Real estate investment is a great way to expand your investment portfolio and diversify your income, but it can be tricky. Even after years of being in the business, realtors find it hard to come up with investment decisions, therefore, it is completely normal to be overwhelmed while you are thinking to step into the industry.
Here, we will try to walk you through the investment process so that it becomes easy for you to decide upon the option that will serve you the best.
Just like any other investment, the process for a real estate investment can be broken down into the following five steps:
- Set up a budget and start saving
- Choose the real estate segment you want to invest in
- Start crunching numbers and analyzing deals
- Build Relationships
- Start Investing
Now let us discuss these steps in detail one-by-one.
Setting up a Budget
As soon as the word investment comes to your mind, the first thing that you must do is to analyze your funds, look into your savings, set a budget for your real estate investment and set up a separate account for your investment funds. It is always wise to keep building a fund in advance while you analyze your investment options and come up with a decision.
It is a common myth that real estate investment requires investment amounting to millions. While some of the investments do require surplus funds but you can step into the industry with as low as $500 by means of options such as real estate investment trusts and online crowd funding platforms. Thus, lower funds are not a limiting factor for real estate investment.
If you are looking to invest in a more conventional option such as a housing property or a commercial property, you must carefully scrutinize the various financial aspects such as your income, market risks, etc. as these investments can be expensive pertaining to the maintenance and mortgage costs. Besides money, these investments will also consume a lot of your time, so be prepared.
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Identify Your Goals and Choose Your Investment Option
Once you set-up an investment account, you must start setting goals. You must have well-defined objectives that you want to achieve with your real estate investment. Once you have identified your aim, start examining the real estate sector and look into various investment options available. Some of the common investment options available are listed below:
- Housing properties: When it comes to real estate investment, housing properties remain to be the favorite. Whether you want to buy a house for your own self, or you wish to rent it out to earn some additional income, residential properties are a great investment with promising returns. Other than rental income, you can also earn profits by means of flipping properties in case of housing properties.
- Commercial properties: Commercial real estate constitutes properties such as office buildings, apartment buildings, hotels, shopping malls, multiplexes etc. All these properties have huge income potential. You can earn by means of both rental income as well as capital gains. However, these properties require a huge initial capital which can be risky when you are just stepping in the industry.
- Industrial properties: industrial property refers to structures such as warehouses, storage units, distribution units, etc. These buildings have a great earning potential and thus are a good investment option.
- Real Estate Investment Trusts: Many real estate firms sell their shares so as to raise capital for various development projects. This phenomena is referred to as real estate investment trusts. It is similar to stock exchanges as you get ownership rights as well as dividend income. It is a good way to diversify your income without investing a lot of money. These investment trusts are very liquid and therefore, you can sell them whenever you want and exit.
- Online Crowd Funding: There are many online platforms that let you invest in ongoing development projects. This is referred to as crowd funding. The purpose of crowd funding is to pool money for big commercial and residential projects. These long-term investment options provide you with regular ad periodic distributions. Once the project is finished, you also receive dividend income.
These are the various real estate investment options available to you. Carefully analyze the pros and cons of every individual option and then choose the one that best aligns with your goals in your available budget.
Number Crunching and Analyzing Deals
Once you are settled with where you want to invest the next major step in your investment journey is to start looking for deals. While analyzing the deals, you will need to do some number crunching. For instance, you will need to come up with an estimated income potential that a given real estate investment offers.
You will also need to calculate your mortgage costs, maintenance charges, and other expenditures that will come attached to your purchased property. While estimating the income potential, you must ensure to do some market research and analyze the charts of property demands in that particular area, the pattern and fluctuations in the rise/fall of demand, etc.
Connections are a basic requirement of any business and real estate is no different. While you may not necessarily need to hire employees, you will need to seek advice from financial experts and realtors from time-to-time. You will also need help from independent contractors to manage your investment.
If you are planning to invest in a large project, you will also need to seek the services form management and maintenance firms. This indicates the need to build a strong network with service providers who have expertise in their respective fields. These connections will help you at every stage of your business.
Therefore, it becomes necessary to ensure that you share a close relationship with them.
Here, we have listed a few experts that you must get acquainted with before you step into the real estate sector:
- Financial Experts
- Property Management Firms
- Maintenance Firms
- Money Lenders
- Real Estate Attorneys
- Closing Agents
- Home Inspectors
- Pest Control Services
- Independent Contractors, etc.
Once you have the list of service providers that you will need for your business, you will need to build a personal connection with them. You can find the lists of best players in all these areas on the internet. Once you have the list of names, you must start contacting them, fix appointments, and hold both business as well as personal conversations with them. The key is to start somewhere, once you start approaching a few service providers, you will get referrals of other service providers. It will help you create a well-coordinated network for your business.
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Start Looking for Deals
The final stop on your investment journey is to start looking for deals. Finding a deal is liking solving a puzzle, you will need to try different combinations before all the pieces fit together to create the final image. The real estate investment market is not always hot and in order to utilize your resources to the fullest it is crucial to exercise financial discipline. It means that you should not wait for too long before coming up with offers.
It is true that it is tricky to come up with offers in the beginning, this is where your connections will help you. Talk to a few experts, do some of your own research in the area where you are looking to invest. Based upon your researched material, formulate a well-defined offer to present to the second party.
However, before presenting the offer to them, share it with your financial experts, realtors and accountants. Seek their advice. If they give you a green light, go on, make an offer. After making a few offers like this, you will get an idea of what a good offers looks like.
Once your offer gets accepted and it looks like a good deal, do not waste much time in closing that deal. Sometimes taking too much time can cost you a good opportunity. What will help you the most in this last step is your research and your instinct.
Real estate investment is a tricky business, you need to take a lot of things into consideration before you go on to invest in this sector. Making a good investment decision that is profitable is a very time consuming and frustrating process. However, if you adopt a well-planned approach, it will become easy for you to take major investment decisions and you will master this art in no time.
Like any other investment decision, the first step is to set up an investment account and come up with a budget for your investment. Once you have settled on a budget, the next step is to identify the purpose of your investment. After you have identified the purpose and set well-defined goals, you must go through the various investment options, analyze their advantages and disadvantages and go for the option that matches your goals. After you have decided where you want to invest, the next step is to analyze the various deals and offers available.
You must go through all the potential earnings and expenditure to come up with the most profitable option. Along with analyzing deals, you must also focus on building strong connection in the industry with the various service providers that you will need in future. It will help you in making smart investment decisions and will save you a lot of time in future. Once you are done with everything else, you must start making offers and closing deals and begin your investment journey.
Hope you enjoyed this post on real estate investment, let me know what you think in the comment section below.
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