Do you think you’re ready to put money into your first real estate investment? Real estate can be lucrative if you invest the right way, but there are also some big financial risks. Here are seven questions to ask yourself before you make your first real estate investment.
You are Financially Stable
The first step to getting ready to invest in real estate is financial stability. If you are struggling to cover your current living costs, you are not ready to invest in real estate yet.
Before you invest, you should be free of any high interest credit card debt, have a stable income, and have enough savings to live comfortably for at least six months without any income after you make your investment.
You Have a Large Stockpile of Cash You Can Live Without
Investing in real estate takes a lot of cash up front, and you won’t be able to access that investment for years, maybe even decades, after you make your investment.
Buying a primary residence generally requires a 20% down payment, and investment property purchases require at least that much as well. If you cannot put down 20% on your own, you will need to look to investors or partners to help finance the purchase.
You Are Willing to Put in a Lot of Work
If you are planning to manage your properties yourself, expect a lot of work getting started. Buying a property requires time and paperwork, and getting the property ready for listing and finding a tenant takes work as well.
You can negate some of this work by hiring a property manager, but doing so also lowers your cash flow, as you have to pay the property manager a portion of your monthly income.
You Want to Build a Business
Property investing can be thought of as a hobby, but according to the IRS, it is a business. Whether you own one condo or hundreds of houses, you are the proprietor of a real estate investment business.
As a business owner, you’ll need to take legal, tax, and other considerations into account and be prepared to respond to tenant, bank, and legal issues surrounding your investments.
You Can Invest in a Stable or Growing Region
Whether you live there or not, you want to make sure you invest in a city or region that is stable or growing, not a high risk or declining market.
It is best if you can invest where you live, as you will be more familiar with the local market and you can keep tabs on things personally, but if your local market is not a good investment, you can invest elsewhere.
You are Prepared to Make Long-Term Financial Decisions
Real estate investing is a long-term decision. The transaction costs can be high, so you’ll want to buy in for a long period of time to give yourself plenty of time to earn back your investment costs.
I know a real estate investor who has owned his properties for nearly 40 years. That is a seriously long-term investment. Keep in mind that your money may be tied up in your properties for decades when you decide to buy.
You Have a Trustworthy Agent
No real estate transaction is a good idea without a trustworthy agent. A quality agent can help you understand the local market, find the right property, and better understand the risks and rents you might earn from your investment.