Questions to Ask Before Investing in Real Estate
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Real Estate is a complicated business. Every facet is controlled, in most countries, by numerous legal restrictions and requirements and there are many people involved in any deal, some with vested and competing interests. But you can also make a lot of money and, in some ways, a lot easier than in many other businesses.
Before you take the plunge, ask yourself some of the following questions:
1. How much capital do you have?
Real estate investing is first and foremost just that — an investment. It requires money. Sometimes a relatively small amount, sometimes big sums. But whatever you layout initially, once you sign the papers, you're legally liable for a serious chunk of change. That suggests you should have enough capital to invest — either in the form of savings or ability to finance which means carrying debt and paying interest. "Enough", obviously, depends on your personal circumstances. How much savings do you have?, how much can you afford to lose?, how much debt can you carry and how much interest can you afford to pay?
2. What's your tolerance for risk?
Capital and risk are inseparable partners. A person with five million in the bank can absorb a risk of five hundred thousand without serious, though maybe painful, consequences. Someone who is putting up their hard earned five thousand, hoping to turn it into fifty, is in a different situation. I'm not suggesting the one with five should stay home and watch television. Taking risks is admirable and exciting. But you should estimate realistically how much actual money you can put into an investment. The mirror half of that is to be honest with yourself and think about how much risk you can live with emotionally. Some people are natural adventurers, others prefer a cautious approach.
3. What are your long-term financial goals?
Some individuals are interested in capital preservation, others want maximum return in the shortest period. Each carries a level of risk, and also an implied time commitment. Each demands a particular level of investment of time and money. If you're looking for a ten percent profit on your investment in a matter of weeks, real estate isn't for you. If you're after high percentage gains, that's possible but risky and usually requires a year or more commitment. During that year, your investments is not liquid apart from the ability to borrow against it. Along with having your funds tied up for other potential uses, property values can change dramatically in a short time frame. With changes in interest rates, that can (and probably will) change.
4. What kind of person are you?
Real estate investment, unless you just enjoy losing money and enduring stress, requires a tolerance for risk, a commitment of time and effort, and an interest in details — especially legal details. Beyond all that, the more basic requirement is an interest and aptitude for learning. Market study, advertising, contracts, construction, property law, even a fair amount of psychology, all form a part of real estate investing. You don't have to become an expert in these, and other, areas before making a move. But if you don't enjoy learning about these and the host of other subjects that are part of the business — well, come on in because the sharks love fresh meat.
If you still haven't been scared away — bravo! You stand to make a lot of money in one of the oldest businesses and biggest adventures still around in the modern world.
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