When considering putting money into real estate, potential investors must first consider a variety of important questions.
Those include an honest assessment of financial goals and tolerance of risk, as no investment comes with a guarantee of making money.
The below question address some of the major areas that people should carefully consider before making a financial investment in real estate.
Questions: What are your goals?
Do you want to buy low and sell quickly? Or do you want to buy and hold rental properties? Are you interested in commercial, residential, or both?
Residential and commercial rentals are separate animals, requiring different types of management and financial commitment. Quick flips can be profitable, but only if you buy at the right price in the right market conditions. And even then there is no guarantee that you will sell quickly. You may end up holding a property longer than you’d like, so you need to factor in the holding costs.
Determine your goals, then do diligent research. Learn everything you’ll need to account for upfront. The less surprises after closing, the better.
What are your investment parameters?
How much of an investment are you willing and able to make? What kind of return are you expecting?
Commercial real estate can yield higher returns, but it also requires more of an investment. A hot real estate market may offer low vacancy rates and quick sales, but the prices of properties in a seller’s market are often inflated.
A rental property purchased in a robust market may lose value as prices adjust in the coming years. Know your parameters: What can you spend, what can you afford to lose, and what types of returns you need to realize in order to make investing worth the risk to you. Everyone’s parameters are different and fluid. What works for you today may not work a year from now, so plan to evaluate your parameters regularly.
What’s the Market Outlook?
One of the first things you want to do is determine how do the areas you’re considering investing in compare to each other.
Commercial and residential real estate markets vary from city to city and state to state. They may vary from neighborhood to neighborhood. A city may have one or two areas experiencing rapid appreciation while the rest of its neighborhoods languish.
Neighboring counties may have similar home prices, but one may have higher taxes than the other, which will affect sale pacing and volume. Find out what’s planned in the areas you want to invest in by analyzing building permits for planned construction. What will draw buyers? What will repel them?
Research the past and present economic performance of investments in the area, and utilize every resource to effectively predict future performance.
Are You Comfortable as a Landlord?
Even if you’re planning to flip properties, you need to be prepared for the possibility that you will need to rent a property if it doesn’t sell quickly.
Leasing, management, marketing, maintenance, and tenant communication take time and money. Prepare a budget for each property, and decide if you will manage them yourself or hire a management company.
The exact amount will vary from property to property, depending on type, size, and location. If you plan to manage properties yourself to keep costs low, remember to factor in your time as an expense. Finding and keeping good tenants is vital for an investment property owner; make sure you’re willing and able to put the time into establishing and fostering a good relationship with tenants.
Coming up with answers to all of these questions can lead you to a more informed decision on making a real estate investment. Keep them in mind and develop a solid plan before making the leap into real estate investing.