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Already the world’s largest asset class and one of the most enterprising industries, the real estate market in the U.S. is expected to reach a value of $132 trillion this year and a market volume of over $155 trillion by 2029, according to Statista. Investors are drawn to real estate because of the prospect of steady, passive income, strong investment returns and advantageous tax implications.
Many investors are enthusiastic people looking to try their hand at real estate because it is frequently seen as a low-risk option that yields quick profits. The perception that real estate investing is simple and enjoyable is nurtured by popular television programs focusing on purchasing investment property and flipping houses.
Real estate might seem like a sure thing at first glance compared to other investment opportunities. However, real estate is influenced by the same factors that affect stocks and other common types of investments, such as economic behavior, market sentiment, interest rates and geopolitical events. Some real estate investments require specialized analysis and expertise, and most demand patience and time to generate a satisfactory return on investment.
Making your first real estate investment successful requires careful planning, research and strategic decision-making. If you’re thinking about becoming a real estate entrepreneur, follow these five steps to make your first real estate investment a winner.
Also check out these steps when investing in real estate.
1. Figure Out Your Finances
Whether you’re looking to participate in a $1 property lot auction, join an apartment limited partnership group or buy the best house on the best street, you’ll need to figure out how you’re going to pay for it upfront and down the line. Determining how you plan to fund your investment is the first step in entering the real estate game. Before buying anything, you should have your own finances in order, self-made millionaire Todd Baldwin told CNBC Make it. Cutting down on your living expenses and establishing a strong credit score will also help your business.
It’s important to be aware of your upfront expenses if you’re new to real estate investing, as they go far beyond the purchase price and real estate fees. You’ll have to pay for repairs and renovations, and far too many novice investors lack the knowledge to determine how much it will cost to patch up electrical issues, for example, or remove bug infestations and restore damaged foundations, which are rarely DIY projects. Failing to budget for closing costs, insurance or utility could cost you dearly.
2. Know Your Market
Knowing the market is one of the best ways to avoid any thorny ownership or investment issues that may arise. You can assess the price of an investment property more accurately if you are aware of your local real estate market and who lives where. You’ll need to brush up on potential rents as well as the average price per square foot of houses in the neighborhood. Always remember to improve properties to increase their appeal to the anticipated buyer and always know.
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“Determine whether amenities are nearby that people would enjoy, such as grocery stores, schools, and parks,” said the property managers at Power Properties. “You’ll also want to investigate property values in that area. If they have been steadily increasing or decreasing over time, it will affect your return on investment.”
3. Buy Low and Pursue Unexplored Leads
Being able to time a purchase properly is part good luck, part recognizing economic trends and knowing your stuff. Getting a significant discount from a desperate seller is a great option, but it will require patience to get a deal. If you can find houses whose restless owners haven’t listed them yet, all the better.
The best sellers are looking to get quick cash for well maintained properties, like a couple going through a divorce or a family selling off their parent’s home. It will pay to really think about why an investment is cheap or if chasing a foreclosure auction is a smart move. A bargain price is nice, but they are often not worth the time and money, and headaches.
4. Property Selection and Investment Options
Typically, real estate is a great investment because it appreciates over time, and for passive investors interested in real estate, there are many opportunities to make money without investing in and selling out your own home or property.
If you’re going to make a go of it in real estate investing, you’ll need to study what the best investment vehicle will be for you. You can invest in real estate via syndications (when a group of investors pools their capital together to purchase a large real estate property), build-to-rent properties (detached units built for long-term rental purposes), real estate investment trusts, or REITs (companies that own investment properties) or contribute through crowdfunding or a Cityfunds – type investment platform.
5. Keep It Slow and Simple
Getting rich quick is a pipe dream to 99% of investors. A basic method can be very effective in real estate investing. As Business Insider notes, “If your goal is to generate passive income, don’t be fooled into believing you need to go big to make it happen.” If you desire to earn passive income over the long run, it might be best to start small and keep costs low rather than exhaust your resources in one big splash in the hopes that riches will result. You can’t force real estate investment success unless you catch lightning in a bottle.
Suppose you simply determine what you want to achieve with your investment (e.g., rental income, property appreciation, tax benefits) and decide on the duration of your investment (e.g., short-term flip vs. long-term rental). In that case, you’ll realize your goals of being a successful real estate investor faster than you anticipate. As Baldwin said, “Perhaps I didn’t scale as quickly as [someone] who has way more money than me. But I’ve also never had a scary time where I’m like, ‘Oh, I could lose my pants on this.’”
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