Back HomeInitial Investment: Dipping Your Toe Into Real Estate Waters
The history of real estate investment in the U.S. is long and storied. You could argue that the country’s first real estate “investment” began with the Louisiana Purchase, followed by laws and regulations designed to offer some stability, as well as patterns of economic booms and busts that both created fortunes or destroyed them.
If investing in real estate has always intrigued you, it’s wise to get started with realistic expectations and curbed enthusiasm. Real estate is not designed to be part of a “get rich quick” scheme; rather, you’re more likely to reap initial benefits in tax advantages. And if you decide to build on your real estate investment empire (that is, purchasing multiple properties), you’ll need to have top-notch bookkeeping, budgeting, and overall accounting skills. Rather than outsource, you could learn all these skills yourself by taking online courses that work around your schedule. You may even decide to add another degree to your belt. However, most real estate investors opt to hire a professional tax preparer and bookkeeper.
If you can afford to tie up your cash in an asset for months or years and aren’t in a hurry for huge profits, then a sensible approach to investing in real estate might be right for you. Here, Watson International shares guidance to help you understand the basics of investing in real estate.
Getting on the right path
While investing in real estate is generally considered safe, part of that safety needs to come from your current financial situation. You should have income stability, disposable income, and cash reserves post closing. If you cannot afford to purchase real estate investments without financing, then you should be sure to have enough income to pay the mortgage on your new investment property until it is either renovated and sold, or it is suitable for a tenant. The safest approach of course is always to buy in cash, as doing so has a way of “recession-proofing” and “disaster-proofing” you. For instance, if you buy in cash then you won’t be burdened by having to carry a mortgage in between tenants or during natural disaster repairs.
You also need to be prepared to take over the costs during vacancies, which can fluctuate based on economic and market conditions. The economy in which you purchased the property may not be the same economy three years later, ten years later, and so on. And, unless you are able to purchase the property without a mortgage, your credit score will help determine how affordable that mortgage payment is. If you can increase your score in a few months to save money on the mortgage, it may be worth your time to wait, in the event buying in cash is not an option for you.
In addition to paying your mortgage (if you have one), you must consider your other associated costs. The rent you charge a tenant must minimally be enough to cover your property taxes, insurance, and other necessary expenses. During vacant periods, those costs are yours – along with utilities that need to remain on so you can adequately show the property to prospective tenants. And of course, if you want to make a profit, which is always the goal, you should ensure that you charge rent that will cause a profit. Moreover, you should raise rent annually to increase your profits and to align better with the increases in your property taxes and expenses.
Maintenance and upkeep are yours year-round. If you already have a full-time job, consider how much available time you have to do this yourself. While property management companies charge a fee to take this off your hands, Women Who Money points out that it may be worth the 8 to 15 percent of the monthly rent to hire a professional property management company – particularly if you increase your rental portfolio.
Location, location, location
Other than your financial situation and stability, the location of your property is the largest determinant to everything: your ability to buy a property, your ability to consistently rent it with quality tenants, your ability to keep up to date on property taxes, and your ability to re-sell.
In order to properly estimate your numbers to maximize your gains – and minimize potential losses – you need to research various real estate market trends carefully to see where you can afford to buy, how quickly you will have to move on your purchase before it sells out from under you, and what your likely return will be in either rental income or a resale.
If you buy in a fast-moving market with a limited inventory, it may make sense to purchase the property with the intention of selling it quickly while the market is still hot, particularly if this occurs during a time when capital gains taxes are favorable (which of course does not happen often, historically). On the other hand, a stable but slower-moving market may be better suited to the rental market for a while, particularly if it has a low vacancy rate.
Search out the most recent real estate data for your desired areas. This will tell you what homes are selling for, how many offers you can expect to compete with, and the average time a home is on the market. If homes are entering contract in days, you have to move faster than they do.
Taking care of the property
Mashvisor notes that preparation for tenants and general upkeep will require some initial investment as well, especially if you want to attract trustworthy tenants. Once the property is yours, assess any necessary repairs throughout, and be sure to completely repaint the interior. You may also need to update appliances, replace light fixtures and hardware, and address any flooring issues as well as any window treatments.
The exterior is equally important, so take stock of what you have to work with, and notice if there are any hazards like large, dying trees, loose bricks, cracked sidewalks, or landscaping in need of fine-tuning. Trees that are dead or dying pose a significant risk, so your best bet is to use a professional tree removal service to ensure anything hazardous is promptly removed. Find a specialist with experience who can also gauge other trees on your property to determine what simply needs pruning.
As for your landscaping, if you have neither the time nor talent, consider hiring landscape design services to make the necessary updates to your lawn and garden. Consider having them create a low-maintenance, high-impact look if possible.
Reapplying real estate investment lessons
Your first real estate investment will be your teacher. Even if there are some things you’ll wish you had done differently, with proper upfront planning and a consultation with a financial investment counselor, you can take those lessons and apply them to the next one.
Photo by: Tierra Mallorca on Unsplash
