Five Tips To Start Investing In Residential Real Estate (Even If You Think You Can't)
Though millennials have been slower to invest in real estate than previous generations, more young adults are prioritizing investment properties over stocks and even cryptocurrency. In fact, 36% of millennials say real estate is their preferred investment strategy. They aren’t the only ones; the majority of Americans (31%) from different age and socioeconomic groups agree that real estate is the premier investment choice, compared to just 20% who prefer stocks.
Luckily, investing doesn’t have to be an either/or situation, and real estate can enhance a diverse range of investment portfolios. Unfortunately, however, many people learn to believe that this type of investment isn’t accessible to them. Unless you’re close friends or family with a real estate investor, the topic can feel unapproachable. But there are many ways you can empower yourself with knowledge.
With this in mind, here are a few essential strategies you can use to determine if investing in real estate could be a good way for you to build wealth and, if so, how you can get started.
Assess your situation.
Clearly establishing your intended career path and lifestyle goals is the best way to determine not only the best investment but also the best loan structure for your unique situation. Most people assume the best way to buy a home is with the standard 30-year fixed mortgage, and while the 30-year mortgage can be a great product – especially for W-2 employees with a regular paycheck and plans for a relatively stable career – it’s not the only (and may not be the best) option for you.
If you work on commission, have a large bonus structure or earn a unique source of income, you may benefit from choosing a different type of loan. Other lifestyle factors, such as whether you plan to travel and/or grow a family, can help you determine which products you may qualify for.
Learn about leverage.
Educating yourself about the different ways you can finance a home will naturally demystify the process. While a fixed-rate mortgage requires you to regularly pay principal at the same interest rate for the duration of the loan, an adjustable-rate mortgage (ARM) has a fixed interest rate for a period of time, after which the interest rate can be adjusted annually. Different ARMs appeal to investors with different levels of risk tolerance. While a 3/1 ARM guarantees interest rates for just three years, a 10/1 ARM guarantees rates for 10 years – which is longer than many people spend in a home before selling or refinancing.
Interest-only mortgages are 30-year fixed mortgages with an initial seven to ten year period with fixed interest-only payments, after which the loan’s principal and remaining interest are paid at an adjustable rate. These loans can be a good choice for people with rising incomes, such as those in commission-based businesses, but they’re not a means to buy more house than you can afford, especially since interest-only loans have strict qualification standards, such as a higher credit score and household income.
Do the math.
Ultimately, you want to select a product that offers the lowest interest rates with the appropriate level of stability. Mortgage calculators and amortization tables offer a fast and efficient way to see how different products could work for you in the long term. Just a .5% difference in interest rates can add up to hundreds of dollars a month and thousands of dollars a year.
Hire a strong team.
Not surprisingly, most people who think they can’t invest in real estate also don’t think they need a financial advisor. While a financial advisor is an excellent asset for real estate investors, there are many other resources. If you don’t have a financial advisor, a strong real estate agent can ask you the right questions about your goals and piece together the right information to formulate the most lucrative financing option for you. No matter which type of loan you ultimately select, you should also maintain an ongoing relationship with your mortgage loan officer, who can monitor the market and let you know when it might be wise to refinance.
Plan for the future.
One of the best aspects of investing in real estate is that rental properties can be a source of cash flow and appreciation. When planning to invest in real estate, think about whether you’re investing primarily for regular cash flow or appreciation over time. Either way, it’s essential to calculate your projected net returns on a potential investment property to make sure it realistically aligns with your goals and expectations ahead of time.
Because you only lose money on a real estate investment if you’re forced to sell it (or if its expenses exceed its generated income), you should prepare to ride out any potential storm. Purchasing real estate in an area’s median price range can be the safest bet for weathering a recession. Even if you’re investing in property you intend to use as your primary residence, a quick search of apartment listings in your area can help you determine if you’ll be able to cover the mortgage by collecting rent, in the event that you need or want to move out.
Buying a strong home that generates cash flow can also set you up for a 1031 Exchange on a duplex or fourplex rental property down the line. This way, you can grow the potential of your investment, while safeguarding yourself by staggering lease renewals to cover mortgage costs. Ultimately, successful real estate investing comes down to education. Knowledge is your most lucrative asset, and a smart investment strategy can grow a great deal of wealth – no matter how big or small your initial investment may be.
Author: Jennifer Anderson