Five Factors to Consider Before Investing in Residential Real Estate

During the past decade, many people have jumped into residential real estate investing. This was never so true as during the recent real estate boom. People read all the “get rich quick” schemes that litter the book shelves of libraries and book stores — use other people’s money, use no money of your own, and make millions! A lot of people did make great sums of money during the most recent boom; but now those, who did not get out before the market cooled, are seeing those investments in foreclosure due to their inability to make the mortgage payments.

Just because the real estate market isn’t over the top, as in the past few years, does not mean you no longer can make money in residential real estate. The difference between now (post-boom) and during the market boom is that the “get rich quick” schemes will not work.

Do You Have What It Takes?
Investing in real estate is not for the faint hearted, the non-risk takers. It is for investors who are in it for the long haul, who can easily sit on their investment (if need be) until the market shifts in their favor. It also is for those who truly enjoy this type of investment. They are the ones who are the most successful in real estate investing.

You must be willing to invest time — upfront and before each potential investment. If you do not take the time to research the properties and your target market, you probably will not be very successful. You also must gather knowledge on how to make a real estate deal that works in your favor. That requires educating yourself to understand the jargon and game rules. Today, it takes a careful, methodical approach to residential real estate investing, especially when acquiring your first property.

Besides needing time and money, being a risk taker, and being willing to commit to a long-term investment, if needed, there are five additional factors you must consider each time before you make an investment in residential real estate.

Supply and Demand — Where Is the Current Market?
The economics of supply and demand is what makes the long-term investors successful in residential real estate. They are willing to weather the ups and downs of the real estate market, waiting for an advantageous market to sell their property.

Supply and demand is influenced by many economic factors, which in turn affects the residential real estate market. Well-located residential real estate will endure fluctuations in the market and continue to appreciate in value. Knowing your market means knowing when to buy or not to buy, which deals will work when, and when to sit on an investment or sell it.

Your Creativity
Another factor to consider is your own creativity in managing your investments. Residential real estate is one type of investment that allows for a lot of creativity:

• You may invest for the long term, renting the property to continue making a profit while waiting to sell at a more advantageous time. You can purchase a home to fix up and resell immediately for a profit.

• There are many financing options available for residential real estate, allowing for even more creativity. You also can invest on your own, with a group of partners, with a corporation, or even with a Real Estate Investment Trust (REIT — a mutual fund with real property assets or mortgage securities).

• There is an abundant variety of residential real estate types in which to invest — single-family homes, townhouses, condominiums, and duplexes.

The more creative you are in creating and managing your real estate investments, the more profitable and successful you will be.

Other People’s Money
A third factor is knowing how you can use other people’s money to your advantage without landing in foreclosure, as so many people now are who subscribed to the “get rich quick” schemes during the boom.

You can begin with only a few thousand dollars, using other people’s money to underwrite the remaining mortgage. You must know all the different ways available to finance your investment. This goes back to taking the time to educate yourself, before you begin investing, and creatively making the best use of financing.

Other People’s Time
Whether you are fixing up real estate to sell or renting it, it will take time, effort and management. If you already have a full-time job and a family, you probably cannot do it all yourself, and I doubt you wish to be woke up at 2 a.m. by a renter with a plugged toilet.

Using contractors to fix up the property or experienced property managers to handle your rental real estate makes for less profit in your pocket on your individual investment properties. However, it frees up your time to invest in more properties, making your overall profits much higher.

Your Tax Advantage
Residential real estate investing is quite unique. It offers you tax write-offs not available in other types of investments. There are many deductions available to you — deducting the mortgage interest or refinancing without being taxed are just two examples. There are many benefits to real estate investing that reduce your tax liability and increase your profits.

If you believe residential real estate investing is for you, begin by learning more about it. There are thousands of books and resources on the topic. Stay away from anything that sounds too good to be true. It probably is, especially in today’s real estate market.

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