Are you a worrier or a warrior? How much money do you have in the bank? How willing are you to get your hands dirty? We share 5 questions you need to ask when you’re considering the world of real estate investment.
You’ve probably seen the TV shows that follow the adventures of property investors. Some buy homes from foreclosure auctions, fix them up and sell them as quickly as possible. Others find properties that may need a few repairs, but which can be rented out. Some do both.
The idea of purchasing an investment property can certainly be compelling. Whether it’s adding a rental to your portfolio or finding a great deal and flipping it, there’s a little bit of “I could do that” in a lot of us. But is purchasing real estate as an investment strategy—outside your primary residence—the right option for you?
Here are 5 questions to ask yourself before you become a real estate investor:
- How much money do you have to invest?
For awhile there were dozens of real estate investment investment schemes that said you could purchase properties without spending any of your own money. Realistically, this just isn’t the case. When you purchase a home at auction, you are required to pay the full amount immediately, meaning you either need to have all of the cash yourself or borrow it from friends, family or other investors in order to do the deal. If you go through the traditional sales process, however, you can finance the purchase with a lender, providing you have enough capital for the down payment and are able to meet credit and debt-to-income ration requirements.
- How much work can you do yourself?
Especially when you begin to invest in real estate, there is a lot of hands-on work needing to be done. Sometimes it’s as simple as deep cleaning the property and doing painting, tiling or other “basics”. If your property has been damaged by renters or the previous owners, it could require new walls, windows, flooring, plumbing and more. If you have the time and skills to do the work, great. Otherwise, you’ll have to hire it out to a contractor. Knowing what you can do may affect what kinds of properties you can or should buy.
- Where do you live?
There are most likely real estate investing opportunities in virtually any city in the United States. Some just happen to possess far greater opportunities than others. For awhile, Phoenix was a flip town; the market had crashed and you could pick up properties for a song, clean them up and turn them at a decent profit if you knew what you were doing. Now it’s hard to even find a property for sale in many areas, and the ones you can get may be out of a new investor’s range. If you live in a city with climbing property values, a property flip can be a fantastic opportunity. In a more static market, a rental may be a better option–especially if you live in a college town or an area with a booming Millennial population who may rather rent than own.
- What happens if things don’t go as planned?
You get the money together to buy and renovate a property, but then the market flexes its muscle and suddenly you can’t sell for what you have invested. Maybe that diamond in the rough turns to coal because of black mold and you have to replace the entire interior. Or no matter what you do, you just can’t get a property rented for a few months. What would such an event do to you financially? Part of investing in real estate is planning for the “what ifs”. Having a good financial footing before you invest, and a contingency fund going into your investment, is always a good idea. If you aren’t there yet, focus on moving that direction so you can be in the right position when a great opportunity opens up.
- Are you a worrier?
Every property investor has to know that with the high reward opportunity comes a certain amount of risk. If you are a worrier, you may need to come to grips that there has never been and will never be a sure thing when you invest in real estate. One thought: start small. For instance, either add a basement rental to your own home (if allowed in your area) or actually purchase a primary residence for yourself that has an existing rental unit. You’ll get to see what you think about being a landlord—and you’ll likely earn money while you do it, giving you a more stable investment fund when you’re ready to move take the next step.
Questions or feedback? We’d love to hear ‘em.