Investing in real estate is a huge step, but it’s also a quite popular investment option. One of the biggest problems of investing in real estate lies in the fact that a lot of people believe this concept to be similar to that of buying a family home. Nothing can be further from the truth. The first is a rational, finance-based decision, while the latter is something subjective and emotion-driven. All in all, you need to keep in mind that, as a first-time real estate investor, you might not even know what you’re supposed to be looking for. So, here are the top five tips to guide you every step of the way.
1. Pinpoint the Exact Reason Why You’re Investing
Before you make an investment of any kind, you need to know the reason why. Other than this, you also need to figure out the goal of your investment. Are you trying to buy your own home or invest in a rental property that will generate passive income for your business? Another option is that you’re trying to create a passive stream of income in order to ensure the security of your assets. Keep in mind that there are also some people who read the city council’s development plan and invest in properties that are supposed to boom in value in the near future. This strategy is referred to as real estate speculation.
Once you have this figured out, you’ll be able to develop a model and establish criteria that will determine whether the investment property in question satisfies your needs. For instance, if you’re looking for a rental property, you need to look at rental return and appeal of the place (seeing as how vacancy can cause you to lose quite a bit of money). In other words, the only way to determine whether an investment is actually good for you is to set realistic expectations and make an estimate of whether a property will be able to live up to them.
2. Estimate the Kind of Return You Can Look Forward To
There are many different ways that first-time real estate investors can use to generate a return from their real estate investments. First of all, you can fix and flip the place, or you can invest in a property and wait for its value to skyrocket. More often than not, however, what you’re looking for is a rental return. This means that you invest in residential or commercial property and rent out the place. This way, you get a passive income for life that you can use for a number of things.
As far as your profit goes, you first have to understand that commercial and residential properties give different returns. Commercial properties generally return 4 to 5 percent of their total value every year, while residential properties are supposed to return 1 to 2 percent every month. This is the so-called one percent rule of rental real estate. Keep in mind, nonetheless, that the cost of rent evolves over time, which means that a current projection isn’t necessarily the reflection of what lies ahead.
3. Get Your Finances in Order
The first thing you need to do is ensure that you’re in a position to invest, to begin with. For starters, you need to get your finances in order. This means paying off all of your debts with high-interest rates, creating an emergency fund, and setting aside some funds for your retirement. If you plan to retire early, especially if you intend to retire abroad (let’s say in Australia), what you need to do is start looking for suitable places to retire to. You don’t have to go for a large metropolis like Sydney or Melbourne but can, instead, find a retirement village in Central Coast. This will help you estimate the costs of retirement.
Sure, there are a lot of people who invest in real estate in order to gain profit, create a passive stream of income or achieve the above-listed goals; however, you need to keep in mind that no investment is ever 100 percent reliable. Also, an investment in real estate property is a major one, which means that after you fully commit to it, it’s highly unlikely that you’ll find yourself in a situation where you have the time, resources, and energy to tend to these issues. So, try dealing with them first.
4. Figure Out How Much Property You Can Afford
This seems like a simple question, but with a plethora of factors affecting properties, first-time real estate investors need to understand how these things work. First of all, chances are that you won’t have that kind of money just lying around (regardless of your income or assets), which means that you’ll have to apply for a loan. This means that you need to consider the interest rate, the number of credit payments, as well as the size of monthly credit payments.
One of the most important things to mention here is the fact that this definitely won’t be your only expense. You see, you still have (potentially) other investments, as well as the cost of living, which might be quite substantial, as well. Now, add to this the monthly credit payment and try to be realistic about whether you can really afford the property in question. One way to make this estimate is with the help of an online calculator tool.
5. Hire Some Professional Help
Investing is a full-time job for a lot of people, which means that it shouldn’t be too difficult for you to just find a mentor. Other than this, you could download some e-books (even buy some of them) and read a thing or two about real estate investing. Nonetheless, one of the best possible tips that you can receive here is that you should start your own network of contacts.
You see, as a property investor, you’ll definitely need the services of a solicitor and an accountant. Other than this, it’s quite good that you have a buyer’s agent on your side, as well. Then, there are various inspectors, like those specializing in plumbing, electricity, and pests. Naturally, you also want to have a general contractor on speed dial. The better your circle of contacts, the better the result will be.
Related: 9 Best Tips for Surviving Your First Year in Real Estate
Conclusion
The very last thing you need to take into consideration is the fact that it all depends on so many factors. We’re talking about things like your budget, a unique opportunity that arises from one occasion to another, as well as several different scenarios that you quickly have to adjust to. All in all, use your options wisely and you’ll find that you can succeed as a first-time real estate investor.
This article has been contributed by Amelia Atkins.