Buying an investment property is a popular strategy for making money and creating wealth, which explains why a lot of people are attracted to the real estate investing market. However, not every aspiring real estate investor is ready to make such a decision. There are plenty of stories of people who purchased investment properties and ended up losing money instead of making profits. Why? It could be one of many reasons, but they all lead back to them not being ready to make the leap in the first place!
According to real estate experts, there are a number of things a beginner real estate investor should have in place before buying an investment property. To break them down, here are some basic questions answering which will help determine whether or not you are ready for buying an investment property.
How Much Do You Know about the Real Estate Market?
Knowledge is KEY! Sure, real estate investing is mainly learning by doing, but no successful real estate investor made it without having sufficient knowledge of the market. So, if you don’t have any knowledge or general understanding, then you’re definitely not ready for buying an investment property.
The first thing to do before entering the real estate investing market is to learn about and familiarize yourself with the different terms related to it. Read about what is cash on cash return, cap rate, net operating income, and other metrics related to buying an investment property which you probably don’t hear outside the real estate market.
In addition, beginner property investors need to research the market and learn about the different types of investment properties and investing strategies. Find out what makes certain investment properties profitable and others unprofitable. You don’t want to regret buying an investment property when you realize too late that it’s costing you more than it’s making you.
For someone who doesn’t have knowledge of the real estate market, the amount of information needed might be overwhelming. However, you have nothing to worry about! Any aspiring real estate investor can easily access this information online through real estate websites, blogs, and books. Moreover, the best way to learn everything about the real estate market is by speaking to an actual real estate investor!
Experienced property investors will provide you with the ins and outs of the real estate investing market and maybe even share their experiences. In this way, you’ll know what to avoid and how to handle challenges you’ll face when buying an investment property.
Do You Have the Money?
Money is the biggest obstacles for many beginner property investors. The first question that pops up when thinking of buying an investment property is: How can I afford it?
If you’re planning on buying an investment property with all cash, you need to make enough to cover both upfront costs (purchase price, closing costs, emergency fund, etc.) and ongoing costs (rental property taxes, insurance, maintenance, etc.). Unless you’re one of those lucky property investors with bags of money, then you’re not ready for buying an investment property will all cash.
However, that does not mean you should forget about your dream of becoming a real estate investor! One of the benefits of real estate investing is that property investors can finance the purchase of investment properties with little money by taking a loan instead of paying fully in cash. There are multiple types of loans specifically for buying an investment property that a real estate investor can choose from. Conventional mortgage loans are the most common in the real estate investing market for beginner property investors. Other financing options are hard money loans, private money loans, and owner financing.
As an aspiring real estate investor, you need to have a clear idea of where to obtain these loans and their requirements and outcomes to determine which way is best for financing buying an investment property in your particular case.
Click here to learn all about the different financing methods for buying an investment property.
Where Are You Buying an Investment Property?
If there’s one thing beginner property investors should know when entering the real estate investing market, it would be location, location, location! Real estate experts agree that the location of your investment property is key to its success. Where a rental property is located determines its purchase price, running costs, rental income, rental property taxes, etc., all of which are factors that determine profitability.
Now, beginner property investors typically plan on buying an investment property in their local real estate market. However, this might not be a smart decision. In real estate investing, the best locations are those with a high demand, healthy economy, growing population, and reasonable property prices, among others. Your local real estate market might lack these factors, thus, making real estate investing unprofitable.
In this case, you have to conduct a real estate market analysis to find in which locations you’ll have better investment opportunities. The question remains: Are you willing to relocate for the sake of your career as a real estate investor? This is one of the challenges property investors face, and if you’re not willing to take the risk, then maybe you’re just not ready for buying an investment property.
Can You Handle Managing an Investment Property?
Becoming a real estate investor does not stop with buying an investment property. To determine whether or not you’re ready to invest in real estate, you have to think about how you will manage your rental property after making the purchase. A successful real estate investing career requires investing not only your money but also your time and energy.
Thus, do you believe you can handle all the responsibilities and tasks that come with investing in real estate and being a landlord like finding and dealing with tenants, doing rental property taxes, conducting repairs and maintenance, etc.? If yes, great!
On the other hand, if for some reason (like having a full-time job), you don’t have the time to manage your rental property, you have the option of working with a professional property management company. These are companies that provide property investors with a set of services that take care of their investment properties.
However, we have to mention that they’re not cheap and charge a fee which will affect your profit margin, which is why they’re not recommended to beginner property investors. Thus, check your budget and expected cash flow before planning on buying an investment property and leaving the management part to a professional.
Are You Ready to Become a Real Estate Investor?
The final question to ask yourself before buying an investment property is quite obvious: Are you ready to become a real estate investor? The real estate investing market sure has its benefits such as cash flow, appreciation, tax breaks, etc.
Click here to read more about why buying an investment property in the US housing market is a smart move in 2018!
However, there’s a set of certain skills one needs to acquire for a successful real estate investing career. Successful property investors are patient, organized, affirmative, and possess social skills and attention to details. Do you believe you have these skills? Many beginner property investors fail simply because they don’t have the needed patience and end up buying an investment property and selling it after only a few years – which is not enough for the rental property to perform and appreciate and, thus, make a profit.
Moreover, you have to commit your time and energy, as previously mentioned, not just your money. Many real estate experts agree that property investors have to hold onto their investment properties for at least 10 years before selling them. Are you personally ready for such a commitment for the long haul? If not, then buying an investment property is probably not a smart decision to make.
The Bottom Line
Based on what we’ve mentioned throughout this article, deciding to enter the real estate investing market is not something to be made on a whim. A lot of thinking and planning has to go into buying an investment. After all, it is a business, and not every aspiring real estate investor is ready to actually become one.