Anytime you invest in real estate, you must understand there is always, always, always risk involved. But how can we make sure we are minimizing that risk?
People will say our economy is due for a crash and while history may say we are overdue, there are a few things to consider when investing in real estate in any economy.
Back in 2008 when we were hit by the housing market crash, a lot of people ended up in foreclosure, because they didn’t understand their mortgage terms or how interest works. There were several factors that led to the crash of 08, but it was the financially uneducated who were affected the most. As a first-time investor, you don’t want to go into this blindly. Having a basic understanding of how purchasing property works and how housing is affected in the event of a crash will put you in a better position when going into any deal.
Know what’s happening in your geographic area. Are there a lot of properties for rent? Are there are lot of homes for sale? How many days are properties sitting on the market? Are there a lot of new construction projects going on? If so, how quickly are they being developed? What are the current median sales prices and rents in the area you are wanting to invest in? Is this higher or lower than previous months and years?
When evaluating a deal, you need to take several numbers into consideration: the purchase price; the interest rate and terms of the loan, if you are using a lender; taxes on the property; insurance; holding costs; monthly expenses, like utilities and property management. All of these matter when it comes to calculating your ROI (return on investment). Depending on what you intend to do with the property, these numbers can determine whether your deal is in fact a deal.
One of the biggest ways to minimize risk when investing is to be sure you are not overpaying for real estate. We do this by always buying at a discount. Running your numbers will help you determine the maximum amount you should pay for a property to be able to still make money. Having equity in a property is also helpful because it allows you to potentially leverage that equity in the future.
If you only know one way to get out of a deal or one way to make money in real estate, you will be at more risk than someone who understands multiple exit strategies. That’s the advantage of having a financial education. If you purchase a property and intend to flip it, what happens if it won’t sell? Can you rent it out? Will the rent cover the mortgage? Hopefully, if you bought the property at a discount, the answer is yes. If you overpaid, it may be unlikely that you’ll cash flow. If you can’t sell it or rent it, now what do you do? Can you do a lease option? Can you offer owner financing? Knowing different creative ways to exit a deal will significantly decrease your risk.
The legal business structure you choose for your real estate business can significantly impact your level of risk involved in your investments. Consulting with your attorney and business tax advisors will be key to making sure your business can take advantage of the real estate laws and tax laws that were designed to help people in this industry. LLCs, Corporations and Land Trusts are our friends in this business. Based on how you're structured, you may be able to protect yourself in the event of a foreclosure or recession.
Big picture takeaway points
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