Real estate investment is often a financially sound activity. After all, no new land is being produced, with the exception of a few tiny volcanic islands, but there are always more people who want to own a home. That having been said, there is no such thing as an easy investment. There are a few things that every potential investor needs to understand before they take the plunge into the world of real estate so they can be sure that they are making the right choice.
Know The Risks
The most important thing to remember is that every investment carries the risk of losing money. Many investors have put their fortunes into land and buildings on the assumption that it was a perfectly safe investment, only to realize that they were wrong when the value of their real estate plummeted. It’s true that some investments are much more dangerous than others, but even a relatively safe investment is only appropriate for investors who are willing to accept the risk of taking a loss. Fortunately, there are a variety of techniques that can help to mitigate the risk and make the investment as safe as possible.
The first and most important rule is that no investor should ever risk more than they can afford to lose. Many people who are eager to make their fortune quickly opt to take loans to expand their investments, but that increases the risk of an unbearable loss. The potential for fast gains may be enough to outweigh the increased risk, but investors should weigh the benefits and the risks carefully before they decide to take a loan.
Managing the size of any improvements to the property or new constructions can also reduce the risk. Larger projects both require more capital and have more opportunities for unfortunate mistakes, which makes them much riskier than small projects. An investor that wants to minimize their risks can try to manage a variety of small investments instead of putting all of their resources into a big project. This prevents any single mistake from causing a catastrophic loss and keeps each individual project down to a manageable size. This is especially important for new investors who have little to no experience working with large projects, since they are much more likely to make expensive mistakes.
Shop For the Market, Not Your Dreams
One of the most common mistakes in real estate investment occurs when new investors invest in things that they like with no regard for the market in general. This is a very easy mistake to make, since people tend to instinctively assume that people share their preferences. Unfortunately, that is rarely the case. Investors who shop for their dream home run into two main problems. The investors often find themselves getting attached to the home, and they can have trouble bringing themselves to sell it. They also run into trouble when they find that they emphasized features that the average buyer does not find interesting. Both of these problems make it hard to sell the home and recoup the investment.
Investors can dodge this problem by ignoring their instincts. Instead of choosing features that feel like they should be desirable, investors should perform research to find local trends in the real estate market. Comparing the features of houses that sell quickly to those that sell slowly, or comparing expensive houses to cheap ones, can reveal which things buyers are looking for in a new building. Relying on raw numbers and statistics will remove most of the cognitive biases that can lead to poor decisions.
Mental exercises can also help with this problem. Investors should regularly remind themselves that they are looking for properties to sell, and not properties that they intend to use. Investors who make a point of thinking about that fact before every deal can develop the habit of thinking about the market’s needs instead of their own, until they finally begin to do so without needing to think about it. It takes time, but it is possible to overcome this tendency and become a better investor by doing so.
Get Legal Help
The real estate market touches a number of legal issues that don’t apply anywhere else. These laws and regulations are far too complicated for most investors to understand on their own, which means they need to call in an attorney for help when problem arise. It’s best to call on a real estate attorney in those cases. Attorney who has experience dealing with the real estate market will be more likely to get a positive result or provide advice that avoids problems that one who does not. Additionally, many of the laws involving real estate are so complicated that other attorneys will not be aware of their nuances.
It is best to find a good attorney before making any investments. Investors who wait until the last minute often find themselves running into legal problems that the attorney could have prevented with a simple warning. Hunting for an attorney at the last minute also tends to mean picking whichever attorney happens to be available at the time, so there is no guarantee of finding one whose skills and personality compliment your own.
The Final Decision
Real estate has been one of the most popular investments for hundreds of years, and for good reasons. Land and housing are usually in demand, and the supply is often quite limited. Many people have made a fortune by cleverly investing in the real estate market. On the other hand, it is not a particularly simple market. Investors need to deal with the complex and varied desires of potential buyers and a large set of very specific laws. These difficulties open investors up to the risk of a loss, and every investor needs to understand and accept that risk before they enter the market. Investors who are aware of these potential problems can take steps to manage them, and in doing so they have the opportunity to find their way to a significant profit.
By: Erica Silva