Investing in real estate allows you to put money into physical assets now – property and buildings – to make a profit in the future. Real estate investments are becoming more and more popular and can be very successful, BUT you need to know some basic facts before starting.
Check out the things you should consider BEFORE investing.
- RISK – You are risking money investing in real estate, “betting” that you will make enough Return on Investment (ROI) to cover any needed improvements you have to make, costs for legal and real estate expertise and services, utilities, insurance and taxes you will have to pay.
- Liability – You need to protect your personal assets – home, savings/checking accounts and more in case you have nay issues. Most experts strongly suggest that you don’t purchase a real estate investment in your own name.
They will recommend that you establish a limited liability company (LLC) or a limited partnership. (Consult with a qualified attorney on what ownership method is best for you and your circumstances.).
If the real estate investment doesn’t work out or someone slips and falls, resulting in a lawsuit, you can protect your personal assets, That way the worst outcome would be that you might lose the money you’ve invested.
NOTE: Be sure that you are NOT buying property that can’t sell or rent for enough to cover ALL your costs and allow a profit.
It really helps to learn all the Buzzwords – Educate yourself about the terms that are used in real estate so you can see what your profit could be
NOI (Net Operating Income), ERC (estimated repair costs), ARV (after repair value),
ERV (Estimated Rental Value), CAP RATE (ratio of Net Operating Income NOI to property asset Value
- Do the Math – There are many formulas for determining profit, but the simplest way to think about potential profit is to just add all the costs:
- The amount you invest in acquiring the property, including the cost of money (unless you can buy something outright, you will have to pay some interest for the time you have borrowed money.)
- Legal and Accounting Costs – Having legal advice is critical, and so it have accounting done correctly. Likewise there will be costs for filings, title insurance and more
- Costs of Any Needed Repairs or Improvements – This can get pricey if there are any unexpected issues (and there are usually are some – including appliances, wiring, plumbing, carpentry and the expense for any inspections and/or permits)
- Insurance on the property – This includes hazards – damage, theft, etcetera AND liability insurance in case of injuries or damage to other properties
- Utilities – Until you rent or sell the property, you have to pay for these
- Security – Empty properties attract theft, vandalism and more, even flood damage. Just simple burglar alarm may not be enough protection for losses, including tools that get stolen
The simplest formulas for a “good” investment:
Determining the price to pay for a given property
* 70% of ARV (after repair value) is a “rule of thumb” number typically by real estate investors, as a quick test of a good deal when purchasing real estate for a profit.
