Are You Ready to Invest: An Investing Primer
Published August 10, 2016
Real estate is one of the best vehicles available for building wealth. But, is it the right option for you? And, are you ready to start investing?
Despite the housing bubble, real estate has the potential to generate wealth in a way that few other options can. But, investing in real estate requires time, money, and dedication. You also have to assemble a team of professionals to help you manage your investments, and be prepared to take risks. Are you really ready to invest in real estate?
Real estate has always been a popular way to create wealth. Not only does it offer the potential for a substantial return on your investment when you sell, but if you rent out the property in the meantime, you generate a positive monthly cash flow that exceeds most dividends on stocks. Plus, real estate is secured by land, a commodity that is always in demand.
But, if you jump into real estate unprepared, you stand to lose everything you’re prepared to invest (and then some). The difference between success and failure hinges on several factors including how much you have to invest upfront, how much time you can devote to your investments, the market, and the team you’ve assembled to help you.
You have the funds.
Don’t believe the infomercials that claim you can score a big payday with no money down. There are creative ways to finance your investing career, but in almost every scenario, you have to bring money to the table. If you can find a loan allowing you to purchase non-owner occupied real estate, expect to need at least a 20 percent (or more) down payment to close.
You have a few other options. The first is short-term financing, also known as a hard money loan. Since hard money lenders charge up to 20 percent interest, these loans only make sense if you intend to renovate the property and quickly sell it because the high interest rate eats up the return on investment in short order.
Another option is to put your individual retirement account (IRA) to work for you. While you can’t invest in real estate using a traditional IRA, you can convert it into a self-directed option that allows you to invest in a number of otherwise off-limits investments, including real estate. A self-directed IRA requires you to educate yourself on IRS regulations, so if you go that route, you need to be willing to invest time in addition to money.
You have the time.
Investing in real estate, in general, takes time. You have to study the market where you want to invest, drive neighborhoods, view properties, and research funding options. Most properties will need renovations, even if you intend to rent it. That means you will have to hire a contractor unless you plan to do the work yourself, which requires even more time.
Whether you want to sell the property or rent it out, you’ll have to spend time marketing it and showing it unless you hire a real estate agent or property management company to do that for you. If you decide you want to be a landlord, you’ll have to educate yourself on the Fair Housing Act as well as state and local laws. You’ll have to collect rent, arrange for maintenance and repairs, evict, and fill vacancies unless you hire a property management company.
Real estate investing can be a full-time job, especially if you own multiple properties. Hold off on investing until you have the time to devote to it.
You have a plan.
Before you invest in real estate, educate yourself on the types of investing (residential, multifamily, commercial, land, real estate investment trusts (REITs), and more) and the different strategies available. If you decide on single family homes, you have the option to buy and hold or fix and flip. Which model works best for your goals? Or, if you want to mix it up, under what circumstances will you hold onto a property instead of selling for a quick profit?
How involved do you want to be? Options like a REIT allow you to invest your money with minimal participation while becoming a landlord requires you to be available to your tenants 24 hours a day, seven days a week. You can reduce your involvement, though, by hiring a property management company.
At some point, do you want to diversify into other types of investing? Under what circumstances? How much real estate do you want to own? What happens if your financial situation changes? Do you have an exit strategy? These are all questions you need to answer before you invest.
You have a team.
It takes a team of professionals to help you acquire, manage, and maintain your real estate investments. Make sure you have one in place before you invest. Start by finding a mentor, someone who can teach you the ropes of real estate investing. A good place to look is at your local real estate investors association. You can find the nearest chapter at the National Real Estate Investors Association (www.nationalreia.com).
Next, find a real estate agent who is familiar with the market you want to invest in and is experienced working with real estate investors. You’ll also want to find a mortgage lender, title company, real estate attorney, and a certified public accountant who understands real estate investing. Once you own property, you’ll need a team of contractors and repairmen. Consider hiring a property management company, too. (Your local real estate investors association can make referrals.)
The exact team you need will depend on the type of investments you plan to make. A good mentor will be able to provide guidance and maybe even make suggest professionals you should include on your team.
The market is right.
Whether it’s a good time to invest in a particular market depends on more than just the current real estate value. It depends first on what type of investing you want to do. Even though it could be an awful time to invest in residential real estate, it might be an ideal time to invest in commercial or industrial real estate.
Also, consider where you want to invest. Look for areas where there is job growth and GDP growth, indicators of a strong economy, and keep in mind that just because Austin is experiencing growth doesn’t mean every neighborhood is a good investment. (Having a real estate agent on your team who is an expert in Austin, especially if you live elsewhere, is essential in this case.)
Before you being actively searching for real estate to invest in, consult with a local real estate agent who can tell you under what circumstances and in what areas it’s a good time to invest in their market.