Rentals in most markets are at an all-time high, mortgage rates are at historical lows and there is a strong desire for investments beating the stock market. These realities have created a surge in investors seeking to enter the real estate investing world. Through the years, I have spoken to countless real estate investors who quit after their first property, or worse, didn’t get started at all. Usually, they stalled as a result of something that could have been overcome. Let’s discuss three things to know for a better first experience!
- Know thy self
There are many different ways to make money in real estate. Don’t get lost in the sea! It’s crucial to match your real estate investments with your personality and your investment strategy. Do you want to be actively involved in the management of several properties and projects? Or do you prefer a hands-off approach that allows you time for your day job and family? Figuring out your “Why?” will help determine your strategy and is the first step to success.
If you can find a niche you enjoy, you will be more motivated. Common motivations include improving a community, seeing a renovation completed and watching a house become a home. Rental properties, renovation projects, and new construction builds can not only be profitable, but they have the ability to change neighborhoods and impact families. Once you’ve developed your “Why?” and your strategy, you’re ready to continue.
- Know your financial limits
When you are starting out in real estate investing, you don’t know what you don’t know. Sure a house sounds like a deal, but have you accurately budgeted the renovation or rental vacancies? On your first project, you will likely underestimate costs on a renovation or use inflated numbers for rental. What are you going to do if the property doesn’t rent as quickly as you thought or if the AC breaks six months after closing? Unexpected repair costs and contractor delays have sunk many a budding investor. Instead, plan for these unforeseen circumstances. In your business plan, account for extra expenses and ensure you have enough reserves to buffer your carrying costs and then some.
Even if the first venture doesn’t cash flow as expected, you must stay patient and not make any quick decisions. These quick emotional decisions in real estate can both cost you financially and keep you from realizing your goals.
- Know you can’t get rich quick
Success in real estate investing is achieved over a long time horizon with a series of quality investments. There will be deals that are too good to be true, and they usually are. It’s critical to avoid the “shiny object syndrome” and build a team of professionals you trust and apply common sense. Lean on your Realtor, other investors and your financial advisor to determine the deal(s) that work for you. I am often presented with great looking deals that I find don’t match my business strategy, risk profile or have glaring flaws once investigated. Avoid these traps and go with tried and true fundamentals.
Eric Tyson, co-author of Real Estate Investing for Dummies says this about investing in real estate, “It’s not easy. It’s a good long-term investment, but so is putting your money in a mutual fund, which is a lot easier. These gurus don’t talk about all that hard work. You have to be smart, you have to be willing to work, and you have to understand your risk tolerance.”
If you invest in something you are excited about, conduct a thorough due diligence, and stay realistic about your return, you might be able to find the pot of gold at the end of the rainbow in real estate!
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.