Consider Where You Fit In
Finding your niche is what it's all about, isn't it? You'll be more successful in your investment career if you genuinely like what you are doing. If you don't enjoy working with people, taking on landlord duties probably isn't for you. You can still own rentals, but plan on having someone else handle the management. If you can't deal with stress, don't take on commercial properties or any property that seems extremely risky — at least not until you have plenty of extra cash and confidence in your ability to deal with all phases of a project.
Many investors start out by living in an investment property while they get it ready to sell or rent. That technique offers benefits, including the lower down-payment and interest rate that are available for owner-occupied dwellings, as well as one less mortgage payment.
Your Available Time
How much time do you have to devote to real estate? The best profits are sometimes the result of refurbishing a cosmetically challenged or true fixer-upper property. The more work you can do yourself, the more money will stay in your pocket when it's time to rent or sell.
However, if you already work sixty hours a week, you'll have to hire someone to handle every renovation task. That doesn't just lower profits — it often means it will take longer to complete the project.
Your Personal Life
Do you have a spouse, a family, or a significant other? How do they feel about sharing you with your real-estate career? A successful career in real estate takes a great deal of time and effort. Once you've made it to some degree, you can delegate responsibilities and hire help, but for most of us that takes awhile. It's easier on your home life if your loved ones are interested in being involved in some way — or are at least understanding of your goals.
Your Hands-On Expectations
You're going to get your hands dirty. At the very least, plan on doing a lot of cleaning. Painting is a given, too. How about laying tile and carpeting and taping off drywall — are you up to those chores? If not, it will limit the number of properties you should consider, unless you have someone who will do the work for you for a reasonable fee.
Your Flair for Interior and Exterior Decor
You might be surprised how many buyers can't see past dirty floors and scuffed walls. If you want to be successful in real-estate investing, you should be able to look beyond the surface and visualize what the structure will look like with a basic cleanup, then take it a step further to determine what kinds of changes would make significant improvements in its appearance and usability.
An effective way to train yourself to be able to see the potential in any property is to read decorating magazines, watch home-improvement shows, and browse the Internet for decorating ideas. The more information you're exposed to, the more likely you are to instinctively know what should be done to make immediate improvements to a property, inside and out.
Where Will You Get the Funding?
Do you have savings or access to other funds? Mortgage terms for investment properties aren't as liberal as loans for owner-occupied dwellings, and they're even stricter for commercial investments. You might be able to persuade a seller to finance all or a portion of the property, but you'll need cash or a line of credit to make updates and repairs.
It might be worthwhile to float expenses for projects you think you can turn over quickly on a credit card, but you sure don't want to be stuck with a high-interest debt for very long. High credit-card balances can also affect the way mortgage lenders analyze your credit reports and scores.
How long can you handle a negative cash flow before it hurts you financially? Your first project could go quickly, but it's more realistic to expect delays. Dealing with real-estate sales and rentals is a learning process, and it might take one or two transactions before your skills are consistent. Plan your budget to include available cash for delays and possible setbacks.
Your Comfort Level
Most importantly, consider your comfort level. How much are you willing to risk? While it's true that real-estate investing is far less risky than the stock market or most business investments, the risk factors depend on what kind of real estate you're working with. Investing in residential real estate carries less risk than commercial properties and land purchases, but some risk is still involved. If you cannot deal with any type of risk at all, real estate is not your best investment choice.
Are you willing to make sacrifices?
Buying an investment property will probably take a bite out of your free money, the dollars you use to have fun. Are you willing to give that up for awhile? Fewer dinners out, fewer vacations, a general cutback on entertainment — is it worth it to you to eliminate these things while you build equity in properties?
