Investing in real estate can help you earn a little bit of extra money to supplement your income, or it can help you build a small fortune over a lifetime. However, getting into the real estate game isn’t always easy for first-timers. Unfortunately, there are a lot of things that can go wrong when it comes to investing in real estate. It’s your own money that’s involved, and that often leads to a great deal of risk. How much is too much to invest? Should you take the leap, or is is just not sure enough? Many investors run into trouble with tenants, who don’t pay rent on time, or a house that is heavy on the “fixer-upper” side and costs a lot of money out of pocket. It’s a game of risks and it takes time to understand all the ins and outs. Investing in real estate isn’t as simple as just buying property. There is so much more that goes into the process and it pays to be aware. Looking to make a little money through real estate? Follow this guide to help you get started, while avoiding the common pitfalls many first-time investors make.
Plan Before You Buy
A lot of first-time buyers think that they can start looking for properties to buy up right away. Sure, they don’t quite have a budget, or a plan for that matter, but it will all fall into place once they property gets bought. Right? Not exactly. This is a backwards way of doing things when it comes to real estate investing and one that may lead to many years of financial heartache down the road. Before even looking at property, figure out your plan first. How much do you have to spend, and what type of return are you looking for? How quickly do you need that return, or can you let your investment build equity over time? These questions will give you a better idea of the investments you’re able to make and help determine exactly which property is ideal for you. Without a solid plan, you could end up with investment property that feels more like an anchor around your neck than a dollar in your pocket.
Not Figuring Costs Properly
If you’re planning to rent your property, just figuring out how much you need to charge for rent to pay your mortgage and make a little something extra isn’t the right way to go about it. After all, owning rental property creates some of the most unplanned situations you could ever dream of, and when tenants want something fixed, they want it fixed as quickly as possible, not two weeks down the line. When investing in a property that you’re planning to rent out, it’s a good idea to set aside at least six months of expected expense cost per property. What does this cost depend on? Well, based on the size and type of home you have, you’ll be able to figure out generally what your expenses should come out to. A single-family home with two bedrooms, for example, generally has less maintenance costs than a four-dwelling apartment.
How Do I Plan My Costs?
One of the best ways to figure out what needs to be set aside is by looking for the most costly repairs that could come up – things like the furnace or plumbing system. Keeping more than what it costs to fix those items aside for general repairs is the best way to avoid dipping into your personal savings, especially in the event of an emergency. Along with not figuring repair costs properly, many homeowners forget about things like closing costs, escrow fees, and attorney’s fees. Believe it or not, these really put a dent in your earnings, especially if you’re planning on flipping a property in the near future for a tidy profit, without doing a lot of work. Take these fees into account before you choose a home to buy, and take out a mortgage or consider paying cash. The last thing you want is to end up with dozens of unexpected costs, all of which may have to come out of your pocket if you’re unprepared. Anyone you talk to who has been in the world of real estate investment long enough can tell you a whole line of personal stories, both successes and failures. Making mistakes and losing some money along the way is inevitable, but the more you know ahead of time, the less likely you’ll be to end up in debt.
Starting out in the world of real estate investing can be tricky. While there are many sites out there that can help you, getting help from a knowledgeable resource is something you should strongly consider. There’s nothing wrong with seeking a helping hand to guide you through the process.
Naomi Shaw is a freelance writer in Southern California. She has a passion for real estate and loves writing about the ins and outs of what to expect from the housing market.