Saying that you want to start investing in real estate is one thing. Having the wherewithal to know exactly which moves you need to make and when you need to make them is something else entirely.
Case in point: financing. The money you’re using to capitalize on those real estate opportunities has to come from somewhere, and if you haven’t even begun your career yet, it probably isn’t coming from you.
Therefore, before you start diving headfirst into real estate investments, there are a few essential questions that you’ll need to ask yourself. The answers will vary depending on the individual, but they will help shape your financial strategy’s future.
Are you Seeking Passive Income or Long-Term Growth?
Before you go into the trouble of investing in a field as complicated as real estate, you first need to come to terms with why you want to go to that effort to begin with.
Meaning, you need to assess your goals. Are you seeking a passive income for yourself, or are you looking at long-term growth? Depending on your answer to that question, you’ll know what to do with a particular property when an opportunity arises.
For example, let’s say you’re looking at a wholesale real estate scenario with an eye toward short-term profits. To understand the bigger picture, you would want to delve into the property’s location, market trends, appreciation potential, and more.
After all that due diligence, you might realize that the property isn’t a good fit for a wholesale real estate plan and makes more sense as part of your long-term portfolio. You truly never know unless you’re willing to put the work in.
Can you Weather Market Fluctuations?
Another one of the most important things to do before investing in real estate has to do with analyzing your risk tolerance. You may think that you’re a risky investor. You may even go around telling people that. But once you start to look inward and ask yourself the difficult questions, the answers might surprise you.
Is it possible for you to weather market fluctuations given your current strategy, for example? Are you willing to explore different financing options beyond the more traditional avenues? Are you prepared to weigh the advantages of a nontraditional financing option, such as leverage, against the potential risks like steadily increasing interest rates?
Again – if you find that the answers to many of these questions make you uneasy, you may learn that you’re not nearly as risk-tolerant as you thought. Nothing is wrong with that, but you need to know this ahead of time to make the best decisions once your investing career begins.
How Flexible is Your Investment Timeline?
Rome wasn’t built in a day, and your perfect real estate investment career won’t be either. However, just because you’re only at the beginning of a journey doesn’t mean you can put off thinking about what the end might look like.
Think for a moment about your exit strategy – assuming, of course, that you have one. Based on where you’re starting and where you want to end up, how much time have you given yourself to do that? If you want to be a millionaire in five years, you’ll naturally be relying on a very different strategy than if your only goal is to retire comfortably in 30 years.
Based on your exit strategy as it exists today, be prepared to scrutinize your property management needs and the associated costs heavily. Nobody is saying that your exit strategy can’t change down the line as your priorities do the same. Until that happens, you still need the most actionable information to work from today.
Will you be Hands-on or Hire Professionals?
Speaking of property management, you’ll also want to consider how hands-on you want to be in terms of involvement. It is entirely possible to invest in a large number of rental properties and never spend too much time thinking about any of them.
It’s just that you’ll need to hire a team of professionals to ensure that all landlord responsibilities are taken care of and that all housing laws are followed. This will represent an additional expense beyond just the home’s purchase price.
Or, you may like the hands-on portion of rental property ownership and want to be your own property manager. People find success and happiness with this approach every day – but it will consume a significant amount of your time.
For the best results, you need to weigh both scenarios carefully to determine which sounds more appealing to you and which fits best with your long-term goals as an investor.
How does Real Estate Fit into your Overall Investment Strategy?
Finally, remember that, especially when it comes to real estate, the old saying “never put all your eggs in one basket” very much applies. That means diversifying your portfolio as much as possible.
With that in mind, consider your portfolio and real estate’s space within it. Is real estate just one of many opportunities you’re actively taking advantage of, or is it where most of your income comes from?
How does real estate fit into your overall investment landscape? What would your portfolio look like if the housing market were to suddenly crash tomorrow?
Nobody is saying that real estate should be X% of your portfolio. Depending on your needs, there may be no such thing as “too much.” But you still need to be aware of the situation to ensure you’re not caught off guard by things beyond your control.
Again, the answers to these questions will vary depending on the individual. Having said that, they are all critical for shaping your financial strategy in the most organic way possible. At a bare minimum, they help you understand your situation and your goals in a real, practical way.
The answers to these questions also empower the type of informed and calculated investment decisions you need to become and remain successful, which in and of itself is the most important benefit of all.
Also read: Hiring a Property Management Company: Everything You Must Know
