Real estate remains a favorite avenue for many investors due to their long-term profitability and market stability. According to Mashvisor, there are about 7 million active real estate investors in America. However, despite the excitement surrounding real estate investment, it is still a technical field that newbies would need some knowledge and guidance to navigate before committing themselves.
If you require some essential advice to help you with your real estate investment journey, consider the following points below.
Your credit score influences your chances of qualifying for a mortgage and affects your lenders’ terms. Consequently, it is vital to maintain a high credit score to secure better terms, translating into significant long-term savings.
Many experts recommend that a score above 800 will suffice in securing top-notch mortgage plans, so aim for this mark.
Popular ways to improve your credit score include regular bill payments and paying down debt. Also, limit your request for “hard inquiries” into your credit history.
Hard inquiries occur when you apply for a new credit card, loan, mortgage, etc. If you rack up too much hard credit within a short time frame, it will likely destroy your credit score because banks will interpret it to mean you desperately need money due to financial difficulty, making you a greater risk.
As such, regulate your credit application for a while if you intend to borrow for real estate investment.
Buying or building?
Data indicates that realtors sell about six million homes annually, while homeowners have completed approximately 1.3 million homes this year.
Despite the encouraging statistic, whether to buy or build property has long plagued real estate investors. There are several pros and cons for both property types worth thoroughly reviewing to decide what is best for you. Built property has attractive pricing; it also allows you to add personalized touches and modern features or amenities popular with present home buyers.
However, these properties are notoriously costly and can delay.
The purchased property allows for cost-effective, quicker, and convenient access to an established home. Frequent renovations and outdated homes are usually the downsides to the purchased property. Therefore, weigh the pros and cons for both built or bought property before committing yourself.
Building homes will require you to secure farmhouse plans or blueprints for any other home type, as well as contractors, materials, and permits. As such, ensure that you guarantee all these requirements before investing.
Pick a prime location
Several real estate experts agree that location remains the most crucial factor that determines real estate profitability.
Your property’s valuation in the present and future depends on factors like the neighborhood’s status and available amenities. For commercial property, your proximity to freeways, markets, and warehouses also significantly influences your property’s valuation.
Therefore, you must pick a great location to situate your property to profit as much as possible.
It would help if you always kept an eye out for the long-term, considering how much the area may evolve to determine whether investing now is a good idea. Long-term consideration can also prevent potential future losses so prioritize securing a great location before committing funds to your property investment.
How to profit from your investment
Making money from real estate generally occurs in three main ways; an increase in your property’s value, the rent you collect from leasing the property to tenants, and business activities that depend on the property, if any.
Consequently, you must first have a working understanding of cash flow and profit generation to ensure that you make positive returns on your investment. To do this, experts recommend developing projections for all three types of profit-generating scenarios to determine which is best for business.
Know your expected cash flow if your property is for rent.
Also, know how much your property will be worth in, say, a decade due to price appreciation. Some experts further suggest assessing whether to use flipping (renovating before selling to increase the price.) Also, weigh your annual income against your property’s inherent value decrease to determine costs like tax, maintenance, etc.
Know about leverage
Leverage is a widespread property investment strategy that you must know about before venturing into real estate investment.
It involves borrowing money from lenders like banks, credit unions, and private entities to purchase investment property instead of covering the full costs upfront. As such, you can spread your capital across multiple properties for increased profits.
Leveraging property has ups and downs that you must know before adopting it as a strategy. It can increase your returns if the interest you pay on loan is less than your investment return rate.
You can also build sustained equity over a long period. Equity is the difference between mortgage debt and your home’s current value, which increases the more you defray your mortgage. On the other hand, leveraging can lead to severe debt and tax problems if you over depend on your property’s high appreciation levels in the future.
The heavy losses from the 2008 housing crisis were mostly due to leveraging gone wrong, so tread carefully with leveraging when investing in property.
Other real estate investment kinds
Physical properties aren’t the only investment opportunities available for you to pump your money into.
There are some indirect investment alternatives that you can opt for, such as the real estate investment trusts (REIT). Investment trusts pool many investors’ capital to invest in properties.
Therefore, individual investors earn their dividends through these indirect investments without having to buy or manage any of the properties personally.
Also, consider investing in mortgage bonds which involves the holders having a claim on the real estate assets brought forth as collateral.
Lenders typically sell these mortgage bonds to investors who collect the interests accrued on each mortgage until the mortgage owners pay off. As such, if the mortgage owner defaults, the bondholder (you) gets the property.
Other indirect investment types like real estate company stocks and mortgage-backed securities also exist for you to consider, so try investing in these areas if mainstream property ownership and management isn’t your thing.