Summary: In this article, you’ll learn how to prepare to invest in real estate. You’ll discover actionable real estate investment tips for beginners, including: where to look, what to buy, and how to be successful in real estate investing.
Did you know that since the 1960s, real estate investing has proven to be the #1 wealth builder? This proven investment strategy has been used for generations to diversify real estate portfolios, increase monthly cash flow, retire more easily and comfortably, and reach financial goals.
One of the reasons real estate has been such an effective wealth builder is due to inflation rates. For example, let’s say you bought a house 20 to 30 years ago. During this time, you would have paid off the property, it would have tripled in value, and you could be generating positive cash flow each year. To achieve lucrative real estate investment goals, implement the following real estate investor tips.
Real Estate Investment Tip 1: Clarify Your Real Estate Investment Goals
The first real estate investment tip (which is really the first step, to any type of investing) is to determine and clarify your individual investment goals. When it comes to making big investment decisions, it’s not enough to simply say, “I think my goals are X, Y, and Z.”
8 Questions to Clarify Your Investment Goals
The following eight questions will help accurately narrow down your goals, set realistic expectations, and keep you on track to make the right real estate investment choices.
- When do you plan to retire?
- When you retire, how much money will you need to cover your bills?
- What are your current retirement income sources?
- How much money are you willing to invest in real estate?
- Do you want to acquire property for future growth or do you need cash flow today?
- Do you have good credit?
- Do you need to plan for college, travel, or your parent’s long-term care?
- Are you looking for a tax break?
Finally, upon answering these eight questions, make sure you set a time frame for each of your goals and do everything possible to stick to that timeline.
Real Estate Investment Tip 2: Define Where You Are Now
The second real estate investment tip is to take a look at your current finances. While you might be mentally and emotionally ready to invest, your financial status might tell a different story. Fortunately, the following four questions will help determine your current financial status and if investing in real estate is a viable next step.
4 Questions to Help Define Your Current Financial Status
Defining where you are, from a financial standpoint, is easier by answering the following questions, which are designed to help determine your net worth.
- How much do you have left over at the end of the month?
- What is your debt minus the value of your stocks, bonds, equity and any other investments you own?
- How much are you paying in taxes and what portion of your taxes could be lowered through the right real estate investments?
- Have you met with a trusted CPA?
Once you’ve answered the above questions, you can start planning your next steps based on the assessment of your monthly cash flow, net worth, and tax liabilities.
Real Estate Investment Tip 3: Discover Your Purchasing Power
Our third real estate investment tip is to evaluate your current purchasing power. This is an essential step to drafting a successful real estate investment strategy.
Leverage Your Investment Property
The term “leverage” in real estate refers to your ability to leverage an investment property by creating the opportunity for someone else (i.e. your tenants) to pay off the property’s loan. By doing so, your ROI will be higher because you’re able to purchase an investment property with a smaller down payment. The smaller down payment frees up additional cash that can be used to purchase other cash flow real estate investment opportunities.
Financing can help determine your purchasing power. In fact, you might discover that you qualify for more financing than originally thought. When qualifying for additional financing, you may be able to afford multiple high cash flow rental properties that will increase ROI, while generating financial assets.
Real Estate Investment Tip 4: Determine Your Real Estate Investment Financing Strategies
Now that your goals, net worth and purchasing power have been outlined, our next real estate tip is to make is to make sure you determine which real estate investment financing strategies you want to pursue.
3 Questions to Determine Your Financing Strategy
One of the reasons it’s important to figure out your net worth is because this information is necessary to choose the right financing strategy. If you don’t know your purchasing power, it will be difficult to accurately determine how you want to finance your real estate investments.
Once again, asking the following questions can help determine your financing strategy:
- What funds will you use for your down payment and are these funds liquid cash?
- How much of your funds do you plan to put toward your financing strategy?
- What kind of loan will work best for your current and projected future financial situation?
The goal of deciding on a financing strategy is to narrow down what type of properties you’re qualified to purchase. Use the information gathered during your financial strategy session to decide which types of homes to purchase, single family or multi-family. Additionally, decide if you want to invest in high quality homes, homes that need to be renovated, newly constructed homes, or foreclosures, etc.
Real Estate Investment Tip 5: Determine Your Real Estate Investment Purchasing Strategy
Real estate investment tip #5 – decide your purchasing strategy. Clearly defining your objectives and goals, will help in finding the right opportunities, in the right markets, at the right times.
