5 Questions First-Time Real Estate Investors Should Ask

Posted January 30 2015
by PenFed Team
small model house next to calculator

It doesn’t matter what your long-term financial goals are: smart investing will help you meet them. And for some investors, real estate can be a good choice, either alone or part of a portfolio of investments. But if you’re just getting started with real estate investing, the business can seem daunting. We’ll help you decide if real estate is the right bet for you by laying out the questions you need to consider before you start investing.

What are your real estate goals?

Yes, you’re looking to make money from real estate, just like any other investment. But before diving into the real estate market you should set some clear goals, because they’ll help you decide on both the type of property you want to buy and what you do with it.

If you’re looking for regular income, rental property (or properties) can be a good choice, as they’ll generate ongoing income that you can live off of — though maintaining the property will have ongoing costs. If you’re targeting to earn or save a certain dollar amount, buying and reselling properties may work better for your goals since your goal is to quickly sell for a profit.

What do I need to know to get started?

Whether you plan to rent or flip property, you need to have a solid knowledge of the real estate market to get started. Though a good real estate agent can help you identify the right properties to meet your goals, you’ll need to be aware of what the local market is like, which neighborhoods are in demand (or will soon be in demand), and just how much it will cost to fix up the property.

While real estate can be a reliable money-maker, if you go in without knowing the market, the area, and your costs, you could wind up making a pricey mistake. Be sure to research thoroughly before you invest.

Should you flip or rent?

When you flip a home, you buy it, fix it up, and resell it for an increased price (which is hopefully less than what you paid to spruce it up). This can be a quick business for professionals who can easily evaluate just what a home needs to appeal to buyers — and has the right connections and contractors to get the work done before too many mortgage payments are due. But repairs and remodeling can take more time or money than you expect, which can turn efforts to flip a house into a headache. Real estate pricing, too, may change unexpectedly — another important reason to do your homework on the local market — which could leave you with a piece of property that’s suddenly worth less than what you paid for it.

If you buy a property to rent, however, you’re likely going to have similar challenges to make the place appealing to renters, but you aren’t under the same time constraint as if you were trying to flip the house. Because a rental property is a long-term investment, it’s fine if the property doesn’t immediately increase in value. However, renting means you’re a landlord and have to deal with ongoing maintenance of the property as well as managing tenants — or hiring a management company to do it for you.

Both of these methods have their pitfalls, but typically flipping is a better for a quick payout — which you could apply to your next property or your retirement account — while renting is a good source of ongoing income.

What kind of property should you buy?

Before you buy, take some time to think about what kind of property you’re looking for. Do you want to work with single-family homes? Duplexes? Commercial property? When you’re considering, you’ll want to lean on your research to help you decide what’s in demand and what’s going up in value.

First-time investors looking to rent property may find it easier to look at multifamily units, where you can live in one unit — and take advantage of mortgage offers and other financial incentives for a primary residence — and rent out another.

What can I afford?

Real estate can be an expensive business — yes, if you flip houses, you’re only planning on paying your mortgage rate for a few months, but there will always be the risk that you wind up with a property you can’t sell for a profit. Before you invest a dime, be sure you have the cash to afford up-front purchase costs and remodeling costs — and that you could afford to take a loss.

Getting prequalified for a loan from your lender can help give you a ballpark figure of the purchase price of a property, don’t forget to consider the other costs. Take a look at your finances and decide how much you could afford to spend on a property up-front and month to month. If you go in with a realistic estimate of how much you can spend, you’re more likely to wind up with a property that’s a good fit for your goals — and that you turn a profit on, in the long run.