Investing in real estate can be one of the best ways to create personal wealth. There are many options when it comes to how to invest in real estate. You can do so passively or be more hands-on through the acquisition of a rental.
Before you jump into the real estate investment game, it is essential to do some research and get some things in order. We put together a brief outline of what your first steps should be in your journey toward becoming a real estate investor.
Decide How You’d Like to Invest.
Deciding you want to own property, become a wholesaler, or getting involved in a more passive manner by investing in REITs is the first step toward becoming an investor. But even then, there are different strategies. If you want to own property, you can do the following with it:
- Traditional rental – You can purchase a home to use as a long-term rental.
- Vacation rental – short-term rentals have become very popular and have the potential to bring in some massive returns.
- Fix and Flip – If you like to get your hands dirty and don’t mind doing a little of the work yourself, then flipping homes can be another profitable real estate investment strategy.
As with anything in life, there is a certain amount of risk included with any one of these investment strategies, and each will also come with a certain amount of time and money commitment for you to consider. If you aren’t sure which route you want to go, try making a list of pros and cons for each strategy to help you decide.
Determine Where You’d Like Your Rental to be
Regardless of what strategy you’ve decided on, you will need to decide what area you would like to buy into. Many experienced investors have mentioned that, at first, they wanted to be in the “hot” and “trendy” part of town and failed to look at the long-term implications of those areas.
When choosing the location, it is essential to look ahead at future growth in addition to looking at how much the rental would bring in today. You should also consider whether you’ll have a property manager. If you were to decide not to have someone else manage the property and rather to do it yourself, then another determining factor regarding the location is the distance the property is from you, and how far are you willing to drive to get to your investment property should you need to.
Run the Numbers
One of the most important steps in real estate investing is learning how to calculate cash flow. A general rule of thumb on a rental is that monthly rent should be 1% of the purchase price, to cover all expenses and leave you with some money left over. That would mean that buying a home for $200,000 would need to have a monthly rent of $2,000. You will also want to consider how much is needed for any necessary repairs or updates, and make sure you have enough money set aside for them.
Getting financing on an investment property is much more complicated than it is when you buy a home of your own. You will likely need to come in with a much higher down payment, generally around 20%. Plus, you will need to factor in money for closing costs. Just like when you buy a home for yourself, it is best to get preapproved before you start the purchase process.
Get Familiar with the Landlord-Tenant Act
The not-so-fun side of real estate investing is that there is a chance you and your tenants will not get along. The Landlord-Tenant Act lays out the rules that a landlord must follow. It was written to protect tenants from unethical landlords who charge too much in fees or fail to provide a habitable residence. Before renting your first property, you will need to read the entire document and become very familiar with what you can and cannot do as a landlord. This is an essential part of owning rental property, to avoid the possibility that you could unknowingly do something that a tenant could sue you for.
Ready to Get Started?
If you are ready to take the leap into real estate investing, don’t go at it alone, contact a real estate agent for help. Many real estate professionals are not only knowledgeable on the subject, but they are often investors themselves and will have personal experience and can help you get started. In fact, many of the REALTORS® right here in the LUXRE family currently own or have owned investment properties, and we have several members in areas across the United States, that specializes in real estate investing. Should you have any questions about the process, your current investments, or if you are ready to get started, contact us! We would love to help you however we can.