If you have heard that investing in real estate is lucrative, you are not alone. Many of the wealthiest individuals in the world have at least some of the funds invested in real estate and there is good reason for this. Consider that land is a limited resource. More than that, the demand for real estate continues to increase as the population grows. While individual markets fluctuate, it is not a surprise to learn that average real estate prices have generally inched upward over time. As a real estate investor, you may be able to take advantage of property value appreciation as well as numerous tax advantages. In addition, many properties produce regular cash flow for the owner.
There are numerous types of property that you could invest in. Some individuals invest in raw land, and others invest in income-producing residential property. There is also an opportunity to invest in a wide range of commercial property types, including apartment buildings, retail property, office buildings, self-storage units, restaurant buildings and more. As lucrative as property investments can be, they can also be risky. You need to spend time learning more about this type of investment before you get your feet wet with your first investment.
How Does It Work: Property Investment
Some investors will pay cash for the full sales price of a property, but many others will apply for an investment loan. The ability to leverage your investment with financing while taking full financial advantage of the many benefits of real estate investing is a benefit in of itself. If you intend to apply for an investment loan, you should initially begin learning more about the investment loan requirements. These can be substantially different than owner-occupied loans that you may have previous experience with. The lending requirements will help you to determine what type of property you may be able to afford through financing.
Once you locate a great property to buy and finalize the purchase, you will then need to determine how you will manage the property. Many investors who purchase income-producing property will hire a property manager to handle daily operations. In many ways, this type of investment is a business and requires regular attention. You may continue to profit from the property through regular cash flow on a monthly basis, but there will come a time when you are ready to sell the property. Through property appreciation and principal debt reduction from monthly loan payments, you may have a sizable amount of equity that is converted to cash through the sale. Remember that your tenants pay for the principal debt reduction through their monthly rent payments to you.
The Checklist: What You Need to Invest in Property
Now that you understand more about how real estate investments work, you can see that the right investment could result in tremendous financial gain. To begin preparing for your investment, focus on these important steps:
- Review Your Finances: Determine if you will pay cash or apply for financing. Ensure that you have enough money to cover the down payment, closing costs and other essential fees without becoming cash-poor. You also should review your credit score to determine if you can qualify for financing.
- Explore Financing Options: Before you begin looking for properties to invest in, you should understand more about the loan terms available to you. In addition, explore lending requirements for the applicant and for the property. This information will help you to narrow down your options when you are searching for a property.
- Hire a Real Estate Agent: Hiring an experienced real estate agent is essential when you are looking for investment property. Remember that buying an investment is different than buying a property that you intend to occupy. Look for an agent who has experience with investors.
- Crunch the Numbers: Each property that you come across may have different potential for profits. The property condition and repair requirements, the monthly gross rents, the operational costs, the sales price, the available financing for that particular property and more all must be reviewed individually.
Questions and Answers:
When you follow these steps, you can make great progress finding a property to invest in. However, you may still have a few additional questions about property investments. These are some of the more common questions that new property investors have:
Q: How much money is needed for the down payment?
A: Each lender has unique requirements. There are variations based on property type, property location, applicant credentials and more. It is best to explore lending options available to you in detail before you begin searching for a property.
Q: Do I need to hire a property manager?
A: In many cases, you can self-manage the property if you prefer. This could save you money because you can avoid property management fees. However, if you have no experience, it may be best to hire a professional to do the work for you. Some lenders may also require you to hire a property manager if you lack previous experience.
Q: What type of property should I invest in?
A: This is a personal decision that you will need to make, and it may be based partially on the amount of money that you have available to invest. Many people will begin by investing in a residential investment property or a smaller commercial property to learn the ropes before moving to larger investments.
Q: Can you buy a property with a partner?
A: Investment properties may typically be purchased by individuals or multiple individuals. They may also be purchased under a business entity, such as a limited partnership or corporation. You should inquire about the requirements with the lender that you intend to seek financing from.