UNITED STATES—Real estate investing is the buying, owning, managing, and selling real estate for profit. The improvement of real estate as part of a real estate investment strategy is generally considered a sub-specialty of real estate investment called real estate development.
This investment requires a person to read both the financial and real estate market. They need to carefully assess upcoming trends and sniff out the next hot spot for real estate investing. This article will cover some things you need to know about real estate investing.
Why do people invest in real estate?
Real estate investment properties offer many potential benefits, the most coveted of which are: regular income, long-term capital appreciation and tax advantages. We’ve gone over five key factors you should consider when making your assessment:
1. Regular income
One of the most important benefits of real estate investing is the ability to generate a steady stream of income. Unlike stocks or bonds, which fluctuate wildly in value, rental properties can provide a stable source of income to help smooth out your overall financial situation.
2. Long-term capital appreciation
Over time, real estate has generally appreciated at a rate well above inflation. So if you buy a property today and keep it for the long term, it will likely be worth a lot more. This increase in value can provide a nice nest egg for retirement or help fund other goals.
3. Tax benefits
The IRS offers several favorable tax treatments for real estate investors. For example, you may be able to deduct depreciation expenses from your taxes, which may offset some of the income you generate from your rental property.
Also, if you are selling your property for profit, you will only have to pay capital gains tax on the portion of the sale that exceeds your cost base.
Leverage is the ability to use debt to finance the purchase of an asset. For example, regarding real estate, you can buy a property with a mortgage and only pay part of its price upfront.
This could allow you to control a much larger property than if you had to pay the full purchase price out of pocket.
5. Forced savings
Another benefit of real estate investing is that it can be a forced savings plan. For example, when you take out a monthly mortgage, part of that payment is used to repay the principal of the loan. This means that you are slowly but surely building up equity in the property.
Plus, if you eventually sell the property for profit, you’ll have a nice windfall that can be used for many purposes.
When invest in real estate, it is important to remember that location is vital. Look for properties in areas that are experiencing strong economic growth and have low unemployment rates. Population density is also key, as properties in densely populated areas will be in higher demand.
Real estate returns also depend on location and demand. Yields are highest in areas with high economic growth, low unemployment and high population density.
When investing in real estate, it is essential to have a long-term vision. Real estate is illiquid, which means selling a property can take time if necessary.
It is also important to remember that an investment property is only an investment. So don’t get emotionally invested.
What to avoid
If you’re considering investing in real estate, there are some things you’ll want to avoid. You may have never considered certain factors before because you may be at the beginning of your investment journey. For this reason, we have also compiled a list of the seven most common mistakes made by newbie investors:
1. Not doing proper research
Before investing in a property, be sure to do your research. This means looking at comparable sales in the region, check zoning changes that could impact property value and understand the local market.
2. Paying too much for a property
One of the biggest mistakes newbie investors make is paying too much for a property. Be sure to work with a qualified real estate agent to help you find properties at a good price. Don’t get lost in the heat of the moment.
3. Not having enough cash
When investing in real estate investment properties, it is essential to have enough cash to cover unexpected repairs or vacancies. Without adequate reserves, an investment property can quickly become a money pit.
4. Become emotionally attached to a property
It is important to remember that an investment property is nothing more than an investment. Don’t get emotionally attached to a property, or you might have a hard time selling it when it comes along.
5. Failing to plan for future repairs and maintenance
All properties will eventually need repairs and maintenance. Be sure to factor these costs into your investment plan so you are not caught off guard when they arise.
6. Not diversifying the portfolio
When investing in real estate, you need to diversify your portfolio by investing in different properties. This will help you mitigate your risks and increase your chances of success.
7. Having unrealistic expectations
Many newbie investors expect to make a fortune overnight. But the reality is that real estate investing is a long term game. So be patient and be prepared for ups and downs along the way.
If you’re considering investing in real estate, try to avoid some, if not all, of the most common mistakes. Also, try to get on the right foot in your new journey as a real estate investor. If you keep your head straight and follow the right directions, there is a lot to be gained from this type of investment.