4 Things to Know Before Investing in Real Estate
If you really want to get ahead in life, you’ll need to do more than work at a job for years on end. While your career can help take care of the monthly bills and maybe even afford a place to live, you will want to be an investor not just a worker to accumulate true wealth. Investing allows you to use your capital to make money and the compounded returns over time can result in tremendous growth. While some focus their portfolio on the stock market, many savvy investors diversify and make real estate a significant part of their holdings. This allows them to leverage their money and, with research and experience, capitalize on great returns.
Investing in Rental Homes
One of the ways you can get started with investing in rental homes is to use a self-directed IRA that can buy shares of properties. These self-directed accounts are set up so that you can independently make the decisions on your holdings, rather than having them specified by an organization like a bank or brokerage. In this case, the custodian of the IRA accepts and offers rental properties as one of the alternative choices. By carefully setting up these accounts, savvy investors can keep most of their accumulated gains. Rental income generated from the properties is allowed to grow tax-free in the retirement account. By using an IRA that is self-directed you’ll be able to purchase these properties much like you would put money into bonds or stocks.
Of all the considerations when investing in real estate, for residential real estate, the trusted mantra has always been location, location, location. It continues to be the most important factor when looking at potential profits when putting your money in rental homes. There are many factors to look at and consider, from the desirability of the neighborhood to the walkability index, area parks, and green space, and amenities like bars and entertainment venues. You will also want to factor in whether it is an up-and-coming neighborhood that should have future increases in value or more of a neighborhood in decline. The quality of the schools in the area is also critical to the determined value.
Projected Cash Flow and ROI
When you are making the choice as to what to purchase, you’ll want to put together detailed cash flow statement and projections. To do this, you’ll factor in all of the income and expenses from each home you are looking to include in your portfolio. Expenses such as management fees, expected costs of ongoing maintenance and owner paid utilities should be included. Times of high inflation will favor the owner of the property as rents can often rise quickly in those circumstances. Both profits and property appreciation factor into your overall return on investment.
Comparing New Construction and Existing Properties
When it comes to rental homes, there are a lot of different choices in any given market. You’ll want to decide whether you are more comfortable with city or suburban properties, or seek to invest in a combination of both. It’s also important to do a thorough evaluation of whether you want to focus on new construction or existing properties. With new construction, you can find incentive pricing and you will have the option to customize many elements of the home. Ongoing maintenance costs will be extremely low and prospective tenants will appreciate the up-to-date amenities. With existing properties, you often have historic charm, full landscaping and mature trees, and a wider choice of diverse, interesting neighborhoods. You will also have a great selection of options to choose from at a potentially lower cost.