Did you know that individuals 36 years old and younger accounted for the largest group of real estate buyers in the last four years? According to the National Association of Realtors, this age group is starting to recognize the value of real estate investment.
Still, investing in real estate can be a tricky business. Few people know that better than millennials, who witnessed the market crash in 2008 through the eyes of their parents – many of whom lost their homes, jobs and savings.
And yet, many of these young adults are prepared to get back on the horse, and perhaps ride faster than ever before. They aren’t alone, either. They are joined by older, more experienced property owners interested in expanding their focus.
Are you one of these interested parties? If so, here are some of the most important things you need to know before investing in your first property:
Residential, Commercial, And Industrial
Here are the three types of properties you can invest in:
They are often known as “flagship” investments for property managers. They are typically located in downtown cores and suburban office parks, with a large and expensive profile to boot. The need for space inside an office building has grown significantly over the past decade, as white-collar jobs in finance, accounting, insurance, real estate and administration grow in size and number.
Your return from a commercial property may vary. Depending on your location and the growth of your targeted industry, you may perform extremely well. Still, commercial buildings have high operating costs. Losing a tenant at the wrong moment can be catastrophic. Indeed, professionals in real estate investment often suggest starting with a less complex property type.
Unless you purchase a single-family home, this will deliver stable returns through having regular tenants. No matter how the economy performs, people will need a place to live. Plus, a single tenant doesn’t have nearly the negative effect brought on by a fleeing business.
More often than not, another tenant will be ready to take over the lease in a month or less. The rates involved in residential property ownership are also more landlord-friendly, passing operating expenses like electricity, gas and water off to tenants.
These are often called the “staple” of real estate investment. These properties require a smaller initial investment, with less management expectations and lowering operating costs.
The tenant or lessee might use your building for warehousing, manufacturing, development or distribution.
Whatever’s the case, you need only worry about functionality, location and safety in order to succeed in this type of venture.
Active And Passive Investment
When you choose to invest in real estate, you can either be an active property owner or a passive one.
This is the intention you might have to purchase a multifamily residence with the goal of renting apartments and hiring a third-party management company to handle the details. When you choose to be an active investor, you have direct control over your business.
You alone determine what type and level of renovations you’d like to perform on your building. You decide what rate to charge for rent, when to sell your property, and when to hire a new management company. Ultimately, the choices that affect your money are your own.
On the other hand, this might involve placing your cash in a real estate syndication managed entirely by a sponsor. When you choose to be a passive investor, you have a limited amount of power in the deal. You don’t have any direct control over your business plan and must, therefore, place a large amount of trust in your sponsor.
Still, you don’t choose your sponsor at random. Your interests must align. A more hands-off approach could mean less wasted time and money for everyone involved. In other words, spend your money, but leave the decisions to the experts.
Starting A Career In Real Estate Investment
Still interested in launching your career in real estate investment? Here are some pro tips to help you along the way:
- Don’t start big. For your first property, choose something that generates cash flow, rather than selecting the largest and most expensive property you can find. Making a smart initial investment will lower your financial risks, making it possible to comfortably purchase large properties in the future.
- Talk to an expert. There’s truly nothing more important than finding a trusted, local advisor for your property. This professional shouldn’t have a stake in the deal. Rather, they should provide an unbiased assessment of your property.
- Keep your eyes open. There will always be unexpected circumstances involved in property management, such as additional taxes or expensive maintenance requests. Be prepared for these setbacks by setting aside extra cash, conducting thorough research, and talking to experts – even after you’ve made the purchase.
- Create a thorough screening process. You don’t want just anyone renting your property. Imagine how much your reputation and wallet would sting after providing affordable shelter to a criminal or a tenant who refuses to pay. Before supplying a lease, request a credit report and background check. This information will typically show a few warning signs if your potential tenant isn’t trustworthy.
- Have an exit strategy. Even if you plan to own your property forever, it’s important to have an escape hatch. If your profit peaks and you’re ready to sell, it helps to understand the market. Take a few weeks to develop an exit strategy that doesn’t hurt your financial investment, but doesn’t leave your tenants hanging, either.
- Stay educated. Rather than jumping into real estate investment blind, take a moment to read some articles and speak to some experts. That’s what you’re doing now, after all. This strategy can keep you from making bad investments. Even if you know the industry relatively well, a trained professional can explain the current market, which is essential to understand if you want to purchase low-risk property.
Contact An Expert To Learn More
For more real estate advice, read our previous blog.