A Real Estate Investment Checklist
If you're considering investing in real estate, consider the following:
Real estate investment is part of an overall financial plan. Investing in real estate requires specific tax, spending, budgeting, and people-management advice. Based on your other assets and your overall financial plan, investment property might be a worthy goal, but only if it fits your investment strategy and if you're willing to put the time and effort into creating a successful business.
Don't spend until you study. If you don't have an intimate knowledge of neighborhoods, rental rates, commercial traffic, or any of the dozens of other factors that make real estate investments a particular success in one community and not in others, don't bother. Make sure you take the time to study a particular market not only for gains in price, but for stability in rent and overall quality of the property and neighborhood you're examining. You might hear about a downtrodden neighborhood ready to “turn,” but that rotation might take years. Start slow, and pick carefully.
A slow market doesn't always mean bargains. Even though the gains of the past fifteen years aren't what they used to be, keep in mind many sellers aren't terribly desperate to sell, and they're not dropping their prices all that much.
Real estate is not an automatic ticket out of financial trouble. Some people have gambled their way out of debt by buying distressed properties and reselling them at a profit. There's no question that many people make fortunes from taking big risks, but if you're not in a position to lose money, you shouldn't be playing in the first place.
Home ownership is not investment. An investment is something you can sell when the moment is right without any hesitation. There are emotional ties as well as physical ties to a home; real estate bought as an investment must be a business. If it doesn't produce targeted income, it must be sold.
Enter the foreclosure market carefully. In tough markets or a down economy, don't think that foreclosure buying is easy. It takes time to master all the correct avenues in a community toward investing successfully in foreclosed properties, and actual contact with families losing their homes can be wrenching even if you do know what you're doing. Foreclosure and preforeclosure investing is not for the faint of heart.
Cash is king. During the white-hot real estate market, people were buying and selling property for little or no money down because lenders were willing to take that risk. In a higher rate environment, lenders head for the exits because they don't want to take on the risk. While many successful real estate investors choreograph borrowing seamlessly into their strategy, it's better to have cash on hand for a down payment and to cover ongoing expenses when it comes to investment property. Planning cash reserves is essential.
Keep your credit report clean. Only borrowers with the highest credit scores will find the best lending deals if they need to borrow. Make sure your credit report is clean before you enter the market.
Overall, real estate investing in general and foreclosure investing in particular takes the most educated of buyers. While you might have heard of complete beginners making a killing in certain markets, don't assume you'll follow in their footsteps.