do You Want to Be?
There are different types of real estate investors out there. While you may have a goal to become one type of investor, you will likely spend time as another type of investor at some point.
For example, many people aspire to be hands-off investors. This means hiring a property management company to actively manage tenants. So rather than having to make repairs and screen tenants yourself, you could spend your time performing more profitable activities, such as networking and acquiring new properties.
But hiring property management companies will eat into your monthly cash flow. In the beginning, this may not be an option for you, so you might spend the first year or two managing properties yourself. This isn’t a bad thing, as doing so will give you a better understanding of the real estate investing business.
Either way, you should define which type of investor you want to be, and set goals to reach that point as soon as possible.
Types of Property Investment
When it comes to real estate investment, there are many different strategies to implement to build your wealth and your monthly income.
Buy and hold real estate is the process of buying single or multifamily homes and renting them out to long-term tenants. With this approach, your goal is to make a monthly profit on the rent, while also letting tenants pay down your mortgage. You’ll also experience appreciation for the value of your property.
Other investors pursue a fix and flip strategy. They will buy run-down properties, perform rehab to make the home desirable, and sell the home quickly for a big profit.
Once investors develop a system for flipping homes, they can usually flip multiple houses per year for big profits.
Investing in Real Estate Is a Business
What many people don’t realize when getting into real estate, is that property investment is a business. Sure, if you do it right, collecting rent and managing your properties is a passive source of cash flow.
But you still have to treat it like a business if you want to be successful. But this is hard for many people who have never run their own business or who have never worked for themselves.
Part of running a business is tracking important metrics to see what is working and what can be improved. These metrics include things like your capitalization rate and your net operating income (NOI).
You also need to pay attention to which properties are making you the most money, and which are costing you money. If you have a house in an undesirable neighborhood, it may sit vacant much longer than other homes in your portfolio.
While it may be tempting to hold onto your properties forever, in hopes that they improve, a good investor knows when to cut losses and move on. Running a business means not becoming emotionally attached to any aspect of your business, and instead of making decisions based on the facts and numbers. Hope is not an investment strategy.
Get Your Initial Funding
In order to get started, one of the first things you’ll want to do is save up as much money as possible. The more you can save, the easier it will be to get started.
At the bare minimum, you should have your sights set on saving up for a 20% down payment. When you buy a property that you won’t occupy yourself, lenders will usually require a 20% down payment.
However, there are ways around this. One popular strategy for first-time investors is house hacking. This is when you buy a multifamily property, from two to four units, and live in one unit while renting out the others.
When you do this, you can qualify for a residential mortgage. And with the right mortgage program, you put down as little as 3.5%.
Alternatively, you may be able to tap into your current home’s equity to finance your first deal. Using a home equity loan, or line of credit, you can put your equity to work rather than let it sit there collecting dust.
This is a great way to get started right away, rather than waiting a few years while you save up extra cash.
Define Your Investing Goals
Before you blindly start investing in real estate, you should establish clear goals. Are you just wanting one or two properties, so you can enjoy appreciation and have paid off homes in the next 30 years?
Or do you want to replace your current income with cash flow from your real estate business? If so, how many properties is it going to take to make that happen?
Do you want lots of properties with a mortgage on them, or just a few properties that are free and clear? Writing down your goals, and what it will take to achieve your goals, is critical for success in real estate.
Sooner Is Better
Investing in real estate is one of the most tried and true methods of building wealth and achieving financial freedom. And even though there are many other investors out there, competing for the same properties as you, there is always enough to go around.
So the sooner you get started, the sooner you can start enjoying a higher quality of life.
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