Investing in real estate is a tried-and-true strategy, but only if you know what you’re doing or get incredibly lucky. Since not everyone can be so lucky, here are some tips to help you understand the world of real estate investing.
1. KNOW YOUR LOCATION
A property’s location is of the utmost importance, so make sure the property in which you are investing is in a good location. That’s a far better indicator of success than even the condition of the property itself.
2. START WITH A PLAN
Buying real estate for investment purposes is a business. That means, you should have a business plan before you get started. Set realistic goals for one year, five years and 10 years from now.
3. UNDERSTAND THE TAX REPERCUSSIONS
Real estate investors are eligible for substantial federal tax benefits, particularly when it comes to writing off the depreciation of the property. Check with your tax professional or accountant to determine how your taxes will be impacted.
4. FOLLOW THE “1 PERCENT RULE”
A good rule of thumb is that your property should generate at least 1 percent of its purchase price each month to be worth the investment. For example, a $200,000 property should generate at least $2,000 in rental income each month.
5. CHECK YOUR CREDIT SCORE BEFORE YOU BUY
If your credit score is weak, you may not be able to get your feet off the ground with your investment strategies. Make sure your FICO score is at least 700 before talking to lenders, or you may be wasting your time.
6. TALK TO OTHER INVESTORS
You many think of other real estate investors in your areas as competitors, but the truth is they’re also a great resource for information and advice. There may be a real estate investors’ club in your area where you can network with other investors as well as lenders and service providers.
7. LOOK FOR A GOOD REALTOR
Just because a Realtor may know the housing market where you live doesn’t necessarily mean that he or she can help you find a good investment property. Look for a Realtor with lots of experience specifically selling investment properties.
8. DO PLENTY OF RESEARCH
There’s no shortage of great books and articles about real
estate investing, but there are a lot of less-than-helpful ones out there, too. Avoid books and articles with get-rich-quick promises or that were written so long ago that the information may be dangerously out of date.
9. UNDERSTAND A 1031 EXCHANGE
Although it may not apply in your situation, a 1031 exchange allows you to sell a property and then invest the proceeds into a new property and defer all capital gains taxes. Specific rules apply to these transactions, so be sure to discuss it with an expert to see if you qualify.