Until recent years, real estate was not recognized as a specific asset class that should be considered when building a diversified portfolio. With that perspective changing, more investors are looking at how to best incorporate real estate into their holdings.
There are several ways to invest in real estate. Options include purchasing shares in real estate investment trusts, investing with an experienced real estate company through a limited partnership or limited liability company interest, or purchasing a property outright. While each of these types of investments has positives and negatives, owning an investment property can be not only financially rewarding, but also emotionally rewarding for the right person.
Assessing Your Candidacy
Like any investment, real estate is not a one-size-fits-all asset. An investor should carefully consider his or her risk tolerance, liquidity and overall asset allocation before deciding to proceed with a purchase. Unlike more traditional investment selections, real estate presents unique challenges, and investors also should consider whether they have the necessary time, organizational skills, and abilities to handle property ownership.
Determining What You Can Afford
Once you’ve decided you’re a good candidate to own an investment property, the next step is to figure out what you can realistically afford. You will need to consider the money you have available for a down payment and closing costs as well as reserves that should be set aside for the future expenses of a property. After determining your available funds, you should contact an experienced lender to learn about the loans you can obtain and current lending parameters for different types of properties. For example, condominium prices were hit hard by the economic downturn of the past few years. In response, many lenders tightened their underwriting standards considerably for condominiums or stopped lending on them altogether. While investing in a rental condominium might bring a lot of appreciation in a recovering economy, it also may require a larger down payment or have higher interest costs associated with it.
Locating a property
There are numerous sources for finding properties, from popular websites such as Craigslist, LoopNet or Auction.com to more traditional approaches using a real estate broker to identify listings in your target area. While finding properties online can seem simpler, it might be daunting for a beginning real estate investor. We have found that experienced real estate brokers can be invaluable for their advice and guidance on specific market conditions, locations, rental rates and operating expenses.
Once you purchase an investment property, you need to decide whether you will manage it yourself or hire a professional property manager. If you have determined that you have the time and skill set to manage it yourself, you should consider joining a local property owners association in the area where the property is located. As a member of a property owners association, you can get information on landlord responsibilities, obtain required forms and network with other property owners who can help provide referrals or make suggestions on management issues. If you decide to hire a professional management company instead, it is important to interview several companies to find one that is a good fit for you personally and shares your investment goals. Remember to always do a background check on any property management company you plan to hire to make sure it is properly licensed and does not have any undisclosed issues.
Developing the Modern Portfolio
Most modern investment portfolios should include some form of real estate holdings. While buying an investment property can seem complicated at first, real estate is an option that should not be overlooked. You should make sure that you purchase a property that fits your budget and lifestyle and use experienced professionals when necessary. Taking these steps will go a long way toward ensuring your first investment is a positive experience.
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©First Republic Investment Management, 2015