Adding real estate to your investment portfolio is an attractive option for building wealth and preparing for the future. Investment properties can produce some serious income over the long term, but if it were simple everyone would be doing it. Real estate investment is much more complex than buying stocks and bonds.
Before diving into the market, you’ll naturally want to do some homework first. If you’re considering getting into real estate investing, here are some important questions you should ask yourself.
What are your financial goals?
A good first step is to clarify where you want investment to take you. Consider your long-term goals and then shape your actions accordingly. This prevents your becoming sidetracked in the midst of complex transactions. Make sure that every investment you make is a step toward achieving your goals.
Are you prepared to begin?
It’s absolutely a good move to understand the basics of investing before you start looking for deals. Just make sure that you don’t get so tied up with reading the experts and attending “essential” seminars that you never get around to taking action. Arm yourself with specific questions you want to answer, get the facts, and forge ahead.
Do you have the time to research the good deals?
Finding good deals is a lengthy process. Investors must have time to devote to vetting properties, or access to reliable services that do it for them. A first step is to narrow down your choices based on your own criteria, and not your personal preferences. Then make sure that a thorough financial analysis is done on each potential investment. Essential figures for this process include:
- Net income (income/expenses)
- Cash flow (net income/debt financing payments)
- Return on investment (cash flow/investment)
- Cap rate (net income/property price)
- Cash-on-cash return (cash flow/investment)
- Total ROI (total return/investment)
Will you have the time to manage the property?
When acceptable deals have been identified, the costs of ownership should be considered. Property management is a critical element. Explore the different layers of involvement in managing a building or portfolio and their associated costs.
Hiring a management company is a good option for many investors. Services and costs vary, but a good management company can help to improve cash flow, retain tenants, and increase value.
Do you have cash on hand for emergencies?
Even with thorough planning, surprises arise when you own real estate. Sudden vacancies, unexpected repairs, and tax obligations can take a big bite. Investors should set aside funds in advance to avoid being shut down by expenses that will always exceed your expectations.
In short, to make a successful start in real estate investing, it’s important to thoroughly understand the potential commitment, in terms of both time and capital. Cash reserves, solid information, and sound advice are your best allies. Relying on seasoned professionals to supply the information you need to identify and manage your investments is a smart move, increasing your returns while ensuring that the moves you make advance you toward the goals you’ve set.