Most people know that investing in real estate can be a smart financial strategy, but applying this knowledge to an actual investment isn’t always easy. We’re here to help you take that first step in real estate investing. We’ll cover a few reasons you should consider investing in real estate and then explore a few ways to get started.
Why Should You Invest in Real Estate?
Still on the fence about investing in real estate? You can enjoy many benefits through investing in real estate, including:
1. Passive Income
Much of the income you earn from real estate investing is passive, at least after you put in the time and work necessary to make it profitable. Most properties will eventually increase in value,
and there will always be a demand for homes. In addition to the potential for the home’s value to appreciate over time, you’ll also use tenant payments to pay down the loan, creating a wider range between the loan amount and the home’s value.
2. Potential Tax Breaks
High tax obligations can easily cut into your returns. Real estate investments can offer many tax breaks, including the ability to write off your mortgage interest, marketing expenses, property management, and lending fees. You can also benefit from rental property tax deductions. A real estate investment is a type of business, meaning you get to take advantage of many of the same tax write-offs as other small business owners do.
3. Portfolio and Investment Diversification
Diversification is an important part of investing, and investing in real estate can be an excellent way to do this. No investment is guaranteed; choosing a wide range of options can help minimize some of that risk.
4. Additional Investment Opportunities
Once you successfully invest in one real estate property, it can pave the way for adding more properties to your portfolio. Lenders are more willing to finance investors’ projects once they prove that they know what they’re doing. You can eventually cash out the equity you earn on the first property and apply it to another investment, whether that’s in real estate or not.
Getting Started in Real Estate Investing
Are you interested in real estate investing but not sure where to begin? Here are a few ways to get started:
Step 1 – Create an Investment Strategy
Creating an investment strategy should be the first step, including choosing the investment type you want to purchase and how you’ll fund your project. Decide how hands-on you want to be in the investment. Some investors may also partner with others to minimize their risk. You’ll want to narrow down your options and create a strategy before jumping in.
Step 2 – Choose a Lender
Most investors finance their first property, and if this is your plan, you’ll want to research available lenders. Consider the loan types available and talk with your lender about your options. Your lender will also let you know what you’ll need to qualify for a loan, which may vary depending on your needs.
A conventional loan, which is perhaps what you used to buy your current home, typically requires borrowers to have specific credit scores and debt-to-income ratios to qualify. Some lenders offer financing options better suited to investors, like a debt service coverage ratio (DSCR) loan. DSCR loans consider your projected income from the real estate investment rather than your current income or debt-to-income ratio. DSCR loans in Kansas are ideal for Kansas-based investors. Of course, you can also utilize DSCR loans for your real estate investments in other U.S. states.
Regularly price-shopping other lenders can also help ensure you’re still getting the best interest rates. Many investors decide to refinance their property at a later date, either to pull out equity or to qualify for a lower interest rate.
Step 3 – Understand the Market
Having a good understanding of the market can ensure you choose the right property. It’s never too early to begin exploring the market, including paying attention to what’s selling and for how much. Get an idea of what current renters are paying in your market area. Find out how long rental properties sit on the market before someone moves in.
Step 4 – Consider the Costs
While investing in real estate can be beneficial, expecting returns or profits overnight is not realistic. It can take a few months to find a tenant or a few years to profit from your real estate investment. In the meantime, you may be responsible for paying the monthly costs of the property.
You can take advantage of the many benefits that come with real estate investing, including passive income, portfolio diversification, and the opportunity to build equity. Once you decide that real estate investing is right for you, you’ll want to create a plan and then contact lenders. Consider what loan options are available to ensure you choose the one that best fits in with your investment goals.