What to Consider Before Investing in Real Estate

Whether you’re looking to make a long-term investment or turn a profit on a short timeline, real estate offers plenty of options with income potential for investors. Not all opportunities are created equal, and it’s important to know your goals before you spend your hard-earned cash.

It’s smart to do your research before making any investment, and real estate is no exception. To get started on your research, here’s a look at factors to consider before investing in real estate.

What options are available for real estate investors?

Thanks to the popularity of home improvement shows, most people probably think of house-flipping when it comes to investing in real estate. That’s a viable option for some, but there are various opportunities available for investors that don’t require you to knock down walls or negotiate prices with buyers.

Take a look at the different options to find which one best suits your skillset, interests, and goals.

House-Flipping

In short, to flip a house you purchase a property at a low cost, fix it up, and sell it for more than you purchased it for to make a profit. When you go this route, it helps to understand the real estate market, have relationships with local builders, and have a quick turnaround. Learn more about the stakes involved in selling your house on a timeline and the financing involved.

Rentals/Income Property

With income property, you play the role of landlord for a single- or multi-family home. You’re responsible for finding and keeping tenants and maintaining the property in return for rent. As a bonus, income properties offer additional revenue potential at a later date should you decide to sell the property.

Buy and Hold

When you buy and hold an investment, you purchase a piece of property and keep it for a long time with a plan to sell in the future. The idea with this is that the property will increase in value over time, earning you a profit in the long-run. In the meantime, you can live in the property or earn income from it by renting it out to long-term tenants or as a vacation rental.

REITs

Real estate investment trusts are companies that own a portfolio of properties. Similar to mutual funds, REITs sell shares to their company and pay dividends to their investors on a regular basis. REITs can be bought or sold at any time without having to take on the full risk of investing in a property or having to manage the daily operations.

Crowdfunding Platforms

Crowdfunding platforms bring together several smaller investors to purchase a property. Investors are paid out based on a portion of rent or sale income based on how much they invested up front. Unlike REITs, where you can buy or sell at any time, crowdfunding typically requires you to be fully vested for the duration of the project.

Where is the property located?

Whether you’re buying a share of a REIT or purchasing a home to flip, a property’s most important asset is its location. Although you can replace a roof, change the colors of walls, and even reconfigure a floor plan, you can't change a property’s location.

When looking for the best place to invest, look at the property’s location from the perspective of the home or business owner who will buy or lease the property. For homes, look at proximity to schools, green spaces, grocery stores, and other amenities they will need daily. For businesses, look at how much traffic passes the location, how close it might be to competitors, and if it is correctly zoned.

You don’t have to make decisions alone. A top-rated local real estate agent can provide resources and expertise in your local market. Find out how to choose the best realtor for your needs.

How involved do you want to be?

Ultimately, picking your route to real estate investment comes down to this: How much involvement do you want to have in its operations?

If you want to be hands-on with every step of the process, you should pick an active form of investment, such as house-flipping or becoming a landlord. If you’d like something in between, you can own an income property and hire a management company to oversee day-to-day operations.

If you want to invest in real estate without managing the day-to-day specifics, you should go with a more passive form of income. Consider buying shares of a REIT, which are more liquid and allow you to sell whenever you like.

What types of financing can you look into?

Although some real estate investors can buy a property with cash, most require some form of financing. Even if you can pay the full cash value, relying on financing for part of the purchase offers some benefits over time.

Mortgages are the most common form of financing for all real estate transactions. Depending on the terms of your loan, you will make monthly payments with interest for 15 or 30 years. Interest rates and terms vary, and it helps to get pre-approval on a loan from at least three lenders before committing to one.

Most loans require you to make a down payment, which can vary from 3% to 20%, depending on your loan provider. Lower down payments typically come with stipulations, such as having an excellent credit score or getting a VA loan.

As with other forms of investments, there are special considerations to take into account during tax time. You must pay taxes on all income earned, including rent and sales. Keep a thorough accounting of all of your related expenses so you can write them off come tax time.

In some instances, you can defer paying taxes on real estate income with a 1031 exchange. The exchange allows you to reinvest income in like-kind properties, enabling you to build more wealth over time. Take a look at the best 1031 exchange companies available to help you earn the most from your investment.