4 Things You Need To Know Before Investing In Real Estate

4 Things You Need To Know Before Investing In Real Estate

As the old saying goes, “Buy land. They aren’t making it anymore.” This quote has been attributed to Mark Twain, and many people have used it to explain why real estate is a wise investment. Getting started in real estate can be intimidating, though. Strategies can range from big commitments of buying commercial real estate to much smaller points of entry, such as fractional ownership. Here are four things you need to know before investing in real estate.

1. What Is Your Budget?

First and foremost, you need to assess your budget. Investing in anything doesn’t make sense if you overstretch your budget and put yourself in a bad financial position where you can’t make ends meet. Loans are typical when it comes to buying real estate, but the amount of money a lender offers might be more than what you should add to your budget. Shop around with different lenders to learn what types of loans you can qualify for and what interest rates they offer.

Calculate how much debt you already have and how much your monthly payments will strain your budget. Optimally, your debt-to-income ratio should be 35% or less. This means that all of your monthly debt obligations (credit cards, car payments, student loans, etc.) should not exceed 35% of your gross monthly income, which is the amount of money you earn before taxes and other deductions.

If you discover that your current budget cannot support adding mortgage payments, fractional ownership might be a good strategy. Fractional ownership gives you the opportunity to have an equity stake in an income property without requiring you to have a high credit score or large down payment.

2. What Are The Market Conditions?

Rising mortgage rates and median home prices have been grabbing plenty of headlines lately, and for good reason. You need to be aware of how the market conditions might affect your investment over the next few months as well as the next few years.

While it is good to know how the national averages and market conditions are trending, you need to know just as much about the market you are looking to invest in. Are home prices trending up or down in the neighborhood you are considering? Are people expecting the area’s population and buyer demand to increase or decrease over the next few years? Are you in a location that provides a steady supply of people entering the market, such as a college town? These are all data points that will help you feel confident about your investment decision.

3. How Do I Want To Invest In Real Estate?

There are many ways to put your money to work in real estate. Most people naturally think of taking out a loan and purchasing a rental property, whether that is a single-family home in a college town or a short-term rental property at a popular vacation destination. This can be a successful strategy, and many people have built sizable portfolios by doing this. However, if you crunched the numbers for your budget earlier and realize this is outside of your current investment range, you should evaluate other options.

Real Estate Investment Trusts (REITs) are companies that own portfolios of real estate properties. They typically focus on similar types of commercial properties, including self-storage and retail shopping centers. You can buy shares of publicly-traded REITs, which are required to disburse 90% of their taxable income back to shareholders in the form of a dividend. As mentioned earlier, fractional ownership is another way to own part of an income property. This option could give you more autonomy in choosing the types and number of properties in which you want to have an ownership stake.

4. What Is My Time Horizon?

You need to know the length of time you are planning to invest your money. Real estate is not a liquid market. In other words, it can take time and effort to sell your investment property depending on which strategy you choose.

If you are the sole owner of an investment property, it will take much longer to find the right buyer who will agree to your asking price compared to REITs or fractional ownership where you are selling your shares to another investor. Don’t think that because your investment is worth a certain amount on paper that you can actually have that amount in cash in a few days.

Conclusion

Real estate can be a lucrative investment, but you need to educate yourself in some key areas before deciding if it is right for you. Remember that your budget and market conditions are key factors to consider when you start to evaluate different strategies. Once you have analyzed the data, you can use that knowledge to determine the proper investment vehicle based on your time horizon and comfort level.