According to Grand View Research’s latest report, the real estate market across the world will be valued at $5.85 trillion by 2030. Thus, it’s evident that the real estate market is booming. On top of that, there are many different ways to get involved. The most common way to do this is by directly investing in real estate.
However, before you invest in real estate, it’s important to do your homework. Here’s what you need to know about making smart decisions when investing in real estate.
#1 Understand the Risks
Real estate investing is a risky proposition. People have been making money in real estate for a long time. But there are also countless stories of people who lost money. Real estate is illiquid and can take years to sell. You may find yourself stuck with an asset that doesn’t sell. This means you can lose money if the value of your property drops before you can resell it at a higher price.
Real estate investing isn’t for everyone. Even those who decide to invest need to know the risks and challenges associated with this type of investment strategy before they make their final decision.
Prices fluctuate based on market conditions and other factors outside of your control. There are also high transaction costs associated with buying and selling property. These including legal fees as well as commission costs paid to realtors when you buy or sell properties.
There are some risks that you personally can’t assess. For that, you need to get in touch with certain professionals.
For instance, let’s say you want to buy an old house in Brunswick, Georgia. According to Realtor.com, old house prices in that area go as low as $55,000, with median listing prices around $300,000. Thus, it’s natural for you to want to invest in this particular real estate market.
However, old houses often have structural issues. They might not even meet updated building codes. Thus, you must get in touch with a home inspector, especially a local one.
In this case, you should consult a home inspector in Brunswick, GA. They are more aware of local building codes than someone from the outside. They can help you assess the house’s condition, and you can then decide whether the investment will be worth it.
#2 Learn About Real Estate Investing Itself
Before you invest in real estate, you must understand the market and its potential for future growth. You also need to understand the different types of real estate investments available to you.
For example, there are many types of rental properties, including single-family homes, townhomes, condos, apartments, and mobile homes. In addition to learning about these options for yourself, seek out other investors who have experience with them. Then they can share their perspectives with you as well.
Be sure to research all your financing options before purchasing a property as well. Which one works best depends on where your down payment is coming from, how quickly you want access to those funds again, what kind of property investment might be appropriate, etc.
#3 Create a Financial Plan
You need to know how much money you have available, how much money you can afford for the down payment and monthly payments, as well as how much cash will be needed for maintenance. That way, you’ll be able to make sure that the investment is feasible. And that it won’t cause problems with your existing budget.
A good rule of thumb is to make sure that when buying property, at least 20% of the purchase price should come from equity (your assets). 30% from the down payment (savings). And 50% from financing (mortgage). This ratio makes it easier for investors. If they sell their property within three years of purchasing it, they don’t have any mortgage left on their hands. This means no debt but also no profit.
Another important thing about making a plan before buying anything real estate related is having enough cash flow available throughout the entire process. Since most banks don’t give out loans without having some kind of collateral, many people end up needing some extra cash on hand right away once they sign an agreement with their bank. Thus, they can fund these projects using other means, such as credit cards or personal loans.
Always analyze the mortgage rates before you take a home loan. The Bank of America’s website regularly updates the rates, so you can get your information from there. As of October 26, 2022, a $200,000 loan has a 30-year fixed rate of 6.875%. You can also update the rates for various loan amounts using this website.
#4 Consider Different Types of Real Estate Investments
If you’re looking for a quick return on your investment, consider investing in rental property. The process is relatively straightforward. Find an apartment building with low vacancy rates and high demand. Purchase the apartment, and rent it out to tenants, all while making sure the property remains in good condition.
Commercial real estate investments are similar to residential ones but on a larger scale. You can look into buying commercial properties such as office buildings or shopping centers. You can generate income from tenants who pay monthly rent for their space.
Residential real estate investments include buying single-family homes or condos and renting them out to tenants. This is usually on a long-term basis (like 30 years). You will have a lot more work involved than with other types of real estate because these properties require upkeep, maintenance, and repairs over time.
However, you may be able to charge higher rents because the competition is lower than other options like hotels or apartments.
#5 Underwrite the Investment Property Yourself
Underwriting is the process of evaluating an investment property to make sure it’s worth purchasing. It involves taking into account many factors, including how much money you will need for upkeep and maintenance, as well as how long it might take for your return on investment (ROI) to happen.
There are plenty of things that can go wrong with an investment property. Therefore, it’s important to understand all of the risks involved before buying to minimize them and maximize your ROI. You can hire a professional underwriter if you don’t have the time or resources available to do it yourself. However, if you’re looking at properties in your local area already, this should be an easy step.
Real estate investing is a complex field that requires you to understand the risks involved before you invest. Therefore, you need to gain as much knowledge as possible regarding this market before you invest in it.