Real estate is the most popular way to earn passive income and amass wealth. However, if you want a good return on your investment, it’s critical you are well-equipped with the right information before laying your money down. In this article, we’ll take a look at 8 great tips to help you get started in real estate investing.
How to Get Started in Real Estate Investing
1. Evaluate your financial state
Before diving into real estate investment, it’s essential you have a good idea of what you’re worth and what you can afford to set aside. Your assets won’t make money overnight, so it’s best not to invest any money you’ll need in the short term.
At this point, you should evaluate whether buying or financing is the best bet for you. Paying cash means you’ll start making a profit as soon as you begin earning rent, but taking out a loan allows you to commit a smaller amount and still make returns after deducting mortgage payments and other expenses.
Keep in mind that you don’t have to start real estate investing the moment you decide to do so. You could take a year or more to save a substantial amount of money and buy a good investment.
2. Know your obligations as a landlord
When people hear the word landlord, a typical mental image is someone going around collecting rent and demanding people turn their music down, but there’s more to it. While tenants have obligations to pay their rent on time and keep the peace, landlords also have obligations to their renters. So it’s essential you understand what your tenants expect from you before leasing out a house.
Questions you should be asking yourself are: Am I familiar with the landlord-tenant laws in my jurisdiction? Am I handy with tools, or do I need to hire someone? Do I have the extra money for repairs? And do I know the first thing about setting up a proper landlord-tenant contract? If your answer to any of these questions is no, I think so, or kind of, then you need to do more research.
3. Educate yourself
There’s a language to real estate that guides investors, and you need to get familiar with it. You can use several rules and plans to guide you when making decisions.
The one percent rule advises that your monthly rent on a property should at minimum be 1% of your total purchase value. If you go lower, you run the risk of being at a loss.
The buy three-sell two-keep one plan is a strategy investors use to build their portfolio. Here, you buy three separate properties, hold them for a while, then sell two off when they’re more profitable, and use the money to pay off all the debt on the one you’re still holding.
There are several similar rules and plans that guide expert investors, learn to apply the relevant ones, and you’ll start off real estate investment on the right foot.
4. Pick a market style
Many people imagine buying a property, cleaning it up, and putting it up for rent as real estate investment, and while it is, it’s also not that cut and dry.
You could enter a partnership where you share the property, risk, and returns with one or a few more people; or be part of syndication. Syndication is like crowdfunding to invest in a property; every investor has a stake in the property and earns interest accordingly.
All market styles have their pros and cons and are beneficial at different risk tolerance and financial stages.
5. Choose properties in prime locations
One cannot overemphasize the importance of the location when you’re ready to purchase a piece of land. Where your property is will determine a lot of factors that attract or put off potential tenants.
There are several characteristics to look out for when selecting a profitable investment property, but they usually come down to these four:
- Safety and security
- Nearby services and amenities like supermarkets, parks, subways, etc.
- Proximity to schools (university campuses, middle school, or high schools depending on the population demographic)
- Proximity to jobs/work
There are other factors prospective renters consider, like furnishing, transportation, and so on. But these four are usually people’s top priorities.
As a landlord, you would also want to consider local codes and taxes to either give you a break or eat into your profits.
6. Take out a loan
As earlier mentioned in the first point, you should evaluate your buying or financing options. Yes, you’ve been told to steer clear of debts. But in real estate, debt can be a good thing if you go about it the right way.
Private lenders and banks are usually the first lines of thought. But other options are more specific to real estate, offer better rates, and are easier to secure. Federal Housing Administration loans and conforming loans are such examples.
7. Take on run-down projects carefully
Doing a house flip can be tempting, especially with how easy it looks on TV. But it’s not advisable for new investors to take on fixer-upper projects with real estate investing.
Run-down apartments might come at a bargain, but you could end up pouring more money into repairs, especially if you’re not familiar with large-scale renovations. More so, the more repairs you have to do, the longer your property remains vacant while you work on making it habitable.
So unless you have a background in flipping houses or know a contractor that can help at an affordable rate, it is better for your wallet if you stick with homes that require only minor repairs.
8. Build the right team
Even if you plan to start as a sole proprietor, you still need support to maximize your profits. Building a relationship with the right people can be a significant advantage to you.
A good reputation with your lender can save you money and get you better rates; a real estate attorney can help you steer clear of legal pitfalls and utilize applicable breaks; a broker can help you source for the best deals, and a highly skilled rental property management company can help you save time and energy by managing your property’s marketing, rent collection, staff supervision, and more.
A lot of research and work goes into real estate investing. But to grow your portfolio and income, it’s essential to sharpen your skills and plan appropriately continuously.