Real estate can be a lucrative investment if you know how to approach it, but also has potential to waste time, effort, and money for those who don’t put in due diligence.
Real estate investment can seem like a gated venture to some; only available to moguls with the money to buy hectares of land at a time. Others might view it as a low cost, easy to manage investment that’s guaranteed to turn a profit.
Regardless of which group you might find yourself belonging to, there are a few crucial things to keep in mind; to both manage lofty expectations and inspire sensible financial habits.
Prepare for the Responsibility
Unlike the stock market, investing in real estate means taking on the responsibility of the maintenance, repair, and refurbishment of your capital.
Owning a rental property involves keeping track of tenants, contractors, permits, zoning laws, rental laws, and much more. Doing your research before investing can significantly help streamline the process, and save time, money, and stress.
Should you find that the property you own is no longer worth the investment, understand that selling can be a lengthy process and that the value of your property may depreciate.
Have Your Finances Managed
It wouldn’t be wise for a first-time investor to assume the returns on their investments will be their primary income; one of the basics of financial literacy. Needless to say, it isn’t recommended to place yourself in a situation where the possible outcomes are success or bankruptcy.
As a first time investor, it would be a good idea to split your finances using the 50/30/20 rule; where 50% of your income is spent on necessities, 30% set aside for savings, and 20% set aside for disposable income.
It’s that last 20% that helps you determine whether you are financially ready for the investment. By opting into any investment opportunity, you acknowledge the risks involved and will be able to handle potential losses should things not work out.
Keep in mind that down payments can be upwards of 25% of the total cost of the property.
Know How to Handle Vacancies
Owning a rental property with no tenant is a liability, but one of the most common mistakes amateur landlords make is rushing to fill vacant units. One of the ways landlords rush the signing process is to skip on the background check.
A background check for credit, rental, and criminal history with every prospective tenant can seem costly at first, but it only serves to protect your best interest. Evictions are lengthy and expensive ordeals that only compound on time a property spends vacant.
Every tenant is another investment, and it’s only reasonable to treat them with the same scrutiny you would give other investments.
Prepare for Market Shifts
Depending on the circumstances your property’s value may increase or decrease. The rent you can charge is also subject to change.
Nothing about owning a rental property is static, and it’s important to be able to handle significant changes. Like the adage goes, “don’t put all your eggs in one basket.”