Real estate is a tangible asset that can provide you with a stream of passive income, ongoing appreciation, and potential capital gains. However, for most people the primary concern is: “Is real estate investment a good idea for me?” The answer isn’t as black and white as you might think.
Whether you’re just beginning your foray into investing or expanding your portfolio, there are Dos and Don’ts to keep in mind when investing in real estate. Whether it be as simple as making sure you have the right legal documents or more complex like understanding the implications of being an operating partner.
The Dos and Don’ts of Investing in Real Estate
Real estate investing can be a profitable venture with the right education and guidance. There are many different ways to invest in real estate, each offering its own set of pros and cons. There is no one right way to invest in real estate, but there are some methods you should avoid. If you’re ready to dip your toes into the world of real estate investing, it’s important that you know the dos and don’ts before diving in head-first. Real estate involves significant amounts of capital and risk, so it’s important to understand common pitfalls for new investors before getting started. Here are some dos and don’ts if you’re considering investing in real estate.
Do Your Research
Before you make any investments, you need to do your research. You should understand the fundamentals of the asset you’re investing in. You should also study the market and demand for that asset — you need to know whether or not there is a consistent way to make money from your investment. When researching real estate investments, look into the specific type of asset you plan to buy. Look into the current market value of that type of asset and try to find historical data on similar assets to get a general idea of how the market has behaved over time.
You should also study the tenants that would be leasing the asset. Make sure you understand the terms of the lease agreement and the payment structure. Don’t just study the terms of your specific investment — also look at market trends for that type of real estate investment as a whole. Knowing how the market overall has behaved will help you understand how your specific investment has performed in relation to the market.
In real estate, leverage is a good thing. It allows you to take advantage of a larger amount of capital while maintaining a smaller down payment. Leverage is a big part of why real estate can be such a profitable investment. It can also be your biggest downfall as an investor. When you over-leverage your investment, you are increasing your risk. If the value of your investment falls, you might not have enough equity to pay off your loan — and you might not be able to get another loan to correct the issue. To make sure you aren’t over-levering your investment, be sure to account for the risk of your investment falling in value and the cost of maintaining your investment. You should always have enough cash on hand to cover a significant decline in value. You should also prepare for the cost of maintaining your property. Make sure you have a plan for maintenance and repairs that doesn’t significantly deplete your cash reserves.
Don’t Buy Into Marketing Hype
Real estate marketing is a very competitive market. There are countless real estate agents and marketers looking to sell you on the idea of buying a particular type of property. Make sure you aren’t getting swept away by marketing hype. Don’t buy into the idea that any investment is a good investment just because someone is trying to sell it to you. Don’t buy into the idea that all properties are good investments just because they are currently being rented. Be sure to analyze the market demand for the rental property before you buy. You don’t want to buy a property that has a low listing price and an average rental rate. Those types of properties will be hard to turn around and resell.
Don’t Fall For a Shaky Investment Deal
It’s important to understand the terms of your specific investment. Look into the terms of the actual mortgage on the property you plan to buy. Make sure that the investment deal you’re getting is actually a good deal. If the terms of the investment are too good to be true, they probably are. Don’t fall for a deal that seems like it’s too good to be true, because it probably is. Don’t fall for an investment deal that promises absurdly high returns. If an investment promises a high return, it probably has a high risk attached to it. You should approach any investment with a balanced risk-reward scenario.
Don’t Pay Too Much Upfront
The upfront cost of real estate investments is one of the biggest risks you face as an investor. If you buy a property for $200,000 and put $20,000 down, you’ll have to pay off the full amount of $200,000 if the property goes into default. If you do not have the cash readily available to cover that loss, you’ll have to sell another asset to pay off the mortgage. This can be a huge hassle, and it could take a very long time to sell another asset and collect enough money to pay the mortgage. Don’t pay too much upfront on an investment. Look into the terms of the loan and see what your monthly payment will be. Buy a property that has a manageable payment and that you can afford to pay on a monthly basis.
DO Run Your Own Numbers
Always run your own numbers and make sure you understand the financial aspects of your investment. You might work with a lender who is willing to bend the rules or decide to finance your investment with cash. In any case, make sure you understand the numbers behind the deal. You don’t want to be surprised with a larger payment than you can comfortably afford. Don’t borrow as much money as you can, as quickly as you can. Make sure you’re purchasing a property that will comfortably fit within your budget.
DO Run Detailed Due Diligence
Make sure you’re doing a detailed due diligence on every aspect of your investment. Are you buying a single-family home or a multi-family housing unit? How many units are in each building? What condition are those units in? Where is the property located? What is the surrounding neighborhood like? Don’t jump on a property just because it has a low listing price. Be sure you’re doing detailed due diligence on each property you consider investing in.
DO Make Leveraged Investments Carefully
Finally, make sure to make leveraged investments carefully. You should only make leveraged investments if you understand the risks associated with debt. You should also have a solid plan for how you will pay off that debt. Make sure you are financially prepared to make the payments on your investment. Don’t go into debt for an investment without a solid plan for how you’ll pay it back. If you can’t afford to pay it back, walk away from the investment and don’t look back.
Real estate investing is an excellent way to create passive income and build wealth over the long-term. Before jumping into the world of real estate, make sure you understand the dos and don’ts. Do your research, make sure you have a good understanding of the numbers behind your investment, and make sure your investment is a good fit with your own financial situation.