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Savvy investors will tell you that investing in real estate is quickly becoming a way to generate excellent positive income. This has been the case in the past, and as the value of property rises across America these days, it’s once again becoming a smart choice for those interested in a long-term source of income.
The catch with any real estate investment, of course, is the issue of cash-flow. Generating positive cash-flow, as with any other income plan, is the name of the game, and those considering investing in real estate would do well to crunch the numbers and be aware of the possible pitfalls before moving forward.
The five tips below are an excellent place to start if you want to learn more about this potentially lucrative–but possibly risky–investment plan.
Tip 1: Be conservative with initial projections.
If you’ve followed the real estate market long enough to recall what it was like during recent years, such as 2004–2006, you probably know that the current state of property prices isn’t unique. The market has improved recently, and that’s precisely what’s driving so many people to start looking into investing in it. However, this also leads to the common phenomenon where buyers are paying more than what properties are currently worth. They’re doing this because they’re banking on future growth to pay off in the long run.
A reasonable amount of this type of daring approach is healthy–and, indeed, sometimes necessary–for real pay-off, but if you’re just starting out, it’s wise to keep your estimates of future value conservative and even on the side of pessimistic. If you have indeed followed the market, you should know that it can change quickly compared to other investment fields, and current growth is no guarantee for the future. If you’re just getting your feet wet in the business, you’re already risking enough: don’t gamble further by banking on a big payout that may not come.
Tip 2: Put most of your money into sure things.
It might not sound like a fast-growth scenario, and it might make new, ambitious investors a bit impatient, but the best strategy in the type of real estate market we have today is to look for certainties. Wise investors will put their money toward properties that are already proven to bring in income that ideally exceeds their purchase price. Yes, you’ll have to spend more to make the purchase, but the upside will be you won’t end up with negative cash flow for the following several years.
Tip 3: Know your locations–and how much they matter.
Some of the most tempting deals in real estate will probably occur in locations with questionable–but promising–attributes. In other words, you’ll probably feel the urge, more than once, to purchase a property (likely for an attractively low price) in a neighborhood or area that isn’t yet up to par, but that shows future promise and growth. While it’s true that the old maxim of “location, location, location” does matter when it comes to real estate value, it’s also possible to over-estimate its impact when investing.
As mentioned in Tip 2, your better bet as a new investor will be going for sure things, as opposed to those that show possible promise but offer no guarantees.
The flip side of that, of course, is that sometimes an area will indeed be on the way up, and getting in on the ground floor could be the wisest investment decision you could make. The best thing you can do, therefore, is simple: research. Arm yourself with information about what goes into making a particular area profitable for real estate. How is the area zoned? What is the view like? What are local schools, income levels, and crime rates? All of these factors and more are the invisible influences behind the “location” maxim that really matter, and understanding them is key to making wise choices about where to invest (and how much).
Tip 4: Plan a strategy, and have an end-goal.
Going into any investment without an idea of what you want from it is a poor idea, but it’s doubly so in the world of real estate. Too many investors dive right in without thinking ahead to consider questions such as how much they want to invest, how long they intend to do so, how many properties they might consider, and more. If you don’t know yet whether you want to invest in properties for “flipping” purposes, rental purposes, or personal ownership, you aren’t even close to being ready to proceed.
The benefit to all of this preparation, of course, is that you will be much less likely to get in over your head. It’s the investors who go in without thinking about how much they might want to spend, for example, who end up putting “just a little more” into their projects until suddenly their personal assets are at risk (or gone altogether).
Tip 5: Have a financial cushion.
It should go without saying, but any investment strategy needs a certain reserve to fall back upon, and real estate is no exception. In fact, it’s even more important here than in other types of investments. After all, owning property, even simply in the role of investor, means dealing with the unforeseen, such as natural disasters, wear and tear, property tax fluctuations, unplanned value changes, and a lot more. At some point, you’ll need some cash to draw upon, whether it’s to make repairs or improvements to the property itself, or to help finance your personal needs should the property become a larger drain than expected. Investing in real estate without a well-planned reserve of money is an unnecessary risk in an already risky and challenging (but potentially quite rewarding) field.