One way to determine a purchasing strategy that is right for you, is to consider the following scenario. Let’s say you have $100,000 to invest. You could then implement the following investment strategies:
- You could buy one property with the cash; or
- You could buy four properties with 20 percent down on each investment.
Next, you might decide to use all the cash flow to pay off one mortgage at a time. This strategy would allow you to pay off the first home in eight years, the next property would be paid six years later, the third four years after the second property, and so on. With this strategy, you could potentially pay off the four properties within 20 years.
Alternatively, you could buy just one property and use the cash flow to save for your next investment home. The goal of this strategy is to acquire multiple properties, while collecting high monthly cash flow.
Real Estate Investment Tip 6: Decide What Investment Property to Buy
Investing in real estate is about more than simply saying, “I want to invest in real estate.” Instead, ask yourself what type of property you want to purchase.
For example, maybe your investment goals best align with buying one single-family home. Conversely, you might want to buy four houses at once and pay off the mortgages using the monthly cash flow. Whatever you decide, focus on the types of properties that will get you to your financial goals.
5 Questions to Help You Decide What to Buy
The following questions can help determine your real estate investment purchasing strategy:
- Do you want to buy single-family homes?
- Do you want to buy new homes or resale opportunities?
- Do you want to buy multi-family homes that will have the opportunity for increased cash flow?
- Do you want to consider purchasing apartments or commercial properties?
- Do you want to purchase condos that are highly discounted?
Real Estate Investment Tip 7: 10 “To Do’s” Before Buying an Investment Property
At this stage in your real estate investment search, complete the following 10 tasks prior to buying your first property. These 10 tasks are designed to help mitigate any associated risks, while simultaneously setting you up for real estate investment success and a higher ROI.
1- Order Inspections Before Buying
Home inspections will alert you to any “red flag” issues. These issues are typically associated with repairs or renovations that might be more costly than anticipated. For example, the home inspection might show that the roof needs to be replaced or that there is mold in the basement that must be removed before a tenant can move in. These types of “red flags” are good indicators of a sound investment versus a high-risk investment. If the issues found during inspection aren’t enough to walk away, consider making a lower purchase offer.
2- Order an Appraisal
Property appraisals are incredibly helpful because they analyze the past, current, and predicted future value of the investment property. Without a property appraisal you are left “guessing” what the property is worth.
An appraisal will also provide a good indication of how much to charge in monthly rent for the property.
3- Get a Landlord Policy
A landlord policy is an insurance policy that can protect you throughout your tenure as an investment property owner and / or property manager. Get a quote for a landlord policy before closing on a home. By getting a quote and / or the actual insurance policy in advance, you can accurately budget monthly expenses, and set the rent at a price that will produce positive cash flow.
4- Get umbrella insurance on your primary residence for at least $2 million. Make sure it covers your investment property.
It’s no secret that accidents (and inevitably lawsuits) happen in life. Unfortunately, all too often accidents happen when property owners are not covered by an active insurance policy. Whether your tenant accidentally burns down the investment property or needs to be evicted for a lease violation, you’ll want to have additional insurance coverage on your primary residence, to protect your home in the event of a lawsuit.
Remember, if someone sues you, they have the right to go after all your assets, including real estate investments and your primary residence.
5- Consider placing the properties in an LLC for added asset protection.
As mentioned in the previous step, it’s vital to have the protection needed in case of an accident or lawsuit. An LLC, not only offers valuable asset protection, but it can keep someone (such as a former or current tenant) from taking your investment properties and / or primary residence, pending a lawsuit.
When it comes to real estate investing, it’s better to follow the old adage, “better safe than sorry.” An LLC might just be the piece of asset protection that keeps your properties safe from a costly lawsuit.
6- Talk to the property manager before closing escrow to verify rents.
No matter which real estate investment strategy you choose, make sure to speak with a local and trusted property manager before closing escrow. The property manager should verify how much your property will make on a monthly basis in rent. This sum, should then be compared against your monthly costs, to estimate how much cash flow you’ll receive from the property.
7- Have at least 6 months of money reserves per property to cover possible vacancies.
Even the strongest real estate markets can take a dip or it’s taking longer than expected to find a quality tenant. No matter the reason, by having at least six months of cash reserves for each property will protect you from defaulting on loans. Additionally, these reserves will come in handy should any unexpected emergency repairs occur.
