12 EASY STEPS TO TAKE BEFORE YOU BEGIN INVESTING IN REAL ESTATE
Real estate investing is one of the most popular investment strategies. It’s a versatile investment and has the potential for short-term gains as well as long-term wealth building. That doesn’t mean it comes without pitfalls and barriers to entry, however. There are a few steps to take before you begin investing in real estate.
When you are looking to begin investing in real estate, it’s important to do your research prior to make sure that real estate investing is the right way for you to meet your goals and build your portfolio. Real estate investing is not for everyone. There are risks as well as potential rewards. Those who are smart and prepared will weather any storm that may come.
Want to get the best start possible when it comes to real estate investing? The rest of this article explains 12 easy steps to take before you begin investing in real estate to be fully prepared to start.
Step #1: Gather Knowledge
Knowledge is power, and in real estate that is definitely true. How much the investor knows and understands about his or her investment is one of the biggest factors that determines whether they’re going to be successful in the long run. A wise investor will seek knowledge on all of the following – and more – before they start investing:
The market conditions
How to determine the ROI in a property / CAP rate
The risk level of an investment
Rental or flip potential
Investment options available
Benefits and drawbacks of short- and long-term gains
Over time, successful investors increase their knowledge in other areas as needed so they can keep growing and stay competitive. You don’t know what you don’t know, and this is especially true for investors.
Step #2: Understand How Income is Generated
There are four main ways that income is generated through real estate investments: appreciation, cash flow, real estate related income, and ancillary real estate income.
Appreciation is one of the more popular income streams where the property is bought with a lower value and then sold at a higher value through value adds and changes in the market. This is usually seen in one of two ways – property flipping and long-term property holding.
Cash flow is commonly seen as rental income. Real estate related income is the type of income that is generated by real estate professionals such as brokers. Ancillary real estate income is income that is generated from things like vending machines and other revenue-generating products in a real property, a building or business.
Step #3: Decide On Your Investment Amount
Getting started in real estate investing is not cheap. Properties cost quite a bit to purchase upfront, and it’s important to remember that real estate investing is not as simple as buying the property and then watching the money flow in. Determining your budget is an important step to take before you begin investing in real estate.
If you are looking at long-term investments, there are maintenance and upkeep costs, annual taxes, expenses, as well as upgrades to keep the property at its market value. You will need to weigh the potential ROI against all of these factors when thinking about investing in your first or first few properties
Step #4: Set Your Goals and Plan
When getting started, it is important to have set goals in mind and a plan of action to reach them. If you’ve already done your homework and know what investment amount you are willing to put in, you can easily determine your starting point. At Veloce Capital, we recommend using the SMART goal-setting system developed by Peter Drucker. Make goals that are:
Real estate can throw curveballs, but if you have a good plan and your goals are realistic and well thought out you can overcome any obstacles that come up.
Step #5: Select Your First Property Type
Now that you have a solid plan, realistic goals, a starting budget, and some working knowledge of your market, it’s time to choose the type of property you would like to invest in. You could invest in a REIT, a crowdfund platform or real property, which we’ll focus on. Short-term rentals such as Airbnb or vacation rentals, long-term rentals, or flips all have unique factors to consider. Select the investment property type that aligns with your budget and goals.
Step #6: Study the Area – THE Most Important Step to Take Before You Begin Investing in Real Estate
Location, location, location. Selecting the first property to buy comes down to a lot more than just budget. A reasonably-priced property in an undesirable area of town may not be that great of an investment, especially if you’re just starting out. Check the market in the area. Take a look at the market history and the projected market viability as well. Research the comps in the area and make sure that the property is in the ideal position for its purpose. This step will help you weed out potential problem properties and can save you a lot of headaches down the road.
Step #7: Protect Your Interests
It is important to think about your long-term safety from any claims that may come against the property. By forming an LLC or similar structure, you can protect your personal assets while also maximizing tax benefits for your investments. Seek out a lawyer and/or a CPA who is knowledgeable about investments and corporate structure to guide you on what would work best for you and your unique situation.
If you are working with contractors or tenants, create and enforce clear guidelines, expectations, and agreements that will protect all parties if a dispute occurs down the road. Many trusting investors have been burned by not protecting their interests upfront.
Step #8: Plan for Growth
Planning is one of the best steps to take before you begin investing in real estate. Keep your goals and future plans in the forefront of your mind. It’s important not to get too focused on the short-term and forget about where you are taking your investments in the future. If you know that the market is about to heat up in an area and you can scoop up a property, do a light rehab and turn a profit, do it – but not if it comes at the expense of your long-term plans.
Many investors get tunnel vision, focusing only on what is happening right now and forgetting their long-term goals for growth and gains. Short-term gains are fun and can feel amazing, but they’re not the only thing you need to worry about. Protect your long-term interests and goals and reevaluate as needed to keep yourself on track.
Step #9: Build a Network
Networking is a great way to make important connections. Building relationships with other investors and professionals can be so helpful in your investing journey. You never know what will come around the corner or who might have their ear to the ground for some great opportunities coming up.
Nurturing a network will help you gain a broad perspective on real estate investing in your local market. The company you keep helps determine your success. Real estate is not without its risks, and having like-minded peers and professionals around can help you weather the storms you may face along the way.
A great step to take before you begin investing in real estate is to join a local investor’s club or monthly investors association meeting – you’ll meet many locally-savvy investors and service professionals who can provide an abundance of knowledge you won’t find anywhere else.
Step #10: Keep Important Contacts Close
Your new network can be a lifesaver. You never know when you may need a helping hand, a referral for a good contractor or property manager, or help with an unexpected deal. Grow relationships with CPAs, other investors, attorneys, inspectors, plumbers, handymen, contractors, electricians, and more. There will come a day when you will need something and you’ll be happy you know just the person who can help.
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Step #11: Decide on Terms
Let’s talk terms. Determining what terms you want before you enter into negotiations will save you headaches later. If you are flipping the property, do you want to try to encourage a bidding war? If you are renting, what terms do you want with your tenants? It’s important to decide this now so you know what your expectations are when moving forward.
In addition, consider all costs, maintenance, overhead, and emergency funds you may need. If the worst-case scenario were to happen, you’ll be glad you were prepared with a plan. Deciding on this now will help keep everyone on the same page.
Step #12: Review Your Plans and Goals Regularly
As time goes on, change will occur. Your situation will change, the market will change, and your expectations, needs, and goals will change. Shouldn’t your plan change to accommodate these changes as well? Failure to regularly review your plans and goals could lead to you stalling out when you thought everything was going well.
As your investments grow, your needs or desires may grow as well. Constantly evaluate the market conditions, your investments, and your circumstances to make sure that everything lines up. If you make regular assessments, you’ll be able to pivot when you need to and even perhaps speed up your goals as time goes on.
More from Veloce Capital
Real estate investing can be a wonderful tool to grow your wealth and secure your financial future, but it can also be confusing and time-consuming. The reality can be a bit overwhelming and harsher than we are prepared for.
But you’re not alone. Here at Veloce Capital, we can help you as you take the first steps into real estate investing. We’ll help you set up an entire plan that works for you from start to finish.
For more information please email us at email@example.com
Kennon, Joshua. “Should You Be Investing in Real Estate?” The Balance,