Investing in real estate can be a tantalizing way to make extra money. Those that are successful can even make a full-time career out of it. And while there are certainly a lot of profits to be made, it also involves risking substantial amounts of capital.
That’s why you should have a solid understanding of how the market works prior to making any investments.
Here are 4 things you should be aware of if you are considering investing in real estate.
1. The Types of Investment
If you are just starting out in real estate, you may not be aware of the variety of options there are for investing in property. It is important to be aware of these, so you can choose the one that is best for you. Buying properties to then rent them is a great way to start since it will quickly provide you with a source of income. You can then use this to further invest in other properties.
Alternately, if you have a background in construction, you may consider fix-and-flipping. This strategy involves renovating low-cost properties, then selling them for a considerable profit. One drawback of these strategies though is that they require a lot of work to implement. If you are looking for a more passive way to invest in real estate, you could instead invest in a real estate investment trust (REIT), which is akin to buying stocks in a company.
If you are not certain what type of real estate investment you should specialize in based on your assets and expertise, you should speak with a commercial real estate agent. They can consequently guide you on which areas are currently lucrative, and what options are available based on your current funds.
For those who don’t have a big capital but still want to invest in real estate, crowdfunding is an option. “Crowdfunding is a method for raising money for businesses and an easier way to access such ventures for investors,” according to Investopedia. In essence, investors pool their money together to come up with considerable capital to fund a business or property investment. Investors can go through a crowdfunding platform or a sponsor to put their money on an investment. Choosing the right platform or sponsor is a must for the success of your investment, so be sure to read first-hand reviews from current or former investors on credible platforms.
2. The Risks
Fortunately, the housing market is considered one of the more stable markets for investors. Thus, it is generally one of the less risky things you can trade-in. However, there are naturally always risks when trading high-value assets like property. It is important you are aware of these so you can mitigate your exposure to them.
These risks can be linked to many different factors. General market risk refers to the volatilities in house price linked to the economy in general. Of course, there is little you as an investor can do to control this. However, you can make sure your portfolio is diversified, so you are protected against any sudden up or downturns in the market.
There are also specific risks attached to the type of asset you invest in. Residential properties are more stable in value than vacation properties for example, as people will always require homes, but in leaner times may consider the latter an unnecessary luxury. This differs slightly from idiosyncratic risk, which refers to risks associated with the specific property you are investing in.
Regardless of the type, you should make sure any risks associated with a property are transparent before investing, so you can work to minimize them.
3. The Market Trends
While any investor can make a decent amount of money in real estate, to truly thrive in this business you should try to inform yourself of the intricacies of the property market. This will allow you to identify trends, and thus make better value investments overall. For instance, you may find through your research specific locations where economic growth is currently outpacing the adjustment of the market. This will allow you to maximize profits, and potentially give you an edge over other less-informed competitors. Educating yourself will also reduce your likelihood of being misled by any buyers or sellers you work with.
4. Your Finances
Real estate can undeniably be a great way of making money. However, you should have a good understanding of your financial position before you risk any of your own capital. Naturally, a lot of money upfront is required for most methods of real estate investment. It is thus vital that you are aware that your finances are in a secure state prior to making any investments. Consider speaking with an accountant or financial advisor, who can evaluate your financial position, and recommend how much money you should put on the market, to begin with.
The different types of real estate investments can vary in how much up-front capital is required, as well. For example, while you can invest in a REIT with a relatively small amount of money, buying and repairing a property can require a sizeable investment. Consequently, having an intimate knowledge of your financial state can help guide you to which investment option you should choose.