3 Steps You Must Take Before Investing in Real Estate

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Considerations and best practices when conducting a real estate search.

 

So, you’ve worked hard to grow a profitable business, and now you need to diversify your investment portfolio. Real estate is an excellent option — as long as you take time to select the best investment for you, which may not be the one you’re currently dreaming of.

Determine Your Goals

If you’re like me, you’ve seen the glamorous lives of property flippers on HGTV. That may even be where your interest in real estate began. But I’m here to give you a reality check: property flipping isn’t necessarily the best way for every individual to invest in real estate.

Luckily for you, a flip isn’t your only option.

There are three main categories for your investment (and if you’re lucky, you’ll find a property where they overlap).

First, there are two property types that yield short-term returns; one generates cash flow from rent and the other yields a profit through a renovation (a property flip). Then there’s the long-term route with properties that will appreciate value over time.

Here are a few questions to help you assess these options:

  • Will your down payment be enough to lower your mortgage and ensure cash flow, even with all of the costs of property ownership and maintenance?
  • Do you have the experience and funds to weather the unforeseen costs of a flip (and can you find a property that will turn a profit despite them)?
  • Do you have the time to profitably renovate a home? Flipping a property often requires you to work for sweat equity, since hiring a general contractor depletes your profits quickly.

If you’re left feeling uneasy with your answers to those questions, think about investing in property that will appreciate value over time.

Build Your Team

Next, consult with the experts who will help you maximize your results.

Choose an experienced real estate agent who can guide your goals based on your target location. Then find a lender who is ready to crunch numbers with you every step of the way.

If you have a financial advisor, bring them on board to help you evaluate the best way to diversify your portfolio. Each of these professionals can help you think through the pros and cons of each investment option.

Crunch the Numbers

As your search begins, you’re going to crunch numbers for property after property. This is the time to be thorough because there’s a lot to consider.

Be sure to evaluate the balance between land value and an area’s price point.

Areas further from the city center often have lower prices, but they also have lower land values and rental rates. These areas can be great long-term options if you can hold them until the city expands outward, but they can limit cash flow because rents and mortgages may be closely matched.

More established areas will carry higher price points, but they’ll also have more location value, which can equal higher rental rates.

Then crunch the monthly numbers. Property taxes, HOA fees, and management costs all impact your bottom line. When looking at specific properties, compare tax rates, and choose areas with lower rates if they’re suitable for your goals.

Also be sure that HOA amenities deliver enough rental value to cover their fee and that the regulations they entail don’t inhibit your investment. Finally, whether you want to use an agency or manage the property yourself, decide which approach is best for you.

Managing a property or two is certainly doable, but you may still want a home warranty, which will come with a monthly fee.

With the right goals and team, you will find a property where all of these numbers line up for an excellent addition to your investment portfolio.

As you embark on your search, I’ll leave you with a three final pro tips that I share with all my clients:

1. A multi-unit property can be an excellent option, since it offers multiple income opportunities in place. You’ll have more protection with a second income to cushion you during months between tenants.

2. Don’t immediately spend the profits from your property. Build a fund for the numerous unexpected expenses that can come with real estate investment.

3. Ugly properties often have great numbers. If you see a property with terrible pictures online and you’re tempted to keep on scrolling, remember that everyone else feels the same way. Look closer to see if it simply needs some cosmetic fixes for a major makeover.

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