If done right investing in real estate creates wealth. But, it’s not easy you need to know things before you invest in real estate. If you have a positive cash flow for every month you may start looking for real estate property for investment. Even if you don’t sell for profit, putting it in rent can recover the mortgage cost and leave you with some profit every month.
Savvy real estate investors already know the market landscape. Right from the start, they can tell if a particular home is worth investing in and if the return on investment is worth the initial price.
They know that there is more than one factor determining whether a home is a good investment opportunity or a looming disaster.
They know how prestigious schools, public transport and more can sway the price and how new job openings can pay off in the long run.
But if you are new to real estate investment, all of this might seem unfamiliar, terrifying even. Almost always there’s a big money involved in real estate investing.
Whether you want to buy a new home or start renting an apartment for a steady cash flow, there are some things you should know before rushing to invest.
Things To Know Before You Invest in Real Estate
Don’t Let Your Emotions Get the Best of You
The number one mistake new real estate investors make is buy a property for its looks, not taking into account any other factor.
In reality, it is difficult to make money off a home just because it’s pretty. You can make money only if the price goes up.
If there are no reputable schools nearby or if the apartment is in a bad neighborhood, it’s nearly impossible to make a profit out of it, no matter how breathtaking it may look.
Instead of getting immediately attached, do your research and don’t rush into buying a property immediately. It might cost you more both with the initial purchase and in the long run.
So, let go of your emotions before you start investing in real estate.
Related – Investing in international real estate
Know the Risks
Any investment is risky, in fact, riskier the investment is, better is the return on that investment. Reale state investment is very risky, perhaps more riskier than stock investment. So, of course, you need to know the risks of real estate investing.
There’s absolutely no liquidity here, unlike stocks which you can sell off any time you want to, a home can’t be sold unless there’s a buyer. For rental homes, another big factor is the tenant.
Unless you get your tenants move out, you can not sell the property. Almost always there’ll be a notice period. Which makes liquidity situation even worse.
Historically price of real estate properties depends on numerous factors. A natural calamity is perhaps one of the tops three. If your rental home is damaged by hurricanes, tornados or fire, you’ll end up losing money.
Even with insurance, you really can’t make up and break even with your mortgage payment on the property plus taxes and fees.
The way real estate properties are bought and sold, you can only make money if your property sells for the significantly higher price than your buying price. The realtor commission takes up a significant portion of your profit.
Choose the Right Neighborhood
This is an absolute must that you study the neighborhood as well as the neighbors before you invest in any real estate property.
The best property you can invest in is one that is going to increase in value. But in order to be able to predict that, you have to take a lot of things into account.
As previously mentioned, schools play a big role in the price of an apartment. The same goes for future job openings.
If a company is set to open up manufacture in the neighborhood, which could result in a huge increase in the property’s value.
That’s why it’s good to look into up and coming neighborhoods and cities before you choose where to invest. For example, San Diego is one of the hottest real estate markets in the US, with property value on a steady rise.
You can find some of the hottest listings at homesalessandiego.com
Research the market
As is the case with any investment you need to think long and hard before you commit to anything.
This involves researching the market thoroughly and investigating current home prices, the potential for growth of the housing market in the area, sell values of properties in last few years, among many other things.
Many resources and a huge amount of time are needed to search for the perfect property in the market. Investing is all about picking the right thing at right time.
Researching thoroughly will allow you to get access to the best property around.
Some people I know who invest in real estate, they actually visit the property and study the neighborhood, check on the neighbors, their family composition, lifestyle, curb appeal of the entire neighborhood, security at the gate, the condition of the approach roads, etc.
Have an Emergency Fund
Don’t let your investment be the reason you fell into debt. An investment as huge as a home can even make you bankrupt. make sure you have sufficient cash to cover unforeseen expenses.
Investing in real estate is usually a huge expense. After all, you are buying a home. But the real devil lies in the unexpected costs. For example, your tenants may cause serious damage or your home might fall victim to a natural disaster.
Unless you have an emergency fund, you’ll have to take out a loan for that large expense.
Additionally, you will have to think about covering your monthly losses, if you’re not able to rent the apartment right away.
For example, if the property is near a College, you might have to wait a couple of months until the students pour back into the neighborhood.
Pick the right mortgage
It’s not just a case of walking into the first bank or building society and signing up for the first buy to let mortgage they offer you. Finding the best mortgage is a tricky and tedious process.
Take your time and shop around. Different providers will offer you different options often with different interest rates.
Related – How to Save for Mortgage Down payment
So you will need to know which type of mortgage such as Fixed, Tracker etc suits you best. There are lots of free options too, so it’s important to factor in all financial issues when making this decision.
Before making any commitment, utilize all the options available to you, such as an online mortgage calculator.
This will enable you to gauge an understanding of the potential mortgage available to you and will assist you when sitting down with your broker, or with the lender directly.
Negotiate with the Seller
Unlike stocks, you can control your buying price by negotiating hard with the seller. Unless you know the art of buying properties at auctions.
As a buy to let investor you’re in a strong position, much like a first-time buyer, as you are not reliant on selling a property before you can buy.
If the seller is looking for a quick sale, it puts you at an advantage as you are free to move quickly. You can use this as a basis on which to attempt to push the price down.
Here’s the realtor.com negotiate hard on the final price to buy, be prepared to walk out, this will send a strong signal to the seller and may lead to you getting a favorable deal.
Be Careful Who You Rent to
Finding decent tenants is perhaps even more difficult than finding a good property to invest in. Choose poorly, and your tenants could cause damage to your property and pile months of unpaid bills leading to an expensive eviction process.
That is why you should conduct a background check on your future tenants to see who you are really dealing with. If you rent out to someone you know and for some reason, that person stops paying his rents, you’ll lose the money and the relationship.
Look into their credit score to see if they have any financial problems that may prevent them from paying rent. Also, make sure to check their criminal record.
How You Want to Manage Your Real Estate Investment
Once the purchase your property you need to consider how you want it to work and how hands on you want to be. Will you rent it out yourself or get an agent to do so?
Will you hire contractor’s to remodel parts of the home or you want to do it yourself?
There are pros and cons of each.
For example, you’ll need to pay a management fee for the agents, but they’ll deal with any problems when they arise.
If you’re an experienced investor, share your tips and tricks below.