Historically, real estate investing is a successful strategy for investors. However, as with any investment, there are risks. Real estate investing requires considerable preparation and research.
Here are some essential steps to improving your chances of success when beginning to invest in real estate.
Do the Research
Before buying an investment property, perform due diligence to determine if the prospective property is everything the seller claims. As with any real estate investment, a professional real estate agent with extensive knowledge of the area and experience can assess the property's viability.
Run the Numbers
Before purchasing an investment property, it is essential to understand the costs. Create a list of all the expenses involved. In addition to the financing, you should include taxes, maintenance, utilities, advertising, and other operating costs.
Annual rental income should exceed the total of these costs while also being at a rate to attract and retain renters. A cash flow analysis will help to evaluate the investment's potential.
Set a Target Return on Investment
Real estate investing is generally only one component of an investment portfolio. However, given the potential risks, the anticipated return on investment should be at least as high as other less risky investment options.
According to a recent Forbes article, real estate investors typically target a return on investment (ROI) of 15%. Achieving this is dependent on the purchase price, cost of improvements, operating expenses, and the potential rental income. So again, an experienced real estate professional is a valuable resource for understanding the local rental market conditions.
Assemble a Team
In addition to relying on the advice of a trusted real estate agent to help identify and successfully negotiate properties, a successful investor should develop a trustworthy team of advisors and contractors to help improve, repair, and maintain the property profitably. An investor needs an expert to understand the cost of upgrades and the long-term impact on the property's value.
Additional experts on your team should include a lawyer, title agent, and accountant experienced with the nuances of real estate investing.
Start Small and Stay Close to Home, Then Expand Your Business
Experts suggest new investors start small, allowing them to get their bearings with their first few properties and learn the real estate investing business.
New investors should buy local properties they can easily monitor to learn the ins and outs of property management. Managing investment property from a distance can create problems, especially for new investors, resulting in frustration and added expense.
Choose a Lender Wisely
The cost of financing an investment property is a significant factor. Interest rates and extra charges can hurt your cash flow and discourage further investments.
Successful real estate investors typically establish an ongoing relationship with a trusted lender. Some investors initially look for non-institutional sources to help purchase their first investment property, such as securing funding from friends or taking out a hard money loan.
After initial success and generating equity, borrowing for future real estate investments from a commercial lender at a more favorable rate becomes viable.
Work with a Proven Real Estate Agent
Any real estate investor's most important resource is a real estate agent with extensive experience and local market knowledge.
Before beginning any real estate venture, investors should consult a proven real estate professional to understand market conditions, pitfalls, and all the components necessary for a winning strategy.