Investing in real estate has been a great path to building wealth for a long time. Many investors have created a steady stream of income through owning properties and renting them out to tenants. And with the rapid rise in home prices and rental rates over the last few years, that’s not going to change anytime soon. Investing in rental property could be a great financial move depending on your situation.
Before jumping into the real estate market, there are some important details to consider so you can be confident you’re making the smartest financial move. If you’re brand new to real estate investing and looking for help with navigating your first investment, check out the tips below:
- Have a Strategy
- Market Research
- Investment Funds
- Property Management
1. Have a Strategy
When it comes to real estate investing, there are different strategies investors use to profit from their properties. Failing to use the right strategy for an investment property can result in a financial disaster, so it’s crucial to have one in place before entering any market. One of the most important decisions you should make about your investment is whether it will be a short-term or long-term investment.
Short-term investments in real estate are typically less than 5 years, however, some strategies can be much shorter than that. Because of the short timeline, they can be risky because you expose yourself to market volatility that can hurt your chances of selling your property for a profit. House flipping is a very popular short-term investment strategy.
Long-term investments in real estate are usually 5 years or more and often can be much longer. A benefit of long-term strategies is they are less likely to be impacted by market volatility because over time the price of real estate steadily rises. A downside to these investments is the time and monetary expense of upkeeping the property for the years you own it. Rental properties are a preferred long-term strategy among investors. Consider these additional tips before investing in rental property.
2. Market Research
Now that you’ve decided on a short-term or long-term strategy, it’s time to talk about the market you want to invest in. There are several influences on each real estate market that can either make or break your investment depending on the strategy. It’s key to understand all influences and make decisions based on your target market conditions. Here are some influences to look for:
Population: Is the population of your target market increasing or decreasing? If people are moving into the area it could signal that the market is healthy and there is a consistent influx of potential tenants for your property. On the other side if people are leaving the area it could mean that you might have a hard time leasing your property since the area is less desirable.
Price: What are the prices of homes and rental rates in your target market? For short-term buy and sell strategies, you’ll want to look for a consistent upward trend in housing prices so you can be confident that prices won’t dip before you go to resell the property. For long-term rental property strategies, you’ll want to see an upward trend in rental rates which signals your cash flow will continue to grow. You’ll also want to ensure rental rates are high enough to cover all the costs associated with owning and managing the property.
Business: Is the business growing or shrinking in your target market? If businesses are opening or expanding, it will help create more jobs in the area and increase the number of potential tenants to rent your property. However, if businesses are closing in the area, it could decrease the demand for housing and hurt your rental rates and resale value.
This isn’t a comprehensive list of market influences, and it’s important to evaluate all market factors before concluding your research. For rental-specific strategies, check out more considerations in this article on rental home investment.
3. Investment Funds
Creating an investment strategy and conducting market research are important first steps when getting involved in real estate investment. It’s also equally important to evaluate the investment funds you have available because it will greatly influence the scale at which you’ll be investing. Real estate is a cash-heavy business and often requires large down payments and big cash reserves for operating costs. For this reason, traditional real estate investments have been out of reach for many investors.
If you don’t have the capital available to invest in property right now, don’t let that discourage you! There are other ways you can get involved in real estate investing at a fraction of the cost of what it typically requires. There are online crowdfunding platforms where investors can pool their money together to purchase “shares” of real estate. One of the most popular platforms you can do this on is called Fundrise. Investors like yourself can invest in real estate for as little as $500! If this is a route you’re interested in, find out more about Fundrise.
4. Property Management
Another important detail to think about with real estate investment is property management. Many new investors overlook the fact that real estate is a time-intensive business, especially when it comes to rental properties. You’ll spend time marketing the property, finding and vetting tenants, keep up with property maintenance, and be available for your tenants whenever they need something from you. It can be exhausting!
For these reasons, many investors turn to property management companies to handle the day-to-day operations of their rental properties. These companies are highly experienced in every aspect of the rental property business and can manage all aspects of the property for you. In return for their services, they charge a percentage of the monthly rental income that typically ranges from 5% – 12%. Yes, the fees cut into your profits, but turning your rental property into a truly passive income stream makes it worth the cost. If you’d like your investment property to be a passive income stream too, consider hiring a property management company to manage the property for you.
As you can see, there is a lot to consider as a new investor entering the real estate market. Real estate has historically been a great path to building wealth and still is today. To maximize your chance of success, do your due diligence by having a good understanding of your strategy and the market you’re investing in.
Now that you have a taste of what it’s like to dive into real estate investment, you should continue to refine your strategy and gain a better understanding of the risks and factors involved. For some additional points to consider as you start your real estate investment journey, check out these 5 helpful tips.