So you’ve got some money sitting around. You’re well invested in the stock market but looking to diversify your investment portfolio (preferably with an investment that provides an income stream accessible prior to turning 59-and-a-half). You think you might like to invest in real estate, but you’ve never done it before. You’ve got questions — so many that it may all seem overwhelming.
- What type of property should you invest in?
- Do you want the responsibility of overseeing a property and dealing with 3 a.m. phone calls when the sewer backs up or the pipes leak?
- How about liability issues?
By asking the right questions and surrounding yourself with the right people, your first-time investment in real estate doesn’t have to be a nightmare. In fact, it could provide you with a great return.
There are some things to think about if you’re looking to invest in real estate. Do your homework. Investigate different options in different sectors. The most important thing to consider when you’re looking to invest is that old adage you’ve heard for years: “location, location, location …” More so than the type of property or even the type of tenant you’d be dealing with, an investor’s greatest consideration is where to invest. It’s about understanding the neighborhood — where do people want to live, shop, work and play?
Many first-time investors decide to sink their money into multi-family residential properties. It can be a good place to start because people need places to live. It is also relatively easy to enter this market compared to other sectors, and is generally low-risk; however, such an investment will not come without potential headaches. You need to prepare yourself for that call in the middle of the night when something breaks. How about trying to track down a tenant who is two months behind on his or her rent?
Investors do have options for handling the more difficult situations, such as third-party companies that handle property management on an investor’s behalf. These firms employ managers who are available 24/7 to deal with burst water pipes, ensure the parking lot gets plowed in the winter or play collector when tenants don’t want to pay up. Most will do it for a fee based on a fixed percentage of the income the property brings in, although there are others that will handle specific responsibilities like billing (depending on the needs of the investor).
While multi-family residential is often seen as the most common way for investors to enter the real estate market, there are other sectors to consider. Industrial is often the second most common sector for first-time investors and may also have fewer day-to-day problems than residential. As a novice investor, retail and office can prove to be the toughest asset types to learn to manage. These properties often require higher working capital — something that takes experience to properly budget for.
Something else to consider if you’re looking at investing: have a team in place to help you evaluate investment opportunities. Think of this group of advisors as your brain trust. Understanding risk is the most important rule in investing; utilizing a team of specialists allows you to identify and prepare for risks associated with real estate investment. Your team should include:
- A banker
- An attorney specializing in real estate
- A CPA
- A real estate broker
Each person brings specific strengths and knowledge that will help you evaluate opportunities to maximize your investment’s potential. Their expertise can make the difference between a successful real estate investment and one that leaves you pulling your hair out and penniless.
Investing in real estate for the first time doesn’t have to be scary. By doing your homework and seeking strong advice from knowledgeable people, your first investment can be a success and hopefully lead to future property investment.