Finance 101: The Basics of Investing in Real Estate
When you are looking to build a good personal investment plan differentiating into different asset classes continues to be very important. One form of investment that you should consider making is to invest in real estate. Over time, real estate investors will enjoy cash flow earned through rental income or value creation. While there is a lot of potential to be successful with real estate investments, there are risks as well. There are several basics of real estate investing that you should be aware of before making your first investment.
Have a Clear Strategy
If you are going to invest in real estate by purchasing your own property, there are a number of strategies you can follow. This could include buying a property to rent or purchasing one to renovate and sell. No matter what you choose to do, it is important that you have a strategy in place that you will follow and makes sense for the asset that you are targeting.
The location and market of a piece of property are incredibly important when it comes to whether or not you will be making a wise investment. You should always do plenty of market research to determine whether your business plan makes sense. Some of the factors to consider are what the median sale price for comparable homes is, what average asking rental rates are, and whether the trends have been improving or declining. You should also do research to see if there are any developments or changes coming to the neighborhood that could help or hurt real estate in the area in the future.
Have a Realistic Budget
Creating a detailed budget for your project is very important. This should include all of the upfront costs including the purchase price and closing costs, renovation costs, and carrying costs. It would also be wise to include a contingency for unexpected costs that you will incur along the way. If you intend to lease the property out and hold it for a while you should also build in operating costs and future maintenance expenses.
Understand Tax Implications
A major part of any investment strategy, which is one that people overlook, is the impact that taxes can have on your property. When you are building out a budget and create projections for future returns it is important that you include a provision for taxes. If you have taxable income each year from rental income, which is after the payment of interest and depreciation, you will have to pay taxes on that amount. Further, if you sell a property for a profit you may have a big tax bill waiting for you at the end. Fortunately, there are ways to reduce your tax liability through a 1031 exchange real estate program that can help you roll the profits you earn into a new project instead of paying taxes.
Build Good Relationships
While you may try to go off on your own when buying and investing in real estate there are still many people in the industry that you will need to rely on to be successful. You should look to form good relationships with realtors, real estate attorneys, mortgage lenders, contractors, and even other investors. All of these relationships can help you to find better deals and get the help you need if a deal is not going the way you want it to.
Other Real Estate Alternatives
When most people think about real estate investing they think about purchasing a home and either flipping it or leasing it out. However, for novice investors, this could seem like a risky and capital intensive venture. For those that do not have the capital to manage their own project, there are alternative options as well. Some of these options include investing through publicly-traded REITs or investing through a crowd-sourcing real estate platform. Both of these will allow you to dip your toes into the real estate market without risking too much.
Investing in real estate can be a great option for those that are looking for a unique form of investment. While there is a lot of opportunity with real estate investing, there are risks as well. By taking these factors into consideration, you can increase your chances of making a successful real estate investment.