Real estate has long been one of the best investments, as it retains value and is relatively resilient to economic shocks. A careful investor can earn a high income from their portfolio, which can help them to invest in further properties or simply enjoy some extra money for vacations, renovations to their own properties, or their retirement fund.
Lucrative as real estate investment is, it is not without its pitfalls, and there can be a large learning curve for those unfamiliar with the process.
Today, we’ll explore some of the most essential things you must know about real estate investment before you start hunting for your income-generating property.
Understand Your Loan Options
Firstly, you need to understand that commercial real estate loans are a bit different than those for a primary residence.
Namely, there are specialized loan programs that are only for real estate investors, and they are generally a better option than a conventional mortgage.
One of the most popular options is the DSCR loan, which relies on the property’s ability to service its debt rather than your financial circumstances.
Instead of handing over pay stubs and tax returns, you’ll focus on calculating your DSCR loan, which means dividing its rental income by its debts to get a ratio.
You want a ratio of at least one, but most lenders prefer a ratio of 1.25 or more.
This shows whether the property will lose money, break even, or generate a profit, and it assists lenders in determining if you’re making a good investment.
These loans have the benefit of quick approval times and easier access for those with unique income sources, such as self-employed individuals.
Decide on Your Niche
Commercial real estate is not a monolith: there are various subsections of commercial real estate, each with its drawbacks and benefits.
For example, residential rentals are usually more hands-on, as you need to be available for repairs and carefully vet your tenants, but they are more affordable to get into.
Retail and office real estate has a higher price tag, but it is less labor-intensive and has a higher profit margin.
Other options include things like factories, restaurants, hotels, special-purpose buildings like cinemas or spas, and parking garages.
All of which can be lucrative depending on the location and the state of the building.
You need to identify which suits your interests, then research the real estate market for that particular type of building in your area.
Determine Your Comfort Level With Repairs
Some people love the challenge of a fixer-upper-dollar home, while others want to purchase a property that is almost move-in ready but for a new coat of paint.
If you have a background in contracting and are confident in your abilities to rejuvenate a property, you may choose to rehabilitate an abandoned home.
But this needs to be considered carefully: it’s not uncommon for repair costs to spiral out of control and leave you in the red.
As a general rule, younger investors without a strong construction background or a good network of contractors should consider buying more “complete” properties, even if the price tag is higher, and then work their way toward completing full renovations.
Otherwise, you might find thousands of dollars in debt without a steady income source while waiting for the property to be completed.
Have a Real Estate Lawyer Examine Contracts
The criticality of relying on a good lawyer when purchasing a commercial property simply can’t be overstated: you need someone to advocate for you and ensure you’re getting a good deal.
There may be hidden provisions that aren’t in your favor, or you may not be aware of certain stipulations that can protect your interest.
Working with a good real estate lawyer will save you a lot of hassle should there be any ambiguities in a contract, and it will also ensure that the title transfer is completely legal when you close the deal.
Connect with Property Management Companies
It’s tempting to go it alone and handle every aspect of property management yourself, but this can quickly become a full-time job – and you may not have the skills necessary to satisfy your customers, the tenants.
This is why many landlords rely on property management companies, who have experience in facilitating a smooth and stress-free experience for tenants.
These professionals can do everything from coordinating repairs through a network of contractors, arranging for lawn care, and ensuring the security of the property should it be vacant for a period.
With good connections in the community, they know the best repair people and can give you helpful advice on what kinds of improvements tenants most appreciate, which will help boost your income over time.
In addition, you can often get a tax credit for the money you spend on property management, which helps to further reduce the cost.