What Questions Do You Need to Ask Yourself Before Investing in Property?

Investing in real estate can be a very lucrative venture, helping you build a basis for your retirement. It can even provide you with a supplemental source of income in the present, allowing you to live a better quality of life.

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While that sounds promising and it's enough to capture the attention of most people, it should also be noted that investing in real estate doesn't come without its share of risk. Just like any type of investing, real estate ventures can and sometimes do fail, which means you may take a loss. For that reason, it's important to take a hard look at the field of real estate investing and determine if this really is the right course for you. By examining how your situation, your temperament, and your goals can affect your ventures, you'll be better informed to make the right decision. After all, investing in real estate isn't for everyone.

1 - Why Am I Interested in Real Estate Investing?

This should be one of the first questions you ask yourself, because your answer will determine the course you take. Some people may get into investing in real estate to earn extra income, while others might want to use the properties for themselves. Still others, may be more interested in long-term value. You'll have to decide what's more important to you, because, in many cases, there will be a trade-off. For example, if you want to buy a rental property and enjoy the tax benefits, you won't be able to use the property as your own residence.

2 - What Kind of Investing Interests Me?

There are literally dozens of different opportunities, when it comes to real estate investing. You might buy rental property, which you will manage yourself and benefit from the monthly income. Another option is to engage in the fix and flip market, which involves buying a property, making repairs, and reselling it for a profit. Some people prefer not to get their hands dirty. For them, other options exist, such as real estate crowdfunding, or buying into a real estate fund (REIT). Your decision should be based on the level of involvement you wish to have in the investment.

3 - How Will I Finance My First Venture?

Once you've decided to take the plunge, you will need to decide how to get started. Unless you have a sizable nest egg stored away, you'll likely need to get funding from other sources. There are a number of ways you can finance your first real estate investment, so don't think going to a traditional commercial lender is your only option. Another possibility is to pursue hard money lenders, or private lenders. These lenders are less strict when it comes to credit, but you should expect to pay a higher interest rate in exchange. Many more options exist, including crowdfunding or wholesaling, which doesn't require down payments or an investment of personal funds. You'll have to conduct your own research and determine which option appeals most to you.

4 - When Do I Expect a Return?

While there are no definitive answers in terms of how long it takes to see a return on investment in real estate ventures, some types of investments are more long term. For instance, crowdfunding can typically take up to a decade, before you see any returns. Conversely, a fix and flip ROI can be received in as long as it takes you to remodel and resell the home. The same thing is true of rental properties, where you can begin seeing returns as soon as you rent out the units. This is another factor that may help you determine which kind of investment you choose to pursue.

5 - How Much Can I Afford to Lose?

This is another issue that can determine what type of investment you pursue. Buying a property you intend to rent out may not attract tenants right away, which means you'll be paying the upkeep, mortgage payments, and taxes on a vacant property. If your intent is to fix and flip, a similar problem can cost you in that you may not sell the home quickly. If the property doesn't sell, or rent, at all, you may be stuck with a loss. Before you get started, you should take the time to compare the possible gains against potential risks to ensure you're prepared for every eventuality.

6 - What is my Exit Strategy?

You will also have to determine how long you plan to be engaged in real estate investing and to what degree. Will this become a full-time occupation for you, or just a passing hobby? Do you plan to do this until retirement age, or just until you earn a certain sum of money? All of these factors are important to consider, because they can also play a part in deciding which ventures to pursue. Some real estate investments require an extensive investment of time and labor, while others will take longer to pay off.

As these questions indicate, there are many points to consider, before taking the plunge into real estate investing. By examining your interests more closely, you can select the type of investment that's ideal for your circumstances. In the end, choosing the ideal path can help you achieve your desired ROI, while giving you a rewarding and enjoyable experience.

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