4 Signs You Are Ready To Get Started Investing In Real Estate

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Around the world, real estate investment is an excellent source of income for many people. IN the U.S. in particular, baby boomers and the “x-generation” crowd are both coming to the same conclusion at the same time:  my retirement may depend entirely on what I do in the next few years.  For many, using real estate as a source of income either now or in their retirement years is become more of a necessity rather than a luxury as it may have been in the past.  That realization is leading to more and more individual investors buying the most affordable investment they can find…Single Family Homes.

Economies of scale do not necessarily benefit the small investor.  It is much harder to negotiate better prices when you are buying one home at a time.  And the negotiating is not just about the price of a home.  It is about the cost of labor, materials and manufactured goods which all go into a project to prepare many properties to be used as investments.  In today’s environment, there are many new players as well that are making it tough for small new investors.  Some corporations own lots of commercial real estate that they rent out to small businesses. Some families own second homes and investment properties that they operate as businesses such as bed and breakfast properties. Recently, hedge fund and institutional buyers have entered the market and squeezed even harder against the individual buyer.

Still other investors are looking for creative ways to enter the market.  Farmers rent out fields for crops and stalls for animals. Some property owners rent out their property for hunting weekends or sell farm produce. And others own properties that they rent to long-term tenants. This only skims the surface of ways in which property ownership can generate either passive income or active income for many people in a variety of ways.  When considering all of the options, individual investors often find an uneven playing field littered with a lot of choices and advice coming from ten different directions.  What is consistent is the reality that we are entering the final phase of one of the greatest real estate investment opportunities this country has seen.  Does that mean that real estate will not be a good bet in the future?  Absolutely not. We simply have seen a confluence of the the best environment from pricing to service to interest rates and housing stock all at the same time and predicting when and if that will happen again is not worth the effort.

Here in the United States, now is a good time to get involved in real estate investment if you are one of those Americans looking around and realizing that a good investment now could reap huge benefits later during retirement.. There are many indicators that the housing market is strengthening, while prices and interest rates are still very affordable, and demand for quality rental housing is high. This means the opportunity to take advantage of all the strong market conditions is shortening and the opportunity to maximize return is here for a shortening period of time.

According to a story in the Associated Press, a fully healthy U.S. housing market typically boasts annual sales rates of 5.5 million units per year. November 2012 had one of the highest seasonally adjusted sales rates, 5.04 million, since 2007, when the market began coasting downhill. This means that housing prices and interest rates will continue to climb in 2013, making it a good idea to lock in low rates sooner rather than later to maximize your passive income returns from a real estate investment.  As the economy improves and housing starts pick up steam, pricing pressure will increase and the affordability index will go up.  A housing recovery would be excellent for the U.S. as a whole, but investing will become an activity only for the prepared and the unprepared will get gobbled up.

Keeping all of this in mind, I put together 4 steps to help you decide and know that you are ready to invest in the real estate market at this time.

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4 Signs That You are Ready to Make a Real Estate Investment

1. You are interested in making an investment in improving your family’s long term financial future.

That is pretty much a no-brainer for most of us, but there is a word in there that freezes a lot of people.  Investment.  Two of my grandfathers are a good contrast in the different attitudes people can have about investments.  One was major risk averse.  He didn’t like leverage and he did not believe in the hype of large returns.  He liked long-term cash and steady savings.  When he passed away he had a modest ability to leave a lot of people a little.  On the other hand, I had a grandfather who was never scared of an investment.  He had lots of investments – some good some bad.  Some were in real estate, but they were in lots in the middle of the Arizona desert.  Not a good investment.  When he passed away he had a modest ability to leave a lot of people a little.  So first and foremost, before staring to invest in real estate, you have to an interest in actually investing and not simply saving your way to a long term financial security.

2. An ability to invest such as capital, partners, good credit or available low-cost mortgage slots.

There are going to be lots of articles and stories about how you can invest with no money out of pocket.  There will always be fly-by-night get rich quick real estate propositions where you need no money, no credit and no hassle!  For me, none of those options are a clear path to financial freedom or the ability to affect the way I want to retire.  I may be able to make some quick cash.  I may be able to do a deal.  But for me, the essentials to know I am ready to make an investment center around my ability to qualify to purchase properties as well as my ability to actually close those deals either with my won cash or with a partner who provides what I lack.  Capital, partners, good credit and the availability of low-cost mortgage options are essentials to let me know I am ready.

3. Your budget has some wiggle room for risk, in case your rental property roof needs a repair, and you won’t receive the full direct deposit from your rental management company one month.

This is a big one for me that I end up spending a lot of time talking about with individual investors.  Having some financial security when you get started is a HUGE bonus to finding success as an investor.  It alleviates a lot of worry and allows for an introduction of an appropriate amount of risk.  When people are not financially secure they can tend to be more risky and try more risky actions.  They have less to lose.  When you are financially secure, it allows you to focus on the basics of a particular deal and really make sure that you have all of the important questions answered.  Worrying if you have enough money to cover for shortfalls is not a worry you want to have every single month.

4. You have a team of experts that know a great deal about real estate investment in your community, or in your target area.

I always tell people that the team of people you surround yourself with will be one of the most important decisions when you get started investing.  I am not simply talking about a good mentor or a good CPA or closing attorney.  I mean the entire team of people that you lean on for advice.  If they are not top notch and do not fill you with confidence when you speak with them, it is going to be a bumpy road.  You really need to think long and hard about who you spend time and energy with as an investor and who you turn to for advice.

Those are simply for our my tips for knowing you are ready.  What other signs did you look for before you got started/  If you have not started investing, what is it that you are waiting on to know you are ready?

Photo: reallyboring

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.

8 Comments

  1. Shawn Sorter on

    Great article. Having the wiggle room that you talk about I think is a huge key. I can see people causing themselves so much stress by cutting it to close. And so much of the risk of leverage can be lessened by having the funds for the wiggle room.

  2. Great article Chris! I agree with you (and Shawn) in that having wiggle room in your budget is very important. That is probably the number one sign for me that I was ready. I have had a couple of months where I didn’t receive the full direct deposit from the PM but it was no big deal as I had that buffer.

  3. I’d add – “when you’ve got enough emotional control to view a deal as numbers on paper, and not get attached to a beautiful porch, a great location, amazing architecture, nice tenants, or anything else that’s based on emotion and not cold facts”. 🙂

    The great divider between buying to live and buying to invest, in my opinion.

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