Six Considerations Before Starting to Invest in Real Estate

To be a successful real estate investor, you need a clear idea of the right strategies and objectives that are appropriate for your situation. (Fotolia)

Before you dive headfirst into real estate investing, there are a number of things you need to think about. Real estate investing is not just about going out, buying a property, and then figuring out what to do with it.

If you take some time and think about the following things, you'll have a much better chance of success. Success in real estate investing is all about making a profit. Profits can be made either from a monthly cash flow or from the sale of a property at a higher price.

Here are six things to think about when starting to invest in real estate.

1. Why?

Why exactly do you want to invest in real estate? Some people are looking to generate an ongoing stream of income while others are just looking to make a quick profit on each deal.

Some people are looking for a retirement strategy. By investing in income-producing properties, a retirement portfolio could be built as a diversification from stocks and bonds or mutual funds.

A lot of people just want to get rich. Sure, they’ve seen all those “get rich quick” commercials, so they think they can make a lot of money really quickly. In most cases, it just doesn’t work that way.

So be clear what your objective is when you invest in real estate.

2. Time

How much time do you have? Do you have another job? Do you have a family? This will help you decide what type of real estate investment strategy you want to get into.

“Buy, rent, and hold” investing doesn’t usually take a lot of time, and you can always hire a property manager to do most of the work.

If you are a busy person, maybe you want to enter into a joint venture with another party. You provide the funds and the other party finds the property and does all the marketing, sales, management, etc.

There are a lot of experienced investors looking for other people’s money to invest. These investors want to use other people’s money to help increase their leverage. This allows them to do more deals and get a better return on their investment while at the same time providing other people an improved return.

Make sure you partner with a reputable person. To make sure you find the right person to partner with you should ask for references and ask to see some of the deals they have done. If you have any doubts, don’t be afraid to ask questions.

3. Skills

What are you good at? What do you enjoy doing? Are you good with your hands or are you good with spreadsheets? Do you like evaluating deals or swinging a hammer?

Your skills will play a big part in deciding what type of real estate investing you get into. For example, if you are good with your hands, maybe “fix and flips” are good for you. A fix and flip is when you purchase a property that needs some type of repair. It could be cosmetic repair or a major renovation. You then “fix” the property and then sell “flip” it once the repairs have been made.

If you aren’t good with numbers, you may want to partner with someone who can do all the estimating and costing for you. Or you can always hire someone.

4. Capital/Career

How much capital do you have to start investing? Or are you looking to make real estate investing your full-time job?

If you don’t have any capital to invest, that obviously limits your options, but there are ways to make money in real estate without having any of your own.

For example, you could find someone with capital to partner with.

Or you could do “sandwich lease” options, wherein you lease the property from an owner and then sublet it to someone else with an option to buy. This is actually a rent-to-own strategy.

You could even act as a “middleman” and find deals for other people and get paid that way.

5. Education

No matter what your answers were to the above questions, you should spend some time educating yourself. You need to know a little bit of everything so that you can manage the people and process of real estate investing.

Start by reading a couple of good books or going to a real estate investing club meeting. There are some good blogs out there that cover a lot of topics on real estate investing.

But do be careful, as there are a lot of people giving bad advice. Ask other people if they recommend someone to follow.

The amount you educate yourself will depend on how much time you have, as mentioned above. You may just want to have another investor invest your money and be a “silent partner.” There are many ways to do that as well, but it’s important to educate yourself so that you understand your options.

6. Plan

After you have analyzed your situation and determined what type(s) of real estate investing you want to get involved in, then you should develop a business plan.

I’m not talking about a 30-page detailed plan here. A 1- or 2-page plan will do. Your plan needs to identify the type of real estate investing strategy you are pursuing, as well as your marketing and financing strategies.

Jim Pellerin has been investing in real estate for over 25 years. He is the author of “7 Steps to Real Estate Riches.” Check out his blog at www.jimpellerin.com.