If you’re looking to become a real estate investor, then you’ve found the right guide. To be sure, this guide will not tell you everything you need to know about real estate investing. But, it can get you started on some of the basics.
This guide is divided into three sections. In the first section, we’ll discuss simple steps you can take on your journey to becoming a real estate investor. In the second section, we’ll look at some of the things that most real estate investors know. This knowledge will definitely come in handy as you begin to buy, sell, and flip your properties.
In the last section, we’ll look at the reasons why it might be a bad idea to become a real estate investor. There is no profit without risk, and we’ll shed some light on risks you can expect once you get into the industry.
Three Steps to Becoming a Real Estate Investor
If you’re going to become a real estate investor, it only makes sense to learn as much as you can about real estate. The knowledge you’ll need for day to day operations is only available in the field. However, without the fundamentals, you’ll never be able to apply the experience you gain in the field.
You can begin with reading up common jargon in the industry and then make your way up to the different kinds of properties, and the cash flow you can expect from each of them. You also need to find out how much you’ll need to buy your first property, as well as how to raise that money. It’s impossible to list everything you’ll need to read up on in a single point. Instead, check out Investopedia and the balance‘s libraries on real estate investment.
2. Create Your Strategy
Your real estate strategy needs to include everything you’re going to do, from searching for properties to financing your operations. You can think of your strategy as a business plan. In it, you should identify things like the demand in your target location and how you plan to grow your network.
You need to be honest with yourself when creating a strategy. It’s good to be ambitious, but don’t include goals you have no way of meeting. For example, even though rental properties yield a good cash flow, they also require some investment. If you need a quick cash infusion, you may be better off with a strategy that includes flipping properties.
3. Build Your Cash Reserves
Once you begin investing, you’ll find out that you’ll need a lot more money than you first thought. It’s a good idea to get to work on building your cash reserves as quickly as possible. Without a cash reserve, you have no way of handling the inevitable but unpredictable expenses associated with owning a property.
There are several ways to build a cash reserve. Saving, selling, and borrowing top the list. However, they are limited by your current means and income. A fourth option is to find a partner. They can provide the cash while you handle the operations side of the business.
What Every Real Estate Investor Knows
In this section, we’ll get into some of the things that every real estate investor knows. This knowledge can help you while you’re trying to build your investment portfolio.
Every Location and Neighborhood Has Price Trends
You’ve no doubt come across some information like this. Everybody knows that real estate is all bout location. But, you might not know that the location is as specific as neighborhoods and city blocks. Lots of factors affect home prices, and they range from the overall market performance to simple things like the aesthetics of the other houses in the neighborhood.
To become a truly successful investor, you’ll need to identify the factors that affect the prices in each of the neighborhoods you’re considering. You’ll also need to know what the current trend is. The good news is that the factors are not so different across neighborhoods.
Tax Rates Can Help You Sell More Houses
Tax rates often differ between different places in the United States. They may even vary between towns. It’s interesting to note that this difference has a significant impact on the demand for real estate properties. Towns that have better rates will always attract more occupants, and that translates to higher demand for houses.
While doing your due diligence, you should call the local tax assessor to find out how much a particular town charges in tax, as well as the time of the town’s last evaluation. This information can help you decide the best place to set up shop.
You Should Always Start Small
If you talk to any successful real estate investor or any successful business person for that matter, they’ll tell you that you should always start small. It’s understandable that you’re excited about the business and can’t wait to get started. However, you shouldn’t get greedy. Begin with small pieces of property that are cheap and easy to manage. You can use these as training wheels to build your confidence and prowess in the field.
Once you’re more skilled and have more money, you can scale up and go for larger properties. Like with many businesses, you never really know what you can do until you start investing. It only makes sense to go big after you’re sure you can handle more properties with bigger and better features.
Vacancy is Bad for Business
As a rule of thumb, the longer your property stays empty for, the more money you’ll lose. Therefore, it should be your goal to keep the vacancies in your property to a minimum. There are several ways to minimize your vacancy rates; making timely repairs and installing Equinox Roofs by Royal Covers are some of them. Also, listing your property with companies like Property Management Inc. will help you find a suitable tenant in a short time.
But, one way to avoid high vacancy rates altogether is to do your due diligence before you invest in an area. Try to find out what the prices are in the neighborhood and how they relate to different property types. You want to choose the best combination of location and property.
Reasons Why You Shouldn’t Become a Real Estate Investor
This guide would be incomplete if we didn’t tell you about the risks and disadvantages associated with becoming an investor. Here are 4 of the risks you need to look out for:
You May Not be Able to Generate Enough Cash
As profitable as real estate might be, you can’t become an investor if you don’t have cash. And unless you have a family inheritance or a lot of money in the bank, you may not be able to make your way into real estate at all. Many real estate investors have to rely on sources like private lenders to get enough capital to begin the business.
Unfortunately, there are significant risks associated with launching a business on borrowed money. You will need to generate the funds in time to pay back the lender, or you could wind up in some financial trouble. And there’s also the possibility of you losing most of your investment, in a market downturn, for example.
You Will Need a Long List of Contacts
People are often surprised at how quickly a real estate agent can find a property that matches their specifications. It’s usually because the agent has an extensive network of fellow agents, contractors, and even homeowners. The right property is, thus, only a phone call away for these agents.
But for a newcomer like you, you’ll have to build a list of contacts slowly, and the process could take you months, or even years. Whether you’re an agent or an investor, you’ll still need contacts. And, you’ll have to endure some adverse reactions because people are always wary of newcomers.
You May Not be Able to Find the Right Property for Months
We’ve already discussed how real estate is all about location. With enough due diligence, you can be able to identify which properties are most likely to make you money. As an investor, you know that it’s counterintuitive to buy a property with low demand. Unfortunately, you’ll face the choice very often in your practice.
The perfect property, for you, would have to meet all financial needs, in addition to all the other conditions we discussed. As a result, it may take you months to find a property that’s worth your money, and another few months to make it profitable.
You’ll Have to Invest a Lot of Time and Energy
To many people, real estate investment sounds more like a secondary source of income than a full-time job. They think, “you simply buy a property and look for tenants. How hard can it be?” Unfortunately, it can be tough, indeed. Becoming a landlord is a full-time job that will require your daily involvement commitment.
You’ll also need to answer a lot of questions. Can you manage the property yourself? Can you go through the process of securing a rent permit? Let’s not forget about fair housing laws. A single honest mistake can cost you lots of money. To be successful at real estate, it’s best to take it as a full-time job. At least in your first few years.