Investing into and building a real estate portfolio is still the safest and most reliable method to establish durable wealth for you and future generations.
But, real estate is also one of the hardest assets to invest in. There are expensive upfront costs, arcane rules, and high risk of failure. However, with the right preparation, you can work through those first few hurdles and take the first step into a new life by buying a rental property.
To help you along your journey, here are five tips to get you started:
Why are you investing in real estate? Are you trying to finance your first home, build wealth, or establish set per annum passive income? You need to clarify what you want to accomplish. Many people get stuck worrying about the value of the property you identified, rather than on the outcome they want. Keeping your goals clear in your mind helps you avoid getting derailed onto other secondary goals.
Once your goals are clear, you will know which properties help you achieve your goal and which are merely distractions. Generally, you will probably want a combination of growth and cash flow properties. A growth property is one in which the value continues to appreciate. A cash flow property is a steady source of rental income. Usually, you want a combination of both because the cash flow properties stabilize your income.
Before you can purchase your first investment property, you must know how much borrowing power you have. Borrowing power refers to how much you can leverage, i.e. the loan-to-value ratio.
Your borrowing power is affected by immediately available funds and your regular, reliable income. Your borrowing power is critical because it informs you how you can purchase your second and third investment properties. Essentially, can you leverage another loan into a second property or will you have to wait to save and build equity in the first property?
Finally, you should consult with a financial advisor that you trust and is knowledgeable in real estate mortgages. The structure of your loan impacts deductions, credits, and other benefits.
We have infomation on how to value and analyze an investment property from an earlier article here.
Life throws you lemons now and then. You need to anticipate these downturns and build them into your investment. A lot of people get trapped in bad investments because they were overly optimistic about the market, their borrowing power, or the reliability of their income (and hence their ability to service the loans).
With that in mind, don’t let hiccups in your life derail your plans. Building an overall strategy allows you to be flexible and adapt to changes in the market and your life.
Real estate is not the type of investment in which you expect to make quick cash. Take a hard look at your financial situation and compare it to insurance, maintenance, property management costs, and other expenses associated with investment real estate. Will this disrupt your lifestyle? To what extent? Can you afford these expenses?
Your properties can weather booms and busts, and you may lose money in the short-term, but rarely is real estate a bad investment in the long-term. But, it is important to anticipate how long you may have to service a property that loses money, or you may risk over-extending yourself.
Don’t try to anticipate a downturn and by into the market when it is “just right.” If you wait too long, you risk pricing yourself out of the markets in which you wish to invest. Furthermore, lenders often include sunset provisions on loans, so you need to “use them or lose them.” Once you identify a property, secure financing and have a plan in place, then it is time to execute it. Don’t wait.
Investing in real estate does have large upfront costs in time and cash. Understandably, many people are unable to invest in real estate because they don’t have the time to manage them.
A real estate management company can offset these demands on your time by taking over the day-to-day burden of managing your properties. Furthermore, a management company, like PropertyAdvantage, can also help you recoup some of your upfront costs. A lot of those expenses are defrayed by management companies, who are able to use their in-house resources. Investment real estate is the best way to build durable wealth that lasts through your retirement and the retirements of your children.