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Real estate can be one of the best ways to earn extra income in addition to the money coming in from your regular job. If you’re looking to get started with real estate investing by buying your first investment property, there are a few things that you’ll want to keep in mind before you do so. While real estate can be one of the best ways to accumulate wealth, there are also pitfalls that you’ll want to watch out for. After reading some of these pros and cons of real estate investing, you’ll hopefully have a better idea if it’s right for you.
Is an Investment Property Right For You?
When compared to investments like stocks or bonds, there are a lot of reasons why many investors choose real estate as their investment of choice. In addition to (hopefully) a positive monthly cash flow, real estate tends to appreciate in time. That means that over a long-term horizon, not only do you reap the benefits of money each month, but the value of your property should hopefully increase over time.
Besides this long-term value appreciation, there are a couple of other reasons that it can make sense to invest in real estate. One is that unlike traditional income sources, real estate often provides tax advantages. One reason for this is depreciation expenses which you can often use to offset ordinary income. Another reason is that real estate can serve as a hedge against inflation. Unlike investments in the stock market which are subject to inflation costs, rents and property values generally go up with inflation.
Still, being a landlord isn’t for everyone. While owning rental property might seem like mostly passive income, there are times that it requires more active attention. Unless you are willing to take on the cost of a professional property manager, you might be on the hook for fielding repair and maintenance calls, showing the property and dealing with tenants. There are pros and cons to being a landlord, so make sure that you understand both sides so that you can make the best decision for your specific situation.
What To Do Before Buying Your First Investment Property
If you’ve decided that an investment property is right for you, there are a few things that you’ll want to do before buying your first investment property. The first thing is to make sure that you’ve paid off high-interest consumer debt. Next, you’ll want to start building up your emergency fund and cash reserves.
It’s important to have additional business reserves in addition to any money you might need for a down payment on your investment property. This will make sure that you have enough money in the bank to handle things like unexpected repairs, maintenance, capital expenses or vacancies. One way to build up your reserve fund over time is to use a separate sinking fund.
How Much Money Do You Need To Buy Your First Investment Property?
The money that most people think of when preparing to buy their first investment property is the money needed for a down payment. Depending on the specifics of the deal you find, where you live and your lender, you may need no down payment or a down payment of 20% or even more. But you don’t want to use all your money on a down payment — make sure that you also have enough money in reserve to handle unexpected expenses.
Building Up a Team of Real Estate Professionals
As you prepare to buy your first investment property, you’ll want to start building up your real estate team. This includes people like a real estate agent, property manager, handyperson and preferred lender or mortgage broker. Your team can help make sure that you have the knowledge and know-how to be successful in your real estate investments. Having a good team is especially important if you are new to real estate investing and/or you are investing in an area far from where you actually live.
Other Ways to Invest in Real Estate
There are many different ways that you can invest in real estate, and both risks and benefits to investing in different forms of real estate. If you’re not sure that buying an investment property and actively managing it is for you, there are ways to still invest in real estate. One way to do that is through investing in REITs. REITs (short for Real Estate Investment Trusts) are a way for investors to get the benefits of investing in real estate without having to actively manage their own investment properties.
The Bottom Line
Investing in real estate can be a great way to diversify your investments, hedge against inflation and build wealth. There are many different ways to invest in real estate, and one popular strategy is buying an investment property. Before buying your first investment property, make sure that you have paid down high-interest consumer debt, built up cash reserves and have a team in place to support you. Once you’ve taken care of those steps, you’re ready to close on your first deal. You’ll be on the road to long-term wealth and financial success in no time.
Save more, spend smarter, and make your money go further
Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids. More from Dan Miller
Real estate can be a great way to increase income. Here’s what to keep in mind if you’re interested in buying your first investment property.
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