Real estate remains to be a popular investment due to its potentially lucrative payoff. It’s also fairly simple to understand and get into. As an investor, you buy a property, let its value appreciate, and cash out after a while. When you compare real estate with stocks, you have a tangible asset you can see, visit, and improve; this is appealing to different kinds of investors. More importantly, real estate remains valuable as long as the property is well-maintained and located in an attractive area.
However, going from someone who is a property owner to a person who strategically invests in real estate requires a bit more work. You’ll need to research, talk to agents, and make preparations when building your portfolio.
Whether you’re considering working with a brokerage firm that uses Brokerkit.com to sustain a roster of effective agents, or want to search for properties on your own, here are key preparations you need to make when investing in real estate:
Set Your Real Estate Investment Goals
Before anything else, it’s important to set the goals you want to achieve in your real estate investment journey. Defining what you want and what’s important to you right from the beginning can help make your decision-making process later on easier. Some of the things you should consider include your budget, risk tolerance, returns, and appreciation value.
For your budget, you can set an amount that is practical for you and your current financial status. In case you go the financing route, it’s best to get pre-approved for a mortgage so you know what you can and can’t afford. Also, make sure not to over-leverage yourself and choose a more conservative budget.
Risk and Return Tolerance
When it comes to the risks and returns, nothing has to be absolute. You can change it up as you go along or what will be more beneficial. You can choose between a lower-yielding property that’s a safer investment and a higher-yielding one that comes with a bit more risk. Both types of real estate investment will be good for your portfolio. What you need is to define what is it you’re looking for exactly. Do you want a higher monthly cash flow, stability, or something in between? Answering this type of question can help you decide.
Appreciation is the increase in value that your investment property gets over time. You need to have an idea of the amount you want to make per investment or at least an idea of how much you want to make. This will help you narrow down your options when selecting a property. If you aren’t particular about your monthly cash flow and prefer to build equity, you can focus on properties with higher appreciation potential.
Prepare a Conservative Cost Estimate
As a new investor, expect some expenses and expect them to easily add up. You may end up covering closing costs, as well as spending on renovations and general fixes. These kinds of operating costs don’t mean you’ve made a bad investment. Rather, it just goes to show you can underestimate your expenses.
While you can predict essential costs such as property taxes and insurance, other expenses are a little more difficult to foresee. This is part and parcel of being a real estate investor. As such, experts recommend preparing a minimum fund of about one to two percent of the property’s purchase price to help you cover any additional costs.
Learn Common Real Estate Terms
Another thing you need to do in preparation for real estate investing is to familiarize yourself with industry jargon. You’ll likely come across terms and acronyms like amortization, leverage, 1031s, REI, REITs, NOI, and LTV, among many others. It’s important to learn about the language real estate professionals use and understand why they matter. It will help you feel more confident in your business and be in a better position to make informed choices.
Research on Different Locations
As a budding investor, you need to pay attention to the location of the properties because it can affect all of your goals. Is the property in a growing city or town? Does the area offer economic opportunities? What’s the neighborhood like? Are there schools and amenities nearby? Do some research and find out more information about the area. These may help you gauge the potential growth of your investment. If you want, you can talk to realtors and property managers to get their insight into the local market.
Have an Investor’s Mindset
As you move from being a property owner to an investor, you need to also acquire an investor’s mindset. This means that when you’re looking into properties, your decisions must be based on the preferences of future tenants and not your own. Although it’s common to form an opinion based on your personal bias, you need to remember that you aren’t the one moving into the place.
Conversely, you can also purchase a property based on the kinds of tenants you want. For example, you may want to invest in properties that can be a home for a retiree, a family with kids, or a young professional.
As an investor, you need to consider if the property will produce the kind of returns you’re targeting. So don’t pass up a home based on how it looks but on how profitable it can potentially be.
Many people get into real estate investing because it’s a profitable market. However, building your real estate portfolio is no easy task. Fortunately, doing the preparations mentioned above can help you ease your way into real estate investment. With some research and planning, you’ll have a rewarding investor’s journey.