The real estate market in the United States is on the rise. In 2017, the U.S. housing stock grew by 6.5% to reach the size of $31.8 trillion, and that’s just the housing market. While the market growth is expected to slow down a bit this year, it will still continue to grow.
Real estate is an attractive area for investment. However, it’s not something you should get into without doing your homework. A lot of it. “Real estate investment is not something you just start doing one day,” says real estate broker Alexander Munro. “You need to have a good understanding of the market, the legal system, and the tax code before you even think about investing.” Here are five tips that will help you make your first steps as a real estate investor.
- Explore Different Ways of Investing in Real Estate
The easiest way to get your toes wet with making money off real estate is to rent out a room in your home. Or, if you plan to invest in rental properties, you can try what is called “house hacking” and buy a property you will live on and rent out.
You should understand there are many different ways to invest in real estate. They require different levels of engagement on your part, different amounts of upfront investment, different risks, and different yields. If you plan to invest in real estate, you should first determine what type of investment suits you best. You shouldn’t try to flip houses, for example, if you’re not willing to put in a certain amount of work into it.
- Protect Yourself Against Liability
As a real estate investor, you might be liable for some things that happen on the properties you’ve invested in. If an accident happens, for example, and you haven’t considered any ways to protect yourself against liability, you could face losing not only your investment but also your personal assets.
The two most common ways to protect yourself against liability are to take out an insurance policy and to form a limited liability company you will use for investments. Both solutions have their pros and cons. You should pick the one that makes the most sense for the type of property you’re investing in and the type of investment you’re making.
- Study the Market
It’s very useful to understand how the real estate market is developing on the national or state level. But as a real estate investor, especially a new one, you will also benefit from having a keen understanding of local markets where the properties you want to invest in are located.
The rule of thumb says that you should always look for the most decrepit property on an otherwise good street and invest into it. As an investor, you want to make a profit. If you look for properties you can get cheaply, invest some money into, and then sell or rent for a significant sum of money, your profits are guaranteed. You need to know the local markets so you can zero in on the properties that will appreciate the most, or that will give you the best return on the money you spend buying and fixing them.
- Use the Tax Benefits
If you create or provide housing, create jobs, or are involved in charitable activities, it’s very likely that you are eligible for tax benefits. There are also some real-estate specific benefits such as depreciation and various types of write-offs. You should take advantage of every single tax benefit you can.
It would also be a good idea to meet with a certified accountant who is going to explain to you the tax landscape for real estate investment. The tax code is changing, and you need to stay on top of the new developments.
- Be Careful with Leverage
Mortgages might be a necessity if you want to grow your investment portfolio. However, the leverage you can get on your properties can quickly turn against you if something goes wrong. If you invest in rentals, for example, and you’re having trouble to keep the occupancy rates at a certain level, you will start having troubles servicing your debts. With a mix of financed and clean properties, you might be more likely to go through temporary cashflow issues unscathed.