- Before investing in residential real estate, there are several steps you should take to ensure you're making a sound investment.
- One of the first steps is researching potential locations for your property as well as current economic trends. This will help you determine the best area to invest in.
- It's also important to understand your financial situation and goals for the property, and what type of financing you'll use to make an investment.
Investing in residential real estate is one of the oldest forms of investing — and it’s an asset class worth considering for your portfolio due to the cash flow, tax and diversification benefits it offers. To ensure you invest wisely, research and advance preparation are key.
Here are five steps you must consider if you’re thinking about becoming a real estate investor:
Step 1. Research these three questions:
- Where are the best places to buy — and how can you forecast demand in the future? By doing your homework and conducting market research, you’ll gain visibility into which locations are established neighborhoods, where the up-and-coming places are and what areas offer the least financial appreciation.
- Is now the right time to buy? Pay attention to economic trends and rent activity in the area you want to invest in.
- How much leverage can I afford? Know whether your real estate goals are short- or long-term, as this will dictate how much debt you can take on when buying an investment property.
Step 2. Gather your financial documents
- Request your credit report from all three credit rating agencies: Experian, Equifax and TransUnion.
- Assemble paperwork, including tax returns, W-2 forms from the past two years, current pay stubs, bank statements from the past several months, current asset statements, etc.
Step 3. Speak with a banker or mortgage broker
Based on your income eligibility and credit score, your banker or broker can help you determine how much financing you’re eligible to receive.
Step 4. Determine the right type of financing
- Research the forms of financing that are applicable to the type of residential properties you’re considering.
- Know what type of financing is best for your investment horizon.
- Understand how each loan type’s structure and terms will impact your monthly cash flow and your overall return on investment.
Step 5. Build the rest of your team
- Select a real estate broker who knows the area you want to purchase in and will give you candid advice you can trust.
- Find a reliable real estate attorney and home appraiser (or home inspector) who will help you avoid last-minute surprises during the real estate transaction.
As with many investments, real estate has potential — but that doesn’t mean it’s an assured gain. Use this checklist to take calculated steps, make careful choices and weigh the costs and benefits of your actions before making an offer.