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When Should You Start Investing in Real Estate

People are investing every day. A lot of people put their trust in a mutual fund manager that takes out a large commission. Others will only tuck away money in their 401k for retirement. The issue is that by not being a hands-on investor, you’re leaving a lot of money on the table.

And even if you invest in an REIT (real estate investment trust), this will help you jump-start your foray into real estate.

But I will be honest with you: nothing beats investing in real estate on your own. When you purchase a rental home or flip a property, you’re taking the helm with your investment and will be able to reap all of the profits as a result.

Every investor will have their own “perfect scenario” when investing in real estate, but a few guidelines that can help along the way include:

1.     Own a Home First

There is a big debate on whether or not you should own a home before investing in real estate. And it really depends on the situation. The idea behind owning a home first is that you’ll have somewhere to call your own.

People can, normally, get a mortgage for their own residence. But it becomes much harder to get a second mortgage. If you were to buy a rundown fixer-upper, you’ll need cash or a mortgage. If you have one mortgage tied up in a fixer-upper, it will be harder to buy a primary home.

There is also another reason to get your own home first: equity.

If you’ve lived in your home for 10 years, for example, you can take out a loan on the equity of the home. What this allows is for a fast, accessible way to purchase property. You could take out a home equity line of credit for $20,000 and snatch up numerous properties with low interest rates.

In the event that you don’t foresee homeownership in the near future, or even in the next 5 years, this piece of advice can be overlooked.

2.     Your Finances Are Stable

Do not go into debt to start investing. This is good practice with all investment types, from stocks to bonds and real estate. The rule of thumb is if you do not have money to invest, you should not be investing.

Make sure that you have stable financials that will allow you to:

  •     Receive owner finances
  •     Pay all debt and financial responsibilities comfortably
  •     Get a loan if necessary

Rarely do people purchase a home without taking out debt, and loans are an acceptable financial vehicle when investing in real estate, but don’t take out a loan you can’t afford.

If you have stable finances and have money to invest month after month, you’re ready to invest in real estate.

But make a plan on what type of real estate you want to invest in:

  •     Land
  •     Fixer-uppers

If you want to invest in land, make sure you save up a lot of money so that you can make your purchase. Land can be had with buyer financing, but a lot of plots will sell for cash, so you’ll need some cash to buy a profitable lot.

Anyone wanting to buy a fixer-upper will want to be pre-approved beforehand. Fixer-uppers can be purchased for rock bottom prices, and many will have too high of a price for a person to make an all-cash purchase. If you want to buy a fixer-upper and flip it, get pre-approved beforehand so that you can buy a house you want once it hits the market.

3.     Invest at Any Age

There is no magical number or calculation that says: invest when you’re 30, 40, 50 and so on. The truth is that you can invest at any age, but you do need stable finances to be able to get started. If you have your tax refund, you have enough money to buy a vacant property. This is based off of the average tax refund of $3,000 per year – and some people get a much larger refund, too.

The idea with investments, physical investments that can be touched, such as real estate, is that you want to use money you can live without. For example, if you have a nice nest egg, all your bills are up to date and the money you would invest with just swells your already-large savings account, this is money you could afford to lose.

But with real estate, there is a much lower risk of losing your investment. Physical, tangible items will always hold some level of value. A plot of one-acre will have a value today and 1,000 years from now, barring any catastrophic event, such as a nuclear meltdown making the land uninhabitable.

4.     Learn the Ropes and Scale

When you’re ready to invest, start slow and scale up as you get accustomed to investing in real estate. Many people will think: great, I bought a plot in Colorado overlooking the mountains, I’ll be rich. But this isn’t the case.

The land will grow in value, and it’s up to you if you want to hold onto the property and let it appreciate over time.

Others will learn that they can:

  •     Lease the land to farmers
  •     Lease the land to hunters
  •     Lease the land for timber
  •     Build a home and sell the property
  •     Farm the property

There are countless options when you own real estate, but they all take time to come to fruition, and they can also be expensive. So, buy a property and learn how to invest properly. Once you understand all of the expenses and requirements that come with owning real estate, you can then scale up operations.

Investors may have a large portfolio of properties, too. Some will own rental houses, leased land, flip houses and so on.

But the best portfolio is always a diverse portfolio. These are portfolios where a person makes money through a variety of sources: i.e. selling the property, renting and leasing. The right portfolio will pay cash monthly, with large lump sums coming periodically from selling real estate for a profit.