It’s no secret that real estate investing has become the “weapon of choice” for many investors. With the stock market growing more and more uncertain it’s not hard to understand why. While real estate investing can be very lucrative and when done right can present very little risk, it’s important to remember that timeless adage “knowledge is key”. As with any financial decision to be made, no one should jump into real estate investing without gaining as much knowledge as possible on the front end. While it is true that experience is the best teacher, having a good knowledge base to begin with might just make your experience a little less scary. With this in mind, following are five things to consider BEFORE doing your first deal.
1. Tend to your personal finances first
Many prospective investors view real estate as a means to get out of financial trouble. Many real estate “gurus” will advocate this practice and even use it as a selling point to sell their latest and greatest real estate investing system. I am definitely not of this mindset. Real estate investing is a great way to secure your financial future but certainly not at the expense of your financial “present”. If you are having financial problems and are having trouble making ends meet, take steps to rectify the situation before risking any money in real estate. As I stated earlier real estate investing can carry less risk than many other forms of investing, but there are still risks and if you are not in a position to handle the setbacks than you are basically just gambling and that is a very dangerous investment strategy.
2. Choose a strategy.
There are many ways to make money in real estate investing. You can buy a property and immediately flip it for profit. You can buy a property and hold it banking on an increase in value in the near future. You can buy a property for rental. You can buy a distressed property and make improvements. There are countless ways to make money. The important thing to remember is that each of these strategies carries its own set of “rules”, if you will, for making a profit. Some might say you should never limit yourself to one strategy and I whole-heartedly agree in the over all realm of your real estate portfolio. What I want to stress here is that indecision in regards to each individual real estate deal can cause you a lot of heartache, frustration and LOST PROFIT, which we could all do without. Decide up front which strategy is best for you and then proceed to find a property that meets your needs.
3. Do your research
While this may sound elementary, it’s very easy to get caught up in the emotion of what seems like a good deal and in the process act hastily. Always, and I mean ALWAYS thoroughly investigate a property before you sign anything. Try to determine if the property has suffered any significant damage, find out if the property is in a flood plain, find out if there is more than 1 lien against a property, etc. Create a property inspection checklist up front and check every one off before you decide to do a deal. When doing a conventional deal with a mortgage lender the lender will likely take care of a lot of these steps (they want to protect their investment as well) however, it is always good practice to pay for a thorough inspection before you make the deal.
4. Stick to a budget
Decide what you can afford and are willing to spend on a real estate deal and DO NOT deviate. Many real estate investing coaches will tell you not to let a good deal go just because you don’t have the money. “Get creative” they say. While I do not shun the idea of creative financing completely I certainly don’t recommend it for the beginning investor. “Zero Down” deals can be very appealing but they also can increase your risk factor tremendously. In a nutshell, if you can’t afford it, it’s not a good deal.
5. Be prepared to walk away
Never get emotionally attached to a property. Emotions can cloud your judgment causing you to make unwise decisions. It’s almost a certainty that if you stick with real estate investing long enough you will come across a deal that seems irresistible. Do not get overly excited and sell yourself on the deal before due diligence is done. This mindset can cause you to overlook some warning signs that otherwise might be deal breakers. Go back and read number 3 again. Be objective and be skeptical. Reserve judgment for after your inspection checklist has been completed. Always be prepared to walk away; there’s likely another prospective deal just around the corner.
These five principles are a good guideline for anyone starting out. While real estate investing can be a rollercoaster ride at times with many ups and downs, sticking to these basic principles will all but guarantee that you will come out on top. Happy Investing!