Investing in real estate is one of the best ways to grow your wealth, but with so many options available, choosing which type of investment is right for you can be challenging. For example, you can invest in a rental property to become a landlord or buy flip homes as a side gig or full-time career. So how do you pick the best properties to invest in? Here are a few tips to help you make a valuable investment in a property.
Know the Types of Investments
We’ve already touched on two types of investments: house flipping and rentals. However, you have options as a real estate investor and aren’t limited to fast flips or buying rentals to earn more money. Here are a few different types of properties you can invest in:
- Residential: Residential real estate refers to people’s homes, and there are many types of residential real estate investments, including long and short-term rental properties, vacation rentals, and house flipping. With residential real estate, you can make a lot of money on your return on investment, and the property’s value will appreciate over time. However, investing in real estate usually requires a substantial upfront investment.
- Commercial: Commercial real estate refers to businesses, including hotels, warehouses, storage, offices, and malls. These investments mean you rent out a space to a company and collect rent or sell the property once the value increases over time. Commercial real estate offers higher returns, but since the investment property is public, there’s more risk involved, including property damage and your reputation.
- Land: Raw land investing refers to purchasing land with nothing on it. This last is often cheaper to invest in and appreciates over time, making it a great option for first-time investors. Buying land allows you to determine the right time to sell easily, and it’s easy to maintain because there’s nothing built on it. However, raw land typically yields lower returns than commercial or real estate investments.
Your return on investment (ROI) is the most crucial factor when investing in any real estate property. Your ROI is determined by how much money you spend on the property, including purchasing it and making repairs, compared to potential profit. Of course, ROI will vary depending on location, property type, and budget. For example, apartment complex owners will have to spend money on the initial purchase, marketing the units available to fill vacancies, pay for maintenance staff, and so forth. Meanwhile, if you purchase a house to flip, you’ll need to pay various contractors, materials, and a real estate agent to help you sell the property quickly.
In addition to your total return, consider how fast you can start earning money on the property. Some real estate properties allow you to get a return on your investment quickly. For example, if you flip a house, you can sell it within a few months to earn money. Meanwhile, buying an apartment complex could mean years or decades before you see a return, but the return will be much higher in the long run.
Choose the Right Location
Whether investing in residential or commercial property, you must always consider the location. Before you purchase a property, consider the asking price and compare it with other costs in the neighborhood to determine how it will affect your ROI. For example, if you’re a house flipper, you might see that buying a house for $300,000, if you can only sell it for $325,000 based on neighborhood comps, might not be worth your time or money. Meanwhile, if you invest in rental properties, you should know how much you can earn.
Property & Neighborhood
Always consider how old a property is before investing in it. While older homes may be less expensive, they often have more problems because of old plumbing and wiring which can cause blackouts. However, if you can get a good deal, it might be well worth taking the additional steps to fix it. You should also avoid investing in a new property if you plan to sell it. For example, if you purchase something built within the last three years, it’s likely already in tip-top shape and won’t need any repairs or heavy-duty maintenance, so it won’t sell for too much more than you bought it for.
Other than the property’s age, consider the neighborhood to determine whether an investment property is worth it. You can look at neighborhood ratings, schools, and amenities to decide whether or not it’s a good location. Remember, higher-rated communities are more expensive but come with lower risk and less crime. Newer properties and better neighborhoods mean potentially lower yields but more predictable and steady income.
Determine How Much To Borrow
Before you can start shopping for real estate, you must know how much you can afford to borrow. Loans for real estate investors vary depending on the lender, so you should research which types of installment loans are suitable for you. Then, if you qualify, you can contact a lender to learn more about your interest rates. In addition, you will want to ensure the bank you borrow money from has API security to protect your valuable assets and avoid cyber criminals. Once you know how much you can borrow, you can focus only on the listings you can afford instead of discovering high monthly payments once you’ve already purchased the property.
If this is your first time investing in real estate, avoid large, complex, and expensive projects like fixer-uppers. Instead, focus on properties that need cosmetic updates rather than large-scale renovations, piping, or electrical updates. In addition, you should avoid purchasing any property that might require hiring multiple contractors, especially for the first few properties you invest in. Ensuring your first few investments are easy can help you slowly learn the ropes while preventing you from becoming overwhelmed or going over budget.
Investing in Real Estate
Investing in real estate offers many benefits and is one of the easiest ways to grow wealth. But, unfortunately, it’s not as passive as other investments like stocks and bonds. Still, if you’re willing to invest time and money, you can drastically increase your ROI in just a few months.
Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer who loves to share knowledge about general business, marketing, lifestyle, wellness, and financial tips. During her free time, she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.