There has been a significant rise in the number of shows on HGTV or Netflix about investing in real estate or turning homes into rental properties. It’s no wonder since it can be an incredibly lucrative source of income. However, it does require a lot of work and research to be successful.
If you think investing in real estate might be right for you, here are a number of things you will want to know first.
Know The Risks Involved
With any type of investment, there are always risks to consider. It’s important to understand what the residential or commercial real estate risks might be before investing time or money. We always suggest working with a professional commercial property management company or a realtor to ensure that you have the best chance at success with your investment.
Some of the risks include, but are not limited to:
- An unexpected event that impacts the economy such as the COVID-19 global pandemic.
- Location-based situations where areas may become gentrified or crime rates may increase.
- Financial investment risks that are dependent upon your interest rates or terms of your investment.
- Longer duration of vacancies based upon the initial strategy or unexpected events that may impact these numbers.
Learn About the Different Types of Neighborhoods
You may think investing in real estate is as simple as buying a house and having a tenant sign a lease. But you may not have realized that aside from the overall location of your rental property, there are three other neighborhood classifications that could have an impact on how well your investment does.
A Class properties are typically your higher-end properties. They are the ones you want to pass on because they are typically taken by homeowners and are less popular for rental properties. B Class properties are usually where you will have the highest amount of inventory to choose from and where most investors thrive. C Class properties usually require major repairs or renovations and typically have a higher tenant turnover rate.
Purchase a Home or Unit at 10% to 20% Below Value
To make a profit from your investment, you won’t want to purchase a piece of property that is on the higher end of your budget. You have to consider all of the other expenses involved before having your renter sign their lease. This would include various things such as your previously stated repairs and renovations, along with permits, insurance, and other financial responsibilities.
By purchasing on the lower end of your budget, you will provide yourself with much more financial security. In addition, after various repairs and renovations are finished, plus the coinciding housing market, you can ultimately flip the house if you find yourself in a financial predicament or you see that selling would make you more of a profit than renting.
Have a Reserve Fund
Just like we discussed, there are risks to every investment. You might come across situations that might put you in a financial restraint you didn’t see coming. This is why it’s crucial to set yourself up financially with a reserve fund.
Make sure you are keeping this fund separate from your personal savings. Remember, investing in real estate is a business and you will want to keep your personal and professional finances completely separate in order to protect yourself.
Talk To Other Investors
There are a mass amount of people who have paved the way for real estate investment before you. Why not take a lesson from them instead of trying to learn it all yourself? Talk to other investors and see what has worked for them.
Join online forums and talk to different people in various markets to see what successes they’ve experienced, things they’d wished they’d done differently, or any other advice they might be willing to bestow upon you as a real estate investment newbie.