There is a lot of misconception regarding real estate. Owning a property is the main goal of many investors, only if done right your investment can offer a number of benefits for you, as it helps diversify your income stream and also capture long-term capital appreciation. There are some of the things that you need to consider before investing in a property. Listed below are some do’s and don’ts that needs to be considered before investing in real estate.
- Consider as a diversification tool
Real estate can diversify your income and asset holdings. As having multiple sources of income helps reduce the impact on your finances. Also, the real estate market is not directly correlated to the stock market so that you can hold both the assets a source of extra income.
- Consider an investment property if your cash flow is already strong
Real estate is cash intensive, and only if you are holding up on too much excess money, an investment property can be one way to put those funds to work for you. Also, you need to consider the fact that there might be unexpected repairs, prolonged vacancies, past due tenants leading to financial problems.
- Talk to someone who already owns a property
This is the best way to educate yourself about all the challenges you might have to face. New real estate investors are often unaware of all the work a landlord has to do. Hiring a property manager can help you, but it can restrict your cash flow. Also, there are many lows that are set, and if not followed may expose them to financial and legal risks.
Over concentrating on one asset
Real estate can provide diverse options from you to choose from. The real estate market can be volatile as the majority of the factors that drive local and national markets are not in your control. These factors can cause a significant impact as changes in interest rates, a sharp increase in property taxes, changes in public service will put a dent in your pocket
Don’t rush through your cash flow projections
When investing in a property, your cash flow assumptions need to be on point to make a good investment. Do your research well, to obtain accurate income and expense figures, try building a model to tie it all together. Your model should include the cost of capital, expected vacancy rates, taxes, and discount rates, which you can make up with the return of the investments. Cash low modelling is one of the most crucial steps to take before making a purchase as real estate carries more risk than traditional investments.