Investing in real estate sounds sexy. There are countless entertaining television shows that make it look fun. It appeals to a wide variety; creatives can design and number crunchers can dissect projections ’til the cows come home. What people appreciate the most about real estate investing is the impression of control—it’s an asset and an investment you can see and touch.
As with most things, perception is not reality. There are countless pitfalls: unexpected costs, lengthy turnarounds, tax implications that can kill NET profits, and fame rarely follows.
I have personally had some extremely profitable real estate investing projects. I have also had some especially costly ones. Beyond that, some of the most successful real estate investors in the state are my clients. Suffice it to say, I have experience and a unique perspective. So, I’d like to offer you some quality information on this topic.
Control your personal finances.
Before you attempt to invest in a house, you need to get your own “house” in order. The following must be completed prior to investing in real estate:
- Eliminate non-mortgage debt. It’s unwise to carry high-interest debt like credit cards, auto loans, and student loans. Get rid of these first.
- Have an emergency fund. Carrying three to six months of your income in an emergency savings account is a big deal.This will give you a parachute if your investment goes sour.
- Maximize contributions to an IRA or 401(k). Investing in tax-sheltered vehicles before investing in non tax-sheltered real estate is critical.This practice reduces the amount of income tax paid to the government.
Make a good purchase.
Many believe that money on a real estate investment is made with how the property is renovated. Others believe money is made by the property’s location. Some hold fast to the idea that correct marketing at the time of resale/renting is where the money comes.
The truth: profit is made at the time of purchasing the real estate investment. Not at the time of rehab, resale, or rent.
Use a knowledgeable realtor who can accurately determine the property value. Then, make sure you are purchasing the property well below market value. If you get a great deal on the purchase, you set yourself up for success.
Intelligently leverage debt.
In my first point, I recommend paying off all non-mortgage debt. This is because properly structured mortgage debt can help make real estate investing profitable. A wise mortgage loan on a real estate investment is one that has a minimum of 25 percent down. This creates immediate equity and allows for a much lower rate on the mortgage. In most cases, it’s better to choose a low-interest rate mortgage over paying cash for an investment property. Keeping assets in mutual funds keeps you diversified, and helps you leverage well. The act of borrowing wise to enter the market quicker, buy more properties, or buy at a higher price point—leverage—increases returns.
Make sure you have enough time.
This is important. The time it takes to manage a successful real estate investment is greater than anyone realizes. Time has an impact on your current job and your family. Most successful real estate investors are all full-time. You have a much lower chance of success if you are doing this on the side.
Investing in real estate is great. The opportunity for profit combined with other ancillary benefits make it attractive. However, before you get involved, please consider my advice.
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