Tips for Entering the Real Estate Market as a New Investor

Posted on Sep 03, 2017 02:45 PM EDT
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Tips for Entering the Real Estate Market as a New Investor

When you have money saved up that you want to invest to generate capital gains or to get more cash flowing into your bank account every year, there are numerous types of investments you can look into, including a business, stocks, and bonds.

Many people like the idea of investing in real estate because their money is buying something tangible, not to mention because, historically, real estate has been one of the best investments. However, if you're keen to get into the property market as an investor for the first time, it can be a little overwhelming and intimidating. To help you on your way, read on for some key tips you can follow today to help the process go as smoothly.

Get Your Finances in Order

The first step is to get your finances in order so that you're ready to go once you have made your property selection. For starters, ensure you have your last few tax returns completed so that you have proof of your borrowing capabilities if need be, and move any money around as required for a deposit. If you need to sell other assets in order to invest in real estate, make sure you give yourself enough time to do this in a way that doesn't require you to rush a sale and lose out on funds.

It's a good idea to check your credit score, too, so that you can determine if your ability to finance real estate investments will be as high as you'd like. Keep in mind that the majority of lenders ask for borrowers to have 700 or higher scores if they want to buy investment property. It typically pays to spend the small cost involved in getting access to a complete credit report, so that you get a thorough understanding of your current financial position.

In addition, if you have large numbers of outstanding debts right now, it will benefit you to pay off as many of these as possible before you find your first real estate investment. This will improve your debt ratio and not only make it easier to get a loan if needed, but also to get better terms. Think about every type of debt, from car loans and credit card bills through to student debt and more.

Treat Your Investing Like a Business

Next, it's important to treat your investment like a business, rather than a hobby or some spur-of-the-moment decision. To help yourself be more successful in your ventures, develop a detailed business plan for your investments which covers things like your goals over the coming one, three, five, and 10years; your desired investment type(s) and strategy; your funding plans; and details of any potential partners you will be investing with.

Ask yourself questions about things like whether you're looking for cash flow or capital gains from your investments, or a mix of both; if you plan to buy and hold properties or renovate and flip them; and if you want to purchase property in a single suburb or region, or diversify across various markets. Also make sure you set a budget for each project.

The clearer you can be about what you want to achieve and how you want to go about doing this, the easier it will be to determine your direction and to steer clear of investments which will take you off course or simply not deliver on your goals.

Furthermore, don't forget that you may want to establish a separate legal entity for your real estate holdings, rather than putting them in your own individual name. You may want to set up a company or a trust, or some other business structure. It is best to speak with a trusted tax accountant and real estate attorney to find out what the best option may be for your particular needs. Ensure you look for a structure that will allow you to reduce liability, minimize taxes, and boost your potential returns on investments.

Research the Different Types of Real Estate Options

Lastly, before you go about putting your hard-earned money into any deals, it is worthwhile researching the various different types of real estate options you can invest in. While most people predominantly think about investment property as being single-family homes, townhouses, and apartments, there are also lots of different commercial properties, plus real estate investment trusts (REITs) to consider.

As an example, you may want to invest in office blocks, hotels, warehouses, retail spaces, parking garages, vacant land, industrial estates, blocks of units, or retirement villages. REIT investing is also a good option to think about if you're interested in finding an alternative to direct ownership.

Through a trust like this you can pool your money with other investors, and see your funds used to buy various properties. From there, the rental income generated by the trust gets distributed as dividends to the various investors, and/or reinvested into building the property portfolio.

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