Are you a real estate investing newbie? Before you get your hands wet in real estate investments, know all about real estate investing. Here are 6 facts you need know.
Have you been thinking about getting into real estate investing but weren’t really sure if it was a viable money-making decision?
To give you an idea, 5,250,000 investment property homes were sold in 2016. That’s a huge market that only increases as home prices continue to rise.
Before you begin your journey down this exciting path, you need to know all about real estate investing including facts and trends.
In this article, we’ll cover six facts you need to know about real estate investing to get you started.
Location Isn’t a Myth
When it comes to real estate investing, there is one old saying that actually is true – “location, location, location.” Location plays such a determining factor into what kind of profit you can make on an investment property.
But why is location so important? It has to do with your potential to attract people to your property’s location.
If your property is for commercial purposes, you want your property to be located in a place where your target customers already go or in a location where they’d potentially want to go.
For residential properties, you want to look for locations where your target customers want to live. Depending on your target customer, a good mix of grocery stores, restaurants, and good schools will mean your property is in a good location.
Being Able to See Value Is Crucial
Whenever you get into investment real estate, being able to do a quick estimate of value in your head is incredibly important. That and being able to see value where others can’t.
Factors that go into estimating value include analyzing the investment potential, property insurance and taxation, financing, and resale price.
Being able to accurately guess value is also a valuable skill if you’re going to hold on to a particular property to rent out so you can set your monthly rent payment.
You can get more info on rental properties here.
There are a few valuation methods that are commonly used, and each has its benefit:
- Income approach – based on expected cash flows from renting properties
- Cost approach – all your costs added up minus depreciation is best for new construction
- Sales approach – compares recent sales of similar properties is great for residential
Whichever valuation method you choose, ensure it aligns with your chosen type of investment and that you learn everything you can about the method.
Have a Clear Focus
Too many people jump into real estate investing without having a clear focus of what they actually want to do in that line of work. That lack of planning ultimately leads to a feeling of being scattered and unsuccessful.
That’s why if you want to get into real estate investing, you need to have a clear understanding of your goal and target market.
Your focus could be on purchasing condos to rent to millennials or on purchasing run-down homes to flip and sell to first-time homebuyers.
If you’re really unsure of where your focus should be, try putting pen to paper. Write down the answers to these questions:
- Why do you think real estate investing is the right choice for you?
- Do you want to buy and hold properties or flip them?
- Why do you like holding properties over flipping them (or vice versa)?
- What opportunities do you foresee with this choice?
Once you have it in writing where your focus will be, you’ll notice that it’s much easier to set your priorities each day.
Whatever your focus, commit to understanding the challenges that face that particular market and the customers in that market. Only through thoroughly understanding your target customers will you find success.
Use Taxes to Your Advantage
A huge advantage of real estate investing is that many of the related activities are tax-deductible.
That’s right! There are many associated expenses that can help you lower your tax bills and thereby improve your property’s cash flow.
As you get started with real estate investing, find an accountant you trust who also has experience with real estate. He or she can help you identify the tax-deductible expenses which can help legally lower your taxes by sometimes thousands of dollars.
Setting up a legal entity for your real estate investing is also highly advisable. Track all your business-related expenses through this entity to make doing taxes a bit easier.
You Have to Be Patient and Persistent
We would be lying if we told you that you’ll jump into real estate investing with immediate success. You will run into roadblocks and snags during your first year or so as an investor.
Getting into investing in real estate means being patient with buyers, sellers, contractors, inspectors, and, most importantly, yourself. You’ll find out more about your level of patience and persistence when you get into this line of work.
You will have some bad days as a real estate investor but those are the most important days to stay motivated and remember why you’re doing what you do. Maybe you got into this line of work to be your own boss or to have a safe investment for your money.
Whatever your reason, you must be patient and persistent because you’re the one that will decide your own success.
Get Your Real Estate License
Having a real estate license can make buying and selling properties significantly faster and easier. This is especially true if you’re trying to flip properties.
There are a few reasons to get your real estate license.
The first is that you get a commission from your purchases and sales. The commission on a sold house is 6% which is split between the buyer and seller agent. If you’re the agent on either side of that equation, you get 3% of the value of the property.
As a licensed real estate agent, you’ll also get access to many MLS systems. That means you’ll have a wider range of properties to hunt for. You’ll also have a better chance of making an early move since properties on Zillow have been on the market for several days by the time they hit the website.
There are a couple of downsides to consider, too.
As a licensed agent, you will have to pay a commission to your broker and annual fees to keep your license. You will also need to disclose that you’re an agent which might chase away some sellers who don’t want to pay commission.
All that being said, having an agent license can open tons of doors for you which can enhance your ability to invest in properties.
Now You Know All About Real Estate Investing
Getting to know all about real estate investing doesn’t stop here. It will take you years to master all the knowledge in this market.
But that’s the fun of any profession. Continuing to learn more about your market and adapt to changes. Being patient and persistent will be key to mastering real estate investing.
For more posts on real estate and real estate investing, check out the rest of our blog.