For decades, it’s been widely accepted that a strong real estate investment has the potential to make significant wealth. However, despite its many benefits, getting into real estate investing can be a complex and intimidating decision. This is why beginner investors need to learn as much as they can about the business and ask the right questions before committing their time and money in an investment property. To find out whether or not you’re ready to start investing in real estate, take a look at the following five questions that you should answer beforehand.
Question #1: Do You Have Enough Money to Invest in Real Estate?
This is the first and probably the most important consideration for a real estate investor. Traditionally, a real estate investment consists of buying properties either to rent out or resell for profits. For many first-time investors, this is an expensive prospect. In addition, investing in real estate is not a static enterprise where you buy an investment property and wait for it to collect money. Investors often need to do some work to add value to their investments in the form of repairs or renovations (this will cost money beyond your initial investment). There are also ongoing costs to consider like monthly mortgage payments, home insurance, property taxes, etc.
Related: 11 Costs First Time Real Estate Investors Should Consider
As you can see, buying an investment property requires you to have money in the bank. And before you start spending money in the real estate business, you need to first know what your budget is – i.e. how much you can afford. The answer to this question depends on your personal financial standing. Calculate your savings and your monthly income. Speak to a mortgage broker or your bank to help you determine how much you can afford to safely borrow to finance your property investment. While a 20% down payment on a property is advisable, you don’t want to go broke from the very beginning. The best thing to do is to set up a budget and have a financial cushion in place, just in case.
Question #2: Do You Have the Time for Investing in Real Estate?
One of the best things about investing in real estate is that it gives you the ability to choose whether to be an active or a passive investor. While some assume that owning a real estate investment has to be active, there are situations where it can be a passive way of making money. If you just started thinking about investing, you may not know where your preference lies or which option is feasible for you. However, it’s important to identify which type of real estate investor you want to become as this will affect your answer to the upcoming questions.
Active real estate investing means you’re either a landlord or a house flipper. Meaning, your role is to buy an investment property to rent out and manage it yourself or to buy property to renovate and then sell it for profits. Either way, you’re the one who owns the property and is responsible for making a profit off of it. On the other hand, passive investors make money in real estate without having to put any work in return. For example, buying a rental property and hiring a professional to manage it is a form of passive real estate investing. In addition, investing money in a REIT or a crowdfunding site are also passive income strategies as a third party owns the investment and is responsible for managing it while you get a share of the profits.
Related: Real Estate Investing for Beginners: A Guide to Passive Income Strategies
So, which option do you think is best for you? Do you love the idea of becoming a landlord? Consider being an active real estate investor. Alternatively, if you simply don’t have the time to deal with managing properties and dealing with tenants, look at passive investments.
Question #3: What Asset and Investment Strategy Is Right for You?
With the wide availability of investment opportunities in the real estate industry, it’s important to know which opportunities are best for you. There are countless strategies for investing in real estate – which could be either active or passive. For instance, there’s the buy and hold strategy, fix-and-flip, real estate wholesaling, REITs, crowdfunding, commercial real estate investing, mutual funds, land, etc. With all these options, it can be overwhelming for a beginner to choose which one to go for. This is why you should educate yourself about these strategies to see which one fits your goals as a real estate investor.
Once you’ve determined which investment strategy you want to pursue, it becomes easier to pick which type of real estate property you’re buying. Experts advise those just starting their real estate investing careers to go for investment properties that are cheaper to buy and easier to manage. Hence, it’s better to start with a single-family home and then invest in multi-family homes for sale as you gain more experience. Other property types to consider include condos, townhomes, co-ops, and retail or office space. Investors should pick the asset type that is more promising and is in continuous demand from both tenants and buyers. Basic research on the market will help you determine which type of investment property you should go for.
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Question #4: How Well Do You Understand the Housing Market?
“Location, location, location” is a saying as accurate as it is cliché when it comes to investing in real estate. Your investment location is perhaps the single most important factor that will drive the performance of your property. It’ll affect your rental expenses, rental income, cash flow, cap rate, appreciation rate, and many other factors that determine how profitable an investment property is. It’s likely that you already have a location in mind – it could be your local housing market or you’re considering out-of-state real estate investing.
Either way, one of the most important questions to ask yourself is: Is this a good place to buy investment properties? In order to answer this question, you need to know what makes for a good location to buy an investment property. Typically, the best cities in the US to invest in real estate have certain features in common. These factors will lead to a high demand for housing and rental properties in the city. In turn, this means there’s a high potential for receiving a good ROI from investing in real estate in these cities. The main features to look for in an investment location include:
- Rising working age population
- Increasing developments
- Growing population
- Growing economy
- Low unemployment rates
- Local restrictions on new construction
- Reasonable purchase prices
Make sure to study these features in the housing market where you want to invest to understand how it’s performing. If you’re not sure where to buy your first investment property, consider investing in the 10 Best Places to Invest in Real Estate in 2019.
Question #5: How Can I Spot Good Investment Opportunities?
We’ve saved the most important question for last. So, you have enough money to afford investing in real estate, you’ve decided on which investment strategy and asset type you’re seeking, and you’ve decided where you want to invest. But, how can you actually find an investment opportunity that will yield a good return? Use the right real estate investment tools! Being in the 21st century, real estate investors have access to online tools and resources that help them find what they’re looking for. There’s no reason why you should not take advantage of such advanced tools as well.
At Mashvisor, we’ll provide you with a number of tools to make smart and fast investment decisions. You can use our tools to search for and find investment opportunities (both traditional and Airbnb) in any city and neighborhood in the US housing market. Our Heatmap Tool allows you to analyze the location based on data and compare it to others to be sure you’re buying in the right place. We also have an Investment Property Calculator – the ultimate tool for analyzing investment properties and getting estimates on what ROI you can expect to earn in terms of the cap rate, cash on cash return, and more based on historical and predictive analytics! To learn more about our tools, click here.
If you’ve got the answer to these 5 questions and are ready to find profitable investment opportunities and start investing in real estate, start out your 7-day free trial with Mashvisor now.