The majority of individuals consider real estate to be a source of passive income. It’s exciting to browse for a home, negotiate over a price, make a deal, and then ultimately take ownership. However, as a novice investor constructing your real estate portfolio, you must learn to distinguish between your fantasies of owning many properties and the realities of becoming an investor. In the exhilaration of buying and owning real estate, the hazards associated with that investment are commonly disregarded. This is one of the most common reasons why property investors fail.
But this does not have to be your fate. When investing in real estate, you can take simple precautions to protect yourself. You can create a list of questions to help you examine the specifics of an investment. In this article, Upkeep Media agency presents ten questions that should be included on that checklist.
1. How does real estate compare to other investments?
Is it better to invest in real estate in terms of risk and return, or should I go elsewhere? What has been the historical rate of return on real estate compared to, say, the stock market, NFTs, cryptocurrency, bonds, and so on? Is it better to put my money in real estate or other assets in the long and short term?
2. What are my goals for ROI?
Your plan might be to target a yearly return of 15%-20% (if this is a short-term rental property) and get all your money back in 5-7 years. Are you investing for short-term gains, or is the goal to create a steady cash flow? Your goals determine the best investment strategy to use. Are you better off buying rental properties or doing rehabs?
3. What is my investment strategy?
There must be a match between the properties in your real estate portfolio and your investment strategy. If direct ownership of real estate is a better way to achieve those goals, you have to decide if you want to own those assets in the long term or short term. You also want to ask yourself if you will invest in commercial or residential real estate. Conversely, you may prefer indirect ownership of property.
4. How will I measure the success of my portfolio?
What performance metrics will I use, and over what timeframe will I be comparing those metrics? Will I be doing this by myself, or do I need the help of an asset manager? Some key indicators you should use to measure the performance of your investments are net cash flow, cash-on-cash returns, economic vacancy rate, and property appreciation.
5. How will I diversify the portfolio to reduce risk?
Diversifying your portfolio by investing in different kinds of real estate will help you limit your exposure to shocks. You may diversify the portfolio by investing in various properties or different geographies. For instance, you may want to buy a selection of commercial real estate, multifamily buildings, raw land, and REITs. You can diversify further by buying in several locations.
6. How do I choose the best locations?
Any real estate location’s performance is determined by its economic characteristics. Who are the most important employers in the area? Will they reduce or expand? Are wages increasing or decreasing? What modes of transportation are there? Are there any huge developments going on there?
7. How do I analyze a property I want to buy?
What is the current rental rate for a property of this type? Is there sufficient demand for this type of property? What is the average vacancy rate for homes like this? Is it likely that the property will be easy to sell in the future? Should I purchase a new or used home? Can I increase the property’s value?
8. What is my financing plan?
Is my financial plan, income statement, cash flow, and balance sheet reflecting my long-term and short-term goals? How will I raise capital? How will I organize financial data so that I can quickly receive a glimpse of my investments and make better business decisions? Which lenders do I intend to work with, and why?
9. Who should be on my team?
Many of the above questions indicate that you will require the assistance of a professional team to help you succeed with your real estate investments. It is ideal to work with specialists who are themselves real estate investors or at least have expertise working with property investors. Your team should include, at the very least, a realtor, mortgage broker, attorney, tax accountant, and financial adviser.
10. How will the properties be managed?
It is hard to be a landlord and property investor at the same time; one is likely to take precedence. Your time will be spent repairing faulty toilets or brainstorming new methods to increase your assets. As a general guideline, you should keep only those roles important to your investments’ success and outsource everything else. It is preferable to employ a competent property manager.
Thinking about these ten questions will get you one step closer to realizing your ambition of building a real estate portfolio.
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