Make Sure You Know This Before Investing In Your First Rental Property

Ready to take the plunge and buy your first investment property? Awesome! There are a quite a few hot markets right now, and locking in on a great deal will help set you up for financial success now and in the future. But before you sign those closing papers, you MUST know this about real estate investment.

All Markets are Not Created Equal

Real estate markets are unique things; no two markets are exactly alike. While some may have similarities, there are always going to be a few factors that set them apart. Naturally, it makes sense then that some markets are going to amazingly profitable, while others are in a slump. Some will be very safe bets, while others are so loaded with risk that you may not want to get anywhere near them. My point is, you have to understand that every market has intricacies and it’s YOUR job to uncover them. If you want to make a smart investment, you need to have a clear understanding of the market you’re buying in, because it can make or break your profits.

By the same token, not all investors are created equally either. Some will find success in a certain area, while others will not. Just because things have worked out well for your buddy over in Cincinnati does not necessarily mean they’ll go swimmingly for you in Cleveland.

Which brings me to my next point...

Numbers are the Law of the Land

Math is your friend. You may not think so, but I promise you that it is. When you’re eyeballing a new property, one of the few things that will be 100% honest with you is the numbers. They won’t lie. But before you can realize this truth, you need to first understand how all the numbers work. You already know that your income needs to be greater than your expenses on a property, because that’s the only way you’re going to make money on the deal. But how do you figure that all out? By running the numbers. There are a few formulas that every investor should familiarize themselves with, because these will tell you if you’re going to wind up in the red or not. And once you have the math done and the numbers are staring you in the face, don’t doubt them. If it doesn’t add up on paper, it’s not going to add up in real life.

Can You Handle the Risk?

Risk is another part of real estate that you need to get familiar with. Every investment comes with a certain amount of risk. There are any number of things that could happen, and some of them are completely out of your control. The market could crash (just ask anyone who was investing in 2008), you could get terrible tenants that don’t pay, your rental house could be invaded by giant centipedes - you just never know what the future holds. Before you close a deal, though, you need to be sure of two things: 1) exactly how risky is this investment, and 2) whether or not you can realistically handle that risk. Once you’ve determined that, you can make a smarter choice and start figuring out ways to mitigate some of that potential danger.

What is Your Strategy?

The final factor, or factors, that need to be crystal clear in your mind have to do with strategy. Long before making a purchase, you should have identified your investment strategy. Flipping houses, buy-and-hold with or without a property manager, commercial properties...there are several ways to get into real estate investment, and you need to figure out which path works best for you and your life. Once you’ve identified your strategy, you need to learn all there is to know about it. What processes are involved with it, what actions do you need to take, how will you carry everything out...all of these need to be determined prior to purchasing the property. Lastly, your strategy needs to cover your entire period of ownership, which means you need to have an exit strategy (or two) planned out before you buy. At some point, you’re probably going to sell the investment, and you never know exactly when that will be or why. It’s best to be prepared with an end game.

Real estate investment is a fantastic way to cement a successful future. However, it’s not something you want to jump into without doing your research first. Familiarize yourself with each of the items above and you’ll be better prepared to make smart decisions that position you for solid financial growth.