Thinking about diving headfirst into the real estate market? Renting or re-selling properties can bring in a lot of income for the savvy investor.
But when you’re first getting started with real estate investing, it’s important to know that it’s not a get rich quick scheme and involves a lot of hard work and perseverance. But if you’ve got the drive for it, you can do pretty well for yourself.
A lot of the most common failings of real estate investors are entirely avoidable with proper planning and expectations.
Here are seven things you need to know if you’re considering purchasing property as an investment.
1. Work with unique properties
If you’re just getting into the real estate business, it can behoove you to work with a smaller amount of properties that are more eye-catching. Look for anything that might indicate a premium mark-up on a property (exciting location, interesting design, historical significance, unique assets, etc.).
Remodeling or repairs might be worth it on a property with unique appeal, but be sure to crunch the numbers before committing.
2. Know your credit
This may seem like a no-brainer, but a lot of people don’t think to double check their credit. If you know your credit is “fine,” it’s easy to jump in right away. But “fine” often isn’t good enough for real estate investments.
Banks and other lenders are less eager to loan money for investment ventures than they are for personal purchases. So your credit has to be more than good, it has to be spectacular.
So, before you go flipping through house listings, work on building your credit. You’ll also want to take a look at your annual credit report to make sure it is free of errors, which are more common than most people assume.
3. Remember property taxes
It’s a common mistake when crunching the numbers to think about investments as the initial price put up against the profit after a sale. But realistically your properties will be vacant for awhile before you find tenants, or on the market for several months before you can resell them.
When you’re calculating expenses, you need to include the taxes and fees from this time period. The longer it takes you to sell a property, the more money you will have to sink into the project. So give yourself a little wiggle room and avoid purchases that are going to have a thin margin of profit.
4. The one percent rule
The rule of one percent is a simple math trick for people looking at renting the property they invest in. Your income from rent needs to meet or exceed one percent of the property’s total worth.
So if you invest in a $100,000 building you need to be able to bring in at least $1,000 a month for the investment to be worth it.
5. Being yourself is a bad idea
It’s rare for investors to actually purchase and sell properties in their own name. The successful investor goes through a limited liability company or partnership. This protects your personal assets.
Real estate can be a risky business and lawsuits aren’t unheard of. You’ll want to avoid connecting your personal finances to your investments as you’ll be risking your retirement funds, 401K assets, and any Roth’s you may be invested in.
6. Plan and then plan some more
“Winging it” is not a viable investment plan. Many people fall into the trap of buying a house because it caught their eye and then trying to work out a plan for the property ex post facto.
If you think real estate is the market for you, sit down with your finances and anyone you want to work with and hash out a plan before you even glance at a sales listing.
7. Avoid the common mistakes
There are a lot of traps you will want to dodge when you enter the world of real estate investments. When things fall apart, it can usually be traced back to one of these primary mistakes:
Mistake #1: Going it alone
When you hear stories of people making millions in real estate, the focus is usually all on the investor. You don’t often hear about the team working behind them to make things go smoothly.
If you’re going to start buying and selling real estate, you absolutely cannot do it successfully on your own. You’ll be much better off if you have a stable working relationship with the following professionals:
- Real estate agent
- Home inspector
- Closing attorney
- At least one lender
Mistake #2: Not utilizing all available resources
Managing real estate investments is a skill you have to learn and preserve. There are more resources out there to assist new investors than you might think. And not all of them are “how to” books, either. For example, the National Real Estate Investors Association is a great place for new investors to learn the ropes.
The more you can familiarize yourself with the investor lifestyle, the more prepared you’ll be when you’ve actually got money on the line.
Christine Yaged is a co-founding partner and Chief Product Officer of FinanceBuzz. Christine launches and scales brands. She is passionate about technology, digital marketing, and people.
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