Real estate is generally a great investment option. It can generate ongoing passive income and can be a good long-term investment if the value increases over time. You may even use it as a part of your overall strategy to begin building wealth.
However, you need to make sure you are ready to start investing in real estate. For one, you will need to put down a significant amount of money up front to begin real estate investing. Buying a home, apartment complex, or piece of land can be expensive. That’s not to mention the ongoing maintenance costs you’ll be responsible for, as well as the potential for income gaps if you are between tenants for a time.
Here’s what you need to know about investing in real estate and if it’s the right choice for you.
- When purchasing real estate as an investment, you should either be able to pay in cash or afford the mortgage payments without collecting rent.
- Plan your purchase carefully, and be sure to account for taxes, repairs, utilities, and other mandatory expenses.
- Always research your purchase thoroughly, especially if you are buying land to develop, and start small before investing in large properties.
Pay With Cash
Many financial experts warn against borrowing money to purchase investments. You should consider this before you purchase a piece of investment real estate. If you can’t afford to pay cash for the home, at the very least, you should be able to afford the mortgage payments, even without rental income. (Use our calculator below to help you decide.)1
Think about it: With renters, there can be high turnover. You may also experience a time where you have no renters at all for the property. If you can’t afford the mortgage payment without the rental income, it may end up being more of a financial burden, rather than a means of building wealth. Plus, if you can’t pay the mortgage, it could end up damaging your credit, which will cost you money in the long run.2
Plan Out All of Your Expenses
When purchasing real estate for investment purposes, you need to consider the cost of taxes, utilities, upkeep, and repairs. Often, it is easier to go through a rental company and have them handle things like repairs and rent collection. While this will cost money, it will help ease the burden of owning a rental property. Especially if you don’t have time to do everything that needs to be done at your property, using an agency is a good option.3
You need to price your rental property so that all of these fees and other expenses are fully covered. Additionally, you should take the first few months of surplus money and set it aside to cover the cost of repairs on the property. It’s also important to have insurance on the property (and plan for the cost). You should also be prepared to deal with additional costs and other situations as they arise, perhaps with a sinking fund for the property.
Research the Property Carefully
If you are purchasing land that you plan to sell at a later date, you need to research the land deed thoroughly.4 Find out whether any new roads are planned close to the land you purchase and consider how that will affect the property value. Also be sure there isn’t a lien on the property. You may also want to consider things like the comparables in the neighborhood, including whether the area is up-and-coming, and other external factors that could affect the property value.
Once you have done your research, you should be able to make the correct decision about purchasing it as an investment. Investing is always a risk, so keep that in mind. You may make money on your investment, but you could lose money as well. Things may change, and an area that you thought might increase in value might not actually go up, and vice versa.
Some real estate investors begin by purchasing a duplex or a house with a basement apartment, then living in one unit and renting out the other. This is a good way to get your feet wet, but keep in mind that you will be living in the same building as your tenant.
Real estate wholesaling may also be one way to start investing in real estate without a lot of up-front capital.
As you become more comfortable with being a landlord and managing an investment property, you may consider buying a larger property with more income potential. Once you own several properties, it becomes easier to purchase and manage more properties—and earn a greater return on your investments.
Frequently Asked Questions (FAQs)
What is an REIT?
A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. Individuals can invest in an REIT and potentially receive dividends from their investment. Equity REITs own the underlying real estate, while mortgage REITs don’t own the underlying real estate. Instead, they own debt securities, which are riskier. Hybrid REITs combine equity and mortgage REITs.
How do you invest in real estate?
You can take several routes to get started in real estate. One would be to purchase a multi-unit property and rent out the other units. You could also buy a single-family home to rent out. Some investors buy and flip properties. You could also rent out rooms in your own home to build up the funds to invest in more real estate. REITs also allow you to invest in real estate, but without having to save up the cash to buy a property or maintain one.