In general, real estate usually proves to be a good choice for investing. You can possibly generate continual passive income or flip something for tremendous profit. If you rent something out while its value increases at an exponential rate over a period of time, then you've truly got a winner on your hands. Going down this road can certainly generate wealth for you.
On the other hand, are you sure that you're prepared for real estate investing? For starters, you'll have to have access to a lot of money before you can get started.
Buying any piece of land, apartment complex, commercial building, or even a single-family home can prove expensive. That's not even going into the recurring maintenance costs you'll face, on top of possible income gaps in between tenants at times.
Keep reading to learn a few things about real estate investing, as you can quickly discover it's not always the best idea, with particular risks in the major ways you can invest in real estate
Buying To Flip
If you've ever watched HGTV, you've likely seen commercials for “Flip or Flop” or the many spinoffs. In these shows, buyers snatch up abandoned, distressed, and foreclosed homes at cheap prices, before renovating them and selling them. The profit potential comes when the sale value is in excess of the combination of purchase price, renovations, and closing costs. However, it's not always a win. Such homes rarely can be inspected fully before purchase, sometimes they don't sell, and sometimes the area comps aren't actually good indicators of what return you might face.
Buying To Build
It's not as common, but it is possible in some markets to buy undeveloped land and build to suit. In this case, construction would be full instead of renovations, so there might actually be lower risk, considering there's nothing there to inspect or offer expensive surprises to fix. On the other hand, the money needed for full construction can be far more than renovations would be, so the entry-level requirements of this kind of investing are higher.
Buying To Lease Or Rent
This is by far the most common way to get started in real estate investing, and it does offer a unique dual benefit. Retaining ownership of houses for sale Cincinnati typically means wealth preservation if property values hold steady or go up, but at the same time, you can enjoy a stream of income from tenants who occupy your property. You can do this with both residential and commercial properties too, using the following process to increase your chances of making real estate investment work for you.
Pay Only Using Cash
Borrowing money in order to buy an investment is simply not a good idea. You need to take this into consideration before buying any real estate investment piece, because you need to be able to withstand a bad deal, lest you risk the rest of your financial wealth and matters. If it's not possible to buy a rental home, for example, with cash, then at least be sure you can afford to personally cover mortgage payments on it when you don't have renters.
It might have been some time since you were a renter, but remember how it was, and then see how it is through the eyes of an investor or owner. They're facing high turnover most of the time. There might even be times when they simply have no renters available for their property. If you can't handle a mortgage without having renters, you might be putting yourself under more financial strain rather than less, and that's putting you in completely the opposite direction of building wealth.
Something else to consider is that if you're not able to keep up with your mortgage, you might hurt your credit. Again, that will cost you money later on down the road.
Map Out All The Expenses Prior To Buying
If you are going to buy any piece of real estate an investment property, then you need to take all costs into consideration. That includes repairs, taxes, upkeep, utilities, HOA fees, and anything else that might apply. Consider the simplicity of using a rental company to let someone else handle rent collection and maintenance.
It will reduce your profit margin, but it will also reduce your stress significantly. An agency is an especially good option if you simply don't have the time or inclination to do all that is necessary for a property, particularly if you like to travel or have a lot of properties.
Whatever price you charge for your rental property will need to be high enough to cover all these expenses, plus your mortgage and periods of no income, while still leaving enough money on the table to make the effort worth it all. Also, don't neglect having enough insurance for the property as well as the right kind.
Research Every Property Carefully
Get all structures fully inspected before you sign anything, so that you know every possible problem you might have to deal with. Walk away if you have to. Make sure environmental assessments are part of the process when applicable. Look hard into any deeds for the land you might want to sell later. Look into plans for roads close to your land and think about whether or not they might impact your property value. Look out for outstanding liens. Consider the general direction of the community and look at comparables. It's still guesswork at the end of the day, but you can get a good idea of how things are looking.
Consider Starting Small To Build To Bigger Things
If you don't have a lot of money to start with, you might want to literally stay close to home. Get a duplex, or possibly a single-family home that has a basement apartment. You can live in the upper unit while renting out another. You'll get started in real estate investing, but you'll also live under the same roof as your tenant. You'll find out soon enough if this is worth doing.
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
While living overseas, he uses PureVPN for a low cost VPN service.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.