8- Be aware that using your equity line can affect your credit.
Your equity line can sometimes impact your credit score. Since your credit score will be reviewed when taking out another loan on a future investment property, it’s usually best to get a fixed loan if you are planning on using home equity.
9- Visit the property whenever possible.
It’s in your best interest to visit the property multiple times before making a purchase. Remember to view the property at different times of the day and days of the week.
For example, if the local marching band randomly practices on your street at 7pm on a Thursday, then you’ll want to know about it. Or you might discover that the evening traffic creates a parking lot in your front lawn, as people take shortcuts trying to get home. In other words, while Google Maps is a helpful tool, nothing beats walking the property yourself.
10- Use the Power & Expertise of RealWealth.
The RealWealth has invaluable resources and an expansive network of property teams throughout the United States. Leveraging these entities to your advantage throughout the real estate investment process can make all the difference. At the very least, consider a free phone consultation with a member of our full-time staff to ask any real estate investment questions.
What’s Next? Take action!
Now that you’ve completed these seven important real estate investor tips, it’s time to take action. Fortunately, taking action is as easy as following these seven steps:
- Meet with your CPA
- Talk to property managers
- Search available properties
- Attend a RealWealth property tour
- Get pre-approved for financing
- Get your umbrella insurance policy ready
- Set up your asset protection plan
Once you’ve completed the above seven steps, you’ll be ready to speak with an investment counselor. Your investment counselor will host a strategy session that is catered to your unique needs. In fact, during this strategy session you can even review all the insights you’ve gathered through this entire process.
When it comes to real estate investing, the most successful investors surround themselves with a trusted team of advisors and industry professionals who can help achieve their unique objectives and goals.
1. Scenario: I bought a 3b/2b house in a nice neighborhood for $161,000, that is now worth $415,000. I am happy, and now ready to sell and reinvest. Next steps?
First and foremost, this is a fantastic scenario. The next steps would be to look into completing a 1031 tax code, whereby you would avoid paying capital gains on the property. So long as the property is, a) qualified for a 1031 exchange, and b) you reinvested the monies earned in the home’s sale for a new investment property. Speak with your investment counselor to learn more about the details of a 1031 exchange, as well as available investment opportunities upon the sale of the property.
2. Is the financing acquired in the name of the individual or in the name of the legal structure that is used, i.e. LLC? Can mortgage be transferred from individual name to LLC?
The optimal loan to receive is one that is insured by the government (aka a conventional loan). Unfortunately, these types of loans have to be in the name of an individual and cannot be transferred into the name of an LLC. A mortgage can’t typically be transferred from an individuals name into an LLC. You can learn more about this by reviewing our free online resources.
3. What if you don’t have a large amount of money to invest like $100,000? Are you excluded from having a strategy session?
Absolutely not. Even if you don’t have $100,000 to invest, you can still have a valuable and informative investment strategy session.
4. I have 2 – 3 properties in Portland, next steps?
Talk to your investor counselor to see what kind of return you can get, as well as what steps are right for your individual objectives and goals.
5. Can you talk about self-directed IRAs? What type of real estate investment meets the requirement of self-directed IRAs?
This is a great question for your CPA! Each type of IRA has different rules regarding real estate investments and taxes. For example, Roth vs Traditional IRAs have different tax rules and regulations regarding real estate investments. Check out this article for more details on How to Use a Self-Directed IRA to Invest in Real Estate.
6. Can you discuss the importance of location? How close do you need to be to your investment properties?
How close or far you are from your investment property is up to you. In our opinion, you don’t have to necessarily live within 30 minutes of your investment properties. Once again, this is why you want to work with a trusted team of local property managers and real estate professionals who will actively manage your investments to your best interest.
7. What are HELOCs and can they be counted as a 10 mortgage property?
No. A HELOC is not a property, it is a second position loan against an existing property.
8. What cities are best?
RealWealth has a great list of resources that can provide insights into the best cities for real estate investments. Generally speaking, these cities feature strong real estate markets, have high population and job growth, and feature numerous opportunities for homes to appreciate over time.
Real estate investing represents a fantastic opportunity to explore new financial avenues, diversify your portfolio, and plan ahead for retirement (or other financial goals). By following the above seven real estate investment tips, you can start on the road to real estate investment success.
To learn more about how to invest in real estate, set up a strategy session with an investing counselor to discuss concerns, answer questions, and take the first steps towards becoming a savvy real estate investor.