Now might be the perfect time to begin investing in real estate but how can you ever be sure? The answer is that you can never be absolutely sure. Investing outside of a FDIC insured account always has risk. However, some risks are higher than others are. Risk with any investment is highly dependent on your knowledge of the market and how you prepare yourself to enter the market. Watching a late night informational about a get rich quick scheme won’t prepare you to manage a real estate portfolio.
There are things you want to do and know before making your investment move.
- Active or passive income? Do you want to actively rehab and flip houses or be a hands-on landlord? Maybe a hands-off turnkey rental or REIT is more suitable to your time commitment, investment knowledge, and lifestyle. Making the decision to be active of passive helps narrow the investment strategies you should pursue.
- Your personal finances are in order. Regardless what the late night informationals tell you, you will need to invest at least some money. It doesn’t have to be a huge investment but no one going to give you a free lunch. As soon as you take control of a property, you need to have reserve funds to cover emergencies and vacancies or you risk never being able to turn a profit. But first, you need to be able to cover all of your own financial needs. You’re best off being able to cover your basic needs, some wants, and have a decent savings account (in addition to your initial investment funds).
- You’ve done your homework. You don’t need to know everything there is to know about real estate investing (it changes constantly anyway). But you should have a broad overview of the many investing strategies available to you. And then you should acquire a detailed knowledge of the strategy you intend to begin with. You can read articles, read books, take courses, or work alongside of a mentor. There are many ways to gain the knowledge you need before making your first investment.
- Understand the economy. You need to understand how both the macro economy and the micro economy you will be investing in matches up with your strategy, financial capability, and investing goals. Most beginning investors do best in a stable economy like the one we have now. An economy when almost everyone has a dependable income, vacancies are low, houses are selling quickly, and borrowed money is in ample supply. However, if you are financially prepared there are big profits to be made by investing in a down market. When distressed sales are common, high vacancies drive down the purchase cost of apartment buildings, and related factors. Highly successful investors like Warren Buffet made their fortunes by investing in down markets. But you must be capable of riding out the financial storm.
- You’ve researched your target market. Your specific investment strategy will determine much of what you need to know about the location you intend to invest in. But there is some general information you need to fully understand. For landlords, this means understanding both tenants and competitors. Know what the going rent rate is in the neighborhood, how stable incomes are, the last time rents were raised, security deposit amounts, along with vacancy and crime rates. More detailed information should include planned infrastructure projects, and trends such as retail businesses opening or going out of business.
- Know your own capabilities and limitations. This goes beyond your financial capabilities. You need good negotiations skills. You should have an understanding of the insurance needs appropriate for you investment property. If you’ll be rehabbing, you need the right construction skills, ability to manage contractors, or both. It’s best to take an inventory of all capabilities you currently have as well as those you could improve on.
The market is and always will be changing. Along with being prepared as a new investor, you need to stay informed of new developments such as the new tax laws that took effect this year. It’s also good to have plans for the future. Have a plan “B” in case your first one doesn’t work out. Stay tuned to the market so you are ahead of major changes. Have a plan for when an unexpected great investment opportunity presents itself. Succeeding as a real estate investor has been accomplished by millions but is never by accident.
What is your advice for beginning investors? Please leave a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.