10 Considerations Before Investing in Real Estate

With an increase in online content regarding financial literacy, it is not surprising that more of us have recently become interested in all types of investing, especially real estate investing. From traditional stocks to investing in cryptocurrency, individuals of all ages and experience levels are looking for more ways to make money and build long-term wealth. 

Real estate investing continues to be one of the most stable and lucrative ways to build passive income. Knowing how to get into real estate investing has continued to pique the interest of would-be wealth generators more than anything else. As long as you know enough real estate investing 101, you can make smart investment decisions (even in a challenging economic market) that will pay off in the end.

Of course, knowing how to start investing in real estate means knowing the key considerations necessary to evaluate before buying properties or trying to make and meet long-term financial goals. So let’s take a closer look at ten factors you’ll want to analyze before investing in any type of property.

1. Budget

One of the most important rules when investing in real estate is to stick to your budget. Investors need to determine a property price that they can feasibly afford to avoid getting into real estate deals they can’t support with enough cash flow.

While buying your first (or fifth) property can mean initially putting in more than you get back, having a budget to work from helps improve your chances of long-term success. As your experience and portfolio grow, make sure that your income is stable and you stay below a ceiling for your costs. That way, you’ll have some wiggle room for surprise expenditures if things don’t always go as planned.

2. Type of Property

Next on your list should be to determine the kind of property, or asset class, in which you want to invest. Again, if you’re just starting, the right resources and real estate investing strategies will guide you to the best properties for your goals.

With residential real estate, you’ll fill an immediate and consistent need for housing. First, however, it’s important to understand markets and how your fix and flips or rental properties serve specific needs within specific markets and how those serve to maximize returns.

Many experts recommend that beginner real estate investors start with what they know or with insights from trusted mentors or other investors in their networking community. You can (and should) always acquire more knowledge, but going too far outside your comfort zone with a property type, or asset class, can be a costly mistake as you start your real estate investing career.

3. Property Location

There’s a reason why the first rule of real estate is “location, location, location.” The property itself matters, but no one wants to buy a good house in a bad neighborhood. 

When evaluating potential investment properties, consider the general area around them. What’s the neighborhood like? Is it in a walkable community? How are the schools? Is it in a desirable spot for your target demographic?

Keep in mind that how the location looks today may not reflect how it’ll be five or ten years from now. Local ordinances or public agencies can tell you more about the area’s zoning and urban planning so you can predict future developments.

4. Property Characteristics

The condition of the property matters as much as the location. Will it require a lot of repairs and upgrades before it can be rented or sold? If so, do you have the knowledge, skills, or staff to take on this project? Will there be considerable maintenance to consider down the line? Evaluate the age of the property’s main systems and account for these potential costs before you buy.

You’ll also want to consider the property’s amenities to attract buyers or tenants. The property’s layout and floor plan—as well as extras like security systems, natural lighting, and landscaping— can make or break the property’s appeal.

5. Investment Goals

When you’re figuring out how to get into real estate investing, your “why” matters. What’s your goal or investment purpose? What do you plan on doing with a property?

If you plan on buying a property and living there while renting out a portion for a small amount of additional income, your investment choices and strategies will differ from that of an investor who wants to buy a fixer-upper and flip it quickly for more significant returns.

Having a clear picture of your purpose when investing can help you keep your costs in check, pick the right financing options, guide you to the right location and property type, and reach your long-term wealth goals.

6. Property Value

A property’s value isn’t necessarily determined by its list (or even purchase) price. One of the most popular valuation methods is to look at comps or comparable sales info involving properties that possess similar characteristics within the area. Determining a property’s value before you buy can help you avoid overpaying for a property that will never give you a good return or avoid properties that need too much work for you to take on.

7. Estimated ROI

Real estate return on investment (ROI) can be influenced by many factors, including when the property will be available for rent or sale and the appreciation of the property.

While it’s not always possible to predict what the market will bear in the future, many real estate investors use reliable resources to estimate potential costs and income for properties before closing on a new investment.

8. Financing Options

Although the current housing market is highly competitive, mortgage rates are more favorable for real estate investors than in previous decades. Investors have several options to fund an investment, including working with a bank or lender on traditional financing options. They can also work with hard money lenders to expand an investment property portfolio. If you’re looking to fix up a property and sell it relatively quickly. Other types of financing may be better suited to your investment.

9. Local and State Laws

Remember that local and state laws can have a significant impact on a real estate investment. Taxes are often a chief concern, but investors should also learn about landlord-tenant laws and city ordinances that can impact renovations for fix and flip investments. It’s best to work with an accountant, lawyer, or property manager to help you make smart decisions based on your potential tax obligations.

10. Market Conditions

While the real estate market currently favors sellers rather than buyers, that can change quickly. Before you invest, conduct thorough market research in your target location. Real estate investors might be able to get more for their money by switching to a different area or timing a new property purchase just right. Sometimes it can pay off to hold off and pay attention to market predictions.

With Privy, you have a software system and algorithm tracking the best real estate investment deals nationwide! Our system gives investors the confidence to attack the right type of investment properties in the right area to maximize returns and minimize risk.