10 Things You Should Know Before Investing in Real Estate
Estimated reading time: 4 minutes
Real estate is the most popular asset among Self-Directed IRA investors. It’s easy to see why. It provides portfolio diversification and it’s an asset many investors already have experience with. Generally speaking, it provides good return on investment (ROI) in the long-term.
So what else should you know before you invest in real estate? Let’s dive in.
It takes time to find the right investment. Savvy investors do their research, and when it comes to real estate, the variables you’ll need to assess to make a smart investment are numerous. Take the time to educate yourself before committing to a specific property or strategy.
It isn’t a liquid investment. The funds housed within your real estate investment are only available to you if you sell it, and unlike a stock, real estate isn’t an asset you can offload over lunch. It’s a longer-term investment and depending on your strategy, it may be years before you’re able to turn a profit.
Your budget. Figure out how much you can spend and stick to it. Be realistic. Do your best to build in room for unanticipated costs. Buying property near where you live can help minimize certain costs (travel, etc.), but figure out your budget before you commit to buying in any particular area. Don’t forget that you also have the option to partner your IRA with other funding sources if you need more capital upfront.
Your strategy. You need to have a plan for the property you invest in. Will you fix it and flip it? Do you intend to rent it out? Your plan for your investment will likely be the deciding factor in the kind of property you purchase. Understanding your strategy is also key to predicting your expenses and budget.
Your aptitude for management. If your strategy involves renting your property, you’ll have to make a decision about managing it. Are you cut out to be a landlord, or would you rather pay someone to manage it for you? If collecting rent and filling vacancies doesn’t sound like your jam, you might want to consider hiring a property manager and research the costs associated with it.
The difference between cash flow and appreciation. Cash flow on a real estate investment is generated by operating, or renting, a property. Examples of properties you can rent are single family homes, apartment buildings, storage units, office buildings, etc. Successfully renting your property generates an income stream from the tenant(s) you’re renting to. It’s considered a reliable way to gain income from your real estate investment.
Appreciation is somewhat unpredictable. While it does tend to increase over time, appreciation is dependent on factors such as increases in demand, the effects of inflation, and upgrades you’ve made to the property. Appreciation is great, but you might want to avoid making it your only source of ROI.
The area you plan to invest in. You need to understand the local real estate market of the area you’re going to invest in before you make any moves. Are prices rising or falling? What’s the current ratio of supply versus demand? What’s the local political landscape and how might that affect development in your chosen neighborhood?
Vacancies happen. Finding the right tenants for your rental can be a challenge, so you’ll want to plan ahead for times when your property is vacant. You need to have funds set aside to cover the mortgage and upkeep during months when the property isn’t rented. It’s recommended to plan for a couple months each year that the unit or property won’t be generating income.
Two (or more) heads are better than one. Part of doing your due diligence is seeking out people who know more than you do. Internet research is good, but finding experts who are honest and willing to take the time to talk to you is also valuable.
Do you know other people who have invested in real estate? Talk to them about their experience. If you intend to be a landlord, you might want to talk to someone who has managed properties. Making connections with people who have implemented strategies similar to yours and who you can rely on to give impartial advice when you need it is a huge asset.
It's a house, not a home. When it comes to your property purchase, it’s best to keep emotion out of it. Stick to your budget, and if your offer sparks a bidding war, bow out. It’s easy to get caught up when you’re buying a property you intend to live in, but the purpose of this real estate purchase is to acquire a return-generating asset, not a home for yourself. The more focused and pragmatic you are, the more likely you are to make a sound investment.
With enough forethought, investing in real estate can be very rewarding. Do your research, take your time, and you just might find yourself a great asset.
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