Evaluating locations and properties, calculating potential ROI, knowing how to identify value. For many, investing in real estate can seem overwhelming.
But, it doesn’t need to be. In fact, if you take the right steps at the beginning of the process, you’ll be able to make decisions quickly — and achieve your goals faster in any market.
If you’re considering investing in real estate, here are five things you should do before you start shopping.
1. Define WHY You Want to Invest
Are you looking to pay for university? Make a short-term profit? Create generational wealth? Pay for retirement?
Investing in real estate can help with all of these; the key to making the best decisions, however, is to be clear on your goals and when you want to achieve them. By defining this up front, you’ll be able to develop a laser-targeted action plan that shaves months off your purchase timeframe and enables you to make confident decisions.
Even after you’ve invested, a clear long-term outlook gives you the perspective you need to better withstand potential ups and downs, making your investment as stress-free as possible.
2. Be Real About Your Skills, Situation, and Preferences
Once you know what you want to accomplish, it’s time to start envisioning your day-to-day life after investing in real estate.
- Are you willing to field texts and calls from tenants?
- Are you good at fixing things around the house?
- Do you plan on traveling?
- Do you like to kick back and relax on weekends?
- Are you comfortable screening tenants?
- What kind of spare time do you have?
It’s important to ask yourself these questions up front and answer honestly. Sure, you may be handy around the house — but can you fix household issues while at your daughter’s soccer tournament? You may have time to handle tenant calls — but do you really want to?
As a result of this exercise, you’ll be better able to narrow in on investment options and services that make sense for you and your lifestyle. For example, if you decide that you want a “hands-free” investment, you may determine low-maintenance products (like condos) and services that handle the day-to-day work (professional property management) are your best bets.
(You’ll learn about all of these options in Step 4)
3. Evaluate Your Finances
Now that you understand your goals and your preferences, it’s time to find out what’s possible. The first step in this process is to be clear on your finances.
- What is your income?
- Your expenses?
- Are you cash flow positive every month? By how much?
- Could you afford an extra mortgage payment right now?
- Are you willing and able to cut costs if needed?
- How is your credit?
These factors determine not only your ability to buy an investment, but also to hold it long-term: where the real financial gains lie.
4. Consult with Real Estate Investment Experts
You know your goals, preferences, and your financial situation. Now, it’s time to find out what options are available to you.
This step and the step that follows — finding out what you can afford — go hand-in-hand. The reason why we advise that you speak with an investment-focused Realtor first is so that you understand all paths to your goals and have the proper framework heading into a discussion about mortgage financing.
For example, you may discover options that don’t require a $100,000 down payment or a mortgage but still allow you to achieve your goals while suiting your preferences. Or, you may learn about and be drawn to joint ventures and other fractional ownership options that give you more financial flexibility.
Clearly understanding all of the options available to you will help guide your conversations in the next step.
5. Find Out What You Can Afford
In today’s market, you need to be ready to act fast; often, this involves a mortgage pre-qualification.
A mortgage advisor will be able to tell you — based on your income, assets, and debts as well as the potential income you could earn from your real estate investment — the mortgage you can afford and your maximum purchase price.
The key is to work with an experienced advisor who helps real estate investors regularly. Don’t be afraid to take some time and explore your options to find the right professional, lender, and terms.
And that’s really the theme with all of these steps. By being methodical up front, you’re building a foundation for better decisions that allow you to achieve your goals faster.