There are many benefits to real estate investing as a way to build passive income or a long-term nest egg. Real estate tends to be less volatile than the stock market and can provide both short-term and long-term monetary benefits. However, becoming a real estate investor is a big commitment of both money and time.
Here are some important considerations when investing in your first property.
Your Investment Strategy
There are various approaches to real estate investing, and not every strategy works for each investor. Before you purchase a property, you need to clarify your goals and strategy. In other words, you need to know your plan for the property. Distilling this information helps plan the financials, secure appropriate investment property loans, and protect your investment.
Some common investment strategies include:
- Long-term rentals
- Short-term rentals
There are numerous options and various combinations, depending on your desires, goals, resources, and location. Take some time to review the multiple avenues and determine which option is best for you. Then, use that strategy to shape the rest of your investment plans.
Putting Protective Measures in Place
Getting a loan in your name for an investment property is a terrible idea. Use a holding company to protect your personal assets in a worst-case scenario situation. Talk to a business lawyer to determine whether an LLC or other form of business entity is best for your investment strategy.
In addition to having a holding company that limits your liability, you’ll also want to invest in great insurance policies. You’ll need policies for general liabilities, rental property coverage, hazard coverage, and possibly umbrella coverage to keep you covered. As a property investor, you’re at risk for everything from rental defaults to slip and fall injuries. Understand the risks before you commit and cover yourself with insurance.
Location, Location, Location
The location of your property also has a significant impact on whether it’s the right choice for an investment. When looking at the location, look at the broader region and take a hyper-local view as well. Consider whether the city in which you’re purchasing property is growing or shrinking. Look at things like the job market and cost-of-living over time. If a city is in a period of growth, it’s a viable option for investing.
Take a deeper dive and make the same assessments for the specific neighborhood you’re evaluating. Is this a place people are hoping to move to or away from? Is there any gentrification happening locally? What amenities does this neighborhood offer?
Another important consideration when looking at a location is the price-to-rent ratio. This number indicates whether it’s more affordable to buy a home or rent from someone else in a given location. When looking for your first investment, you’ll want a PTR ratio that suits your goals.
The Current Market
While assessing the location, be sure to evaluate the current real estate market. Ideally, you’ll want to purchase property during a buyers’ market and sell during a sellers’ market to make the most money possible. Pay close attention to fluctuations in the market and industry predictions when timing your purchase.
One of the biggest mistakes first time investors make is underestimating the cost of their investment. It’s essential to set a realistic budget that accounts for all of the work, commissions, and taxes when investing in real estate. It’s better to over-budget than to under-estimate your costs; err on the side of caution.
Developing a Network
As a real estate investor, you’ll get by with a little help from your friends. Developing a network with members of adjacent industries is a must as a property investor. Get to know your local contractors, real estate attorneys, insurance agents, and realtors. Nourish those relationships to build a lasting investment outfit.
Keep these critical considerations in mind when considering your first investment property. It’s better to slow down and take a step back to ensure you’re ready before committing.