Real estate investing is an investment method that encompasses a wide variety of strategies and products. It ranges from buying Real Estate Investment Trusts (REITs) to a more direct approach where properties are traded outright. Property rentals are undoubtedly one of the best ways to earn a side income.
However, there are also many misconceptions about how risky real estate is and how to make money from it. In fact, it can be one of the most time-consuming investment methods that also requires you to actively manage it.
Professional real estate investors already know the do’s and don’ts and how to do it efficiently. So, if you're a beginner trying to get into this lucrative industry, here are some tips to take note of before you get started with rental investment.
Know Your Financial State and Situation
Understand that real estate investing is simply a means to achieve your financial goals. Ideally, financial independence. Now the big question is, where do you start? Are you at rock bottom where you need to get out of debt first? Have you recently inherited a huge amount of money and are looking for a place to park it? Or have you recently won the lottery?
This mountain to financial freedom will determine what type of strategy will best suit your situation. Because the truth is, not all strategies can work for all situations, and discretionary adjustments are needed to maximize returns. So be honest with yourself.
Choosing a Specific Strategy
After determining what your circumstances are and, more importantly, how much risk you can take, your job changes to that of a researcher. By now, you would be determined to climb the mountain to reach financial freedom, and would want to know how right?
To determine whether it is worth investing in a rental property, you must first make a rough estimate of how much ROI it is likely to bring in. Consider costs such as capital gains taxes and any other fees. They can add up to a considerable sum.
Only start with a strategy that fits best after all your research. However, that doesn't mean there won't be detours where you have to choose a different strategy or take a completely different path. Most real estate investing strategies work well in the long run, so don't give up too soon, but remember to be flexible as well.
Choosing the Right Market
Choosing the right market is certainly one of the most important factors that can affect the outcome. For a beginner, it is always advisable to look for a place nearby where you can travel without much hassle. The reason being that if something goes wrong, you can just head over and settle it immediately.
Regardless of whether you decide to invest locally or remotely, here are a few key factors that can serve as your guide.
- Employment rates
- Population growth
- Rent to price ratio
- Nearest public transport
- The supply and demand of properties
- Safety and crime rates
- Facilities nearby
- Entertainment within walking distance
Take your time when choosing a target market because getting it right will make your life so much easier while getting it wrong can mean you'll spend a lot of time fixing problems.
At this point, you should have a very clear picture of what you are looking for in an investment property. One of the most viable ways to do this is to use what is known as the 1% rule.
Take the estimate of your monthly income for that rental property and divide it by the purchase price. The 1% rule states that if this number falls in the 1% range, it is a good rental property. Note that this rule is a simplified rule as it does not consider opportunity costs.
On the other hand, just like other factors, your list of criteria will change over time and will need to be customized. Therefore, keep it simple and easy to understand.
Your network will be your support group throughout your real estate investing journey. You don't need employees per se, but you do need a few contractors and some professionals who can give you advice on what to do next.
Your team can include your business partners, your mentors, your spouse, a property manager, an accountant, a lawyer, and all the people who will help you fix the property when something goes wrong.
With so many things to consider and so much information to digest, it can become overwhelming for beginners to get started. Take it one step at a time, and we guarantee you'll figure it out along the way. All you must do is take the first step and the next one will reveal itself to you.
Although we have listed these tips, real-life can be different. So, the most important thing is that you are smart, flexible, and determined enough to overcome the challenges. If something goes wrong, contact a professional in the industry and ask for help.