If you’re just starting out with real estate investing, there’s a lot to know.
You could feel overwhelmed with all the different articles out there trying to tell you what is most important, what you should learn first and a half-dozen other assertions.
But when you distill it down to the most basic components, there is a list of about five things you should know or consider before you invest in real estate.
Because they all ultimately impact your bottom line, knowing these five elements can be crucial to determining your success as a real estate investor and how well you accomplish your goals.
Without further ado, let’s explore these tips:
1. Be Aware of Tax Laws
This is one of the biggest things that you should know about real estate investing. Where you are and where you’re investing matters, as there are state, county and city laws that dictate local taxes on properties. There may be differences in how the taxes are calculated based on the type of property.
Additionally, you should be aware of federal and state taxes on income from rental properties. Learn the laws, discover if there is anything you can do to reduce your responsibility, and evaluate how they will impact your financial goals for the property. It can mean the difference between a positive cash flow and a negative one.
2. Compare Property Values and Rents
This is the next biggest thing that will determine how well your real estate investment will pay off. You want to make sure that the income you receive will be worth it. You don’t want to invest too much into a property just to find out that the local market won’t support the rent you’d have to charge in order to make the income you expect.
Look at the prices of similar properties being sold nearby, as well as the cost of comparable rentals in the area. Try to seek out the highs and lows, as well as the average for sales prices and typical rents. Then use this information to help inform your property investment strategy, as well as how much to charge for rent.
3. Know the Costs Going in
The prices of property and rent are just the beginning of the cost of property investment. How much are the loan payments? What’s the price of insurance? What does it cost to operate the building? To maintain it? What are the typical utility expenses? How much will it cost you to have vacancies? What was the previous marketing budget to find more tenants?
There are a lot of financial aspects of property ownership to be aware of when investing in real estate. For the most part, you can fold much of the costs into your rent (provided that you don’t set the rent too high for comparable units in the area), but knowing this information is vital to ensuring that you make money instead of losing it.
4. Know your Tenants
Find out if the building has tenants already, what types of leases they have signed and how long they’ve lived there. If they have a short history there or even have short-term leases, they just might be sticking around long enough for you to buy the building.
Moreover, people are somewhat predictable when it comes to breaking their lease, so you might be able to guess when they’ll move. In the spring and summer months, more people look for new places to live. During fall and winter, people typically like to stay put, especially if they have school-age children.
Additionally, when you increase rent, it gives your tenants a reason to consider moving sooner than they might otherwise. Once you’ve determined your tenants, it’s best to make a marketing plan for how to advertise vacancies or create a waiting list in case your tenants move.
5. Consult with the Professionals
If you’re a first time investor, don’t go it alone. There are plenty of experts available who can help you make a good decision. You may want to talk to a financial planner, real estate agent, lawyer, tax expert, building inspector, property managers and other people who have invested in real estate.
Depending on the type of property you are considering, there may be other experts with whom to consult. The advice and services might cost you, but if you are able to ultimately make a good investment that works well with your portfolio, the price will be well worth it.
There’s a lot of advice about real estate investing out there, but the best advice boils down to money. The list above isn’t comprehensive on everything you could possibly need to know about investing in real estate, but it’s a really good place to start to learn the nuances of what could impact the success of your investment.
Hopefully the pointers above will get you headed in the right direction toward a positive cash flow.