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What to Consider Before Investing in Real Estate?

Whether you're buying your first investment home or another, read this before you invest in real estate!

You might have read about real estate investing in the newspaper or watched it on TV; and making up your mind to invest in real estate thinking it could give you a better financial future. Yes, real estate investing can offer you great returns and there are a lot of people who have made huge fortunes out of it. But before you decide to invest in real estate, you have to be sure if you really want to do it.

You also need to know the difference between a good investment and a bad one. Once you have made up your mind, you should do your homework. Read stuff on real estate investing; the Web is full of useful information on how to invest in real estate. This will help you gain knowledge and understanding on how to go about it.

Here are five things to keep in mind when buying an investment property:

1. Make a Plan

As is the case with most types of real estate investing, the main reason for failure is poor planning. A plan helps you identify where you stand right now, and outlines the ways to get to where you want to be.

There are tons of different ways to invest in real estate, so you're going to want to determine what appeals to you the most. Are you a hands-on sort of person who likes to renovate and is comfortable with a fair level of risk? If you are, then a "fix it and flip it" strategy could be perfect for you. Alternatively, maybe you prefer stability and a steady income, in which case you might consider single-family rental homes. Perhaps you don't want to be involved at all, and you'd rather just lend money to other investors and take a share of their profits? Find the strategy that suits you the best.

2. Consider the Neighborhood

If you're thinking about investing in rental properties, consider the neighborhood. What is the vacancy rate? At various points in your career as a landlord, you're certain to experience vacancies, so be prepared for that. Will you be able to withstand the lack of income when the rental homes are vacant? You may be able to circumvent this problem to a certain extent by determining what's the average rent of a rental property in that area, and setting yours just a little below the average.

3. Consider Your Expenses

You've got your down payment, you can cover the monthly mortgage payments, and your tenants are providing a bit extra for your rental home. But what happens if the sewer backs up, the roof leaks, or a tenant can't pay the rent? If you didn't consider these costs before you invest in real estate, you can end up in negative cash flow. Simply stated, this means that you shouldn't buy more rental property than you can afford to maintain. The general rule of thumb is that on an average, the expenses you incur on a rental property over time will equal about half the income it generates for you. So, if you're renting a property for $1,000 per month, assume that you'll have to shell out $500 for expenses.

4. Financing

Arranging finances to invest in real estate can be an uphill task. If you can pay cash for your real estate investment, that's great, but the reality is that most people are going to need a mortgage to invest in real estate. Make sure that you understand the terms and the interest rate, and avoid adjustable rate mortgages. You want to lock in, because if the interest rate goes up, so will your payment for the rental property.

5. Know When to Get Out

When you begin, keep the end in the back of your mind. This goes back to having a plan. You need to know what you intend to do with the property you're buying before you commit to it. This means a good deal more than just "buy low, sell high," which was the kiss of death for a lot of investors in the last housing boom. When the market went bust, a lot of investors lost their properties.

So, what are you going to do? Buy the property and pay it off slowly, then sell it or use it as a retirement home for yourself? Or offer it as a rental home and sell it when the market is hot? From the moment you enter real estate investing, you should know how you plan to get out.

Summary

If you're planning to invest in real estate, plan ahead, cover your cash flow, and decide how long you plan to hold onto the property. With a little caution and common sense, your first investment property can be the beginning of a fruitful career in real estate investment.

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