What You Need to Know Before Investing in Real Estate

May 01, 2018

Many people are attracted to the idea of investing in real estate. It can be a very lucrative form of passive income that allows the investor to live life as they see fit. However, real estate investing is not a get-rich-quick scheme. Being successful at it requires a lot of hard work, skill and knowledge. It also carries substantial amounts of risk, because the money invested in real estate is often significant by its very nature.

Potential investors should do their research to determine whether this path is the correct choice for them. It is critical for every property investor to outline their goals in advance and then determine the steps that need to be taken in order to reach those goals. In this regard, preparing to invest in real estate is very similar to writing a business plan for a new company. What follows is a guide outlining what prospective real estate investors need to know before they begin buying property.

Questions for Prospective Real Estate Investors

1. How Does a Person Get Started Investing in Real Estate?

A: Real estate investors can get started by simply buying a property and either renting it out or fixing it up and reselling it. However, there are plenty of details to consider. For example, where will the capital come from? A good strategy can be to hold onto a first home instead of selling it. This way, an aspiring investor will already have a home they can rent out for passive income. The history and details of this home will be known, which can make renting it easier than purchasing a new property. The rent collected from the old house can be saved and then used to purchase a new property, thus growing the investor's business.

2. It is a Better Option to Rent or Flip a House?

A: There are two main approaches to investing in real estate: renting out owned properties or reselling them for a profit. Some investors use both methods, while most primarily do one or the other. Flipping, or selling a property, consists of buying properties that may have significant problems, are old, unattractive, in undesirable neighborhoods or for some other reason are below market value. These properties are ideal for investors, who buy a house (usually for cash), remodel it and then resell for a profit. Investors can also buy properties they then rent out to tenants long-term. They can still sell their properties when it makes the most financial sense to do so, but sales are not likely to occur as often.

3. What Are the Right Type of Properties to Invest In?

A: Deciding what type of properties to invest in is a major question all new real estate investors need to answer. Owning a condominium is very different from owning a single-family home, for example. Some investors specialize in luxury properties, while others primarily own condos. Investors must learn the pros and cons of each and then decide what kind of properties they prefer to work with. Real estate investors should also be concerned about developing their brand. Real estate investment is a business and needs to be treated as such. Having a strong brand associates an investor with a particular image and reputation that helps attract tenants.

4. Is a Real Estate Agent Required?

A: Real estate investors may wonder if they should enlist the services of a real estate agent or try and go it alone. That decision is wholly up to the individual; however, there are numerous advantages to working with a real estate agent. Buying a home as an investment is markedly different than buying a home for personal, residential use. Investors look for specific criteria and must do careful cost analysis to determine if the profit will outweigh the cost of both buying and maintaining the home. Real estate agents who specialize in working with investors help meet an investor's unique needs and are important long-term contacts.

5. What Are The Responsibilities Of A Landlord?

A: Prospective landlords should first consider what it takes to be a landlord and whether the role is right for them. This includes learning about the responsibilities of a landlord, such as keeping the property safe, screening tenants, collecting rent, legal issues and more. It is also important to consider personal ability to maintain a property or if investing in a property manager would be a better choice. This decision largely depends on an investor's confidence in managing a property herself.

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