Investing in real estate can be a good strategy, no matter what your end goals are. It could be an outlet to generate revenue through rental properties, an opportunity to cash in on property appreciation in a lucrative area, or just a chance to build equity while paying for your living expenses. That said, real estate never comes with a guaranteed return.
If you’re a first-time investor, there are some important factors to consider before you make your first major real estate investment.
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Top Considerations for the First-Time Real Estate Investor
Keep these facts and perspectives in mind before you make a down payment on any piece of property:
- You should understand what you’re purchasing, inside and out. You should never purchase a piece of property on a whim; instead, you should only move forward if you’re confident you understand the property, inside and out. For starters, that means using architectural visualizations to see inside the property and explore it, or visiting it in person. You should also hire a property inspector to go over the property with a fine-tooth comb, looking for any possible structural deficiencies or problems that could arise in the future. You should even have a good understanding of the neighborhood, and what upcoming changes could affect property values in the near and distant future.
- Real estate shouldn’t be your only investment. One of the most important features of any investment portfolio is diversification. If your investments are too exposed to any one sector, or any one type of asset, you’ll be hit hard if and when there’s volatility in that sector. Accordingly, real estate shouldn’t be your only investment—you should also have a mix of stocks, bonds, mutual funds, and other holdings in your portfolio eventually. And within real estate, if you own multiple properties, they should be in different neighborhood, with different strengths and weaknesses.
- Real estate is never free money. People like to think that real estate is a guaranteed return on your investment. After all, property values have historically risen in practically all areas, and consistently as well. However, there’s no guarantee that your chosen property will increase in value, and there’s no guarantee you’ll be able to earn more in rent than you pay in overall upkeep.
- Costs are almost always more than you think. Speaking of upkeep, you should bear in mind that the costs of buying, repairing, and maintaining your property will almost always be more than you intended—which is why flipping properties is almost always an unsuccessful strategy. Budget conservatively, and estimate your costs to be a little higher than you think they’ll be if you want to play it safe.
- You need an emergency plan and multiple backup plans. Eventually, something will go wrong at your property, and unexpectedly. If and when it does, you’ll need to have an emergency plan ready. Who will you contact in the event of a disaster? How will you respond? What money will you use? It pays to have a lump sum of several thousand dollars set away, and a rolodex of people who can help you. It’s also important to have multiple backup plans, in case your first line of defense fails.
- You aren’t an expert yet. Just because you’ve bought a house before, or because you’ve watched lots of real estate shows, doesn’t mean you’re an expert. True real estate investing expertise can only develop after years, if not decades of experience, along with making and learning from your own mistakes. In the meantime, lean on other experts—including other real estate investors, agents, and contractors—to help you make the best decisions.
- You’ll need an exit strategy. If you want to make good on your investment, eventually you’ll need an exit strategy. That may mean planning to sell a given property after a set number of years, or when neighborhood prices reach a certain threshold. It could also mean retaining a set number of properties to serve as passive income generators by the time you retire. In any case, you should have a long-term plan in mind if you want to be successful.
If you feel you understand the potential risks and rewards of real estate investing and you want to get started, the best first step you can take is engaging with people in your area who are already doing it.
Talk to seasoned real estate investors, landlords, and property managers to better understand which neighborhoods are best, how far your money can go, and what common mistakes you should watch out for.
It’s the best way to gain secondhand experience, and a great way to find a solid first-time buying opportunity.