There are several examples of people who have made a fortune investing in real estate. It is easy to look at people who are successful in real estate and think that all of their success was good fortune, good timing, or an accident. The reality is that real estate is a competitive field. It has many risks associated with it. If a person can make money in real estate, it is because they took the time to educate themselves, they were dedicated, and they were able to make sound decisions at the right time. The following are three things you should know if you are investing in property.
1. Count the Cost
There is a well-known parable about a man who started to build the tower but did not factor in the total expense. The result was that he could not build the tower, and the townspeople mocked him. The principle of this parable applies to investing in real estate.
Everything starts with you calculating expenses and profits before beginning the project. Determine the amount of money you have and the amount of money you can borrow before purchasing an investment property.
Next, identify how much money you will need to spend to purchase a property and renovate the property. Don’t go skimpy on your calculations. It is rare for any real estate purchase or renovation to go under budget. When factoring in the price of materials and labor, also include operating costs.
Finally, think about how much you will try to sell your property for or rent the property for. Get a rough estimate of how much you stand to make in profit. As you do this process, you need to be realistic. In most cases, people do not hit 50 percent of their estimated profit. But you use this calculation to keep yourself from overspending and underperforming.
2. Pay Your Debt
For your first investment property, you are going to need to get a loan. You don’t want debts in your investment portfolio. You need to get rid of medical bills and student loans. Clear all of your debts before jumping into real estate.
Along the same line, use caution with leverage. Delaware statutory trust properties are inviting investors. However, some fall into the trap of becoming over-leveraged. Think about how much debt is going to be used in financing a property and to generate returns. The simple truth of the matter is that more leverage means greater risk. Leverage can magnify returns, but the same can also happen in reverse.
This is not saying that you should completely avoid a highly leveraged project. However, you should make sure that you understand the amount of leverage being used and ensure that you are getting sufficiently compensated for the risk.
3. Location Matters
Location, location, location. This adage is still king and is the primary factor to determine the profitability of investing in real estate. Ask yourself, how close is the property to scenic views, neighborhoods, or amenities? The closer the property is to transportation hubs, freeways, and markets, the more value it is going to have.
When looking at a property’s location, see it from a short-term view, midterm view, and long-term. What is the location of the property like now? Look for things that would be inviting for individuals who want immediate benefits from the area where they move.
You also have to think long-term. For example, the open land around a residential building could someday be purchased by a manufacturing facility. The value of the home could diminish. You must do a thorough review of the land or home you are looking to purchase and investigate the intended usage of the areas immediately around where you plan to invest. A simple conversation with the town hall or public agencies responsible for zoning and urban planning can give you the information you need.
Conclusion
Investing in real estate can be profitable. Many people have made their entire fortune by knowing when to purchase real estate and where to purchase it. You can join this group of successful real estate investors if you take the time to scout the location, keep your project as debt-free as possible, and count the cost before investing.
Article contribution by freelance writer Julie Carter.