Investing in real estate provides you with the opportunity to diversify your portfolio. But jumping blindly into this type of investment can have disastrous consequences. Real estate is more than just an investment; it’s a commitment.
It’s crucial to arm yourself with knowledge before making such a significant investment. Here are some things to consider before taking the dive and buying your first property.
Are Your Personal Finances in Good Shape?
Before investing in real estate, you need to take an honest look at your personal finances. Can you really handle the costs of a real estate investment?
Many gurus recommend following the 50/30/20 rule: 50% of your salary goes to needs, 30% goes to wants and 20% goes to savings.
Savings is crucial because you’ll need it for your down payment, which can range from 20-25% of the home’s purchase price.
Along with your personal finances, you also have to consider your credit score. The higher your score, the better the rate you’ll get for a mortgage. Interest rates for investment properties are generally higher to begin with, so having a higher score will help reduce the overall cost of the loan if you can secure a great rate.
Have You Researched the Market?
You may not have a particular property in mind yet, but you probably know where you want to invest. Have you taken a look at the market? How well do you know the area?
Learn as much as you can about the area you want to buy. Is the economy growing? What about the unemployment rate? Are people moving to the area?
Buying properties in up-and-coming areas may offer a big payoff later one. Myrtle Beach, South Carolina, for example, is the second-fastest growing metro area in the country. If you were to invest in property in this oceanfront town right now, you may see a big return in the future as prices rise in a hot market.
Along with these factors, you also have to consider the competition. What types of units are for rent in the area? What is the vacancy rate? If the market is saturated, the number of vacant properties may outnumber the demand.
Are You Ready and Willing to Learn?
You can read dozens of books and attend seminars on real estate investing. But until you actually make your first purchase and get your feet wet, you really won’t know what to expect. You will make mistakes, and you will need to learn.
But learning comes with the territory when making any type of investment. You just have to be willing to put in the work, learn from your mistakes and roll with the punches.
If you aren’t ready and willing to learn and make mistakes, real estate investing may not be a good fit for you.
Do You Have a Plan for Handling Vacancies and Repairs?
Your first tenant moves out, and you don’t have another one lined up just yet. This is a common scenario for landlords, and it may not seem like a big deal – until you consider the costs.
While the property sits empty, you still have to pay for the mortgage, utilities and maintenance of the property. You’ll also have to cover the cost of repairs that need to be made before a new tenant can move in.
Successful landlords invest in background checks – ones that check for evictions, credit scores and criminal records – because they know that a good tenant is less likely to leave before the lease is up, pay on time and leave the property in relatively good condition. Failing to properly vet your tenants can result in you having to make more repairs or find new tenants before you intended to.
Do You Know How You’ll Fund Your Investment?
How will you pay for your investment?
- Conventional loan: These require a down payment of 20% or more and a good credit score (620 or higher).
- Home equity loans or lines of credit: If you already own a home, you may be able to borrow against your home’s equity.
- Hard money loans: These short-term loans provide quick cash, but they typically come with higher interest rates.
- Cash: If you’ve saved up enough money, you can purchase the property with cash. This is the optimal way to pay for a property.
