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10 Questions to Ask Before Investing In Real Estate

May 24 2018
by Leisl Bailey

what to look for investing real estate

You’ve wanted to make a real estate investment for a while now, but you still haven’t quite committed. Why? Maybe you’re still in the learning phase and realize there are many answers you need before moving forward. Here are 10 of the most common investment questions answered.

How much income do you make at your job?

Investing in a property requires you have some money in the bank. A 20% down payment is the absolute minimum. And while you may be able to negotiate to have the closing costs paid by the seller, it’s a good idea to have some extra money on hand, just in case. Your stable income will provide the numbers you need to set up a budget for monthly spending and saving, debt repayment, and reaching your investment goals.

How much income do you make outside of your job?

Are you earning income from other investments or another property? Did you receive an unexpected gift or inheritance? This money can be routed immediately toward an investment property fund to shorten your investment timeline.

What short-term expenses do you have?

investor longterm goals These are your more immediate expenses. Everybody’s financial timeline is different, but generally speaking, these are the things that you’ll spend money on within a few months or years. Think of things like rent and insurance, saving for a vacation, paying down student loans, or luxury purchases, such as furniture.

Try to keep a detailed spreadsheet of every dollar you spend. After a few months of documenting your expenses, you’ll be able to see spending patterns emerge. Then you can ask yourself if any of these expenses are able to be redirected to saving for a down payment on an investment property?

 

What long-term expenses do you have?

Most of us have long-term expenses: paying off a mortgage and hefty student loans, or saving for retirement. Reaching these goals is a fantastic achievement that happens after years or decades of payments and savings. These expenses are typically non-negotiable and require more money and attention than your daily or monthly short-term expenses.

While purchasing an investment property will likely bring a stream of passive income, it is not a guarantee. What it does promise, however, is an additional long-term payment due each month. Make sure you can take on additional financial responsibility.

Do you anticipate any changes to either your income or expenses in the future?
You should always anticipate the unexpected: loss of job, medical emergency, car troubles, for example. It’s vital to put a minimum of six months of mortgage payments aside for all of your investments.

What is your investment timeline?

Usually, real estate investments are not small. Investing is done for a particular purpose, so you should literally draw a timeline with your financial goals. Say the goal is to save $20,000 for a down payment. First, you need to set a deadline. Do you want to save $20,000 in five years? Ten years? Goals will help to determine how much you need to set aside each month for the down payment, plus building your savings for the investment’s mortgage payments, renovation and maintenance costs, insurance, and emergency funds.

How important is liquidity to you today and in the future?

The term liquidity refers to something you can turn into cold, hard cash. The cash you have stuffed under your mattress or in your savings account is the most liquid asset because you can pull it out and spend it immediately. It also holds the most risk because it can be destroyed or stolen much more easily.

Real estate investments are great investments because of the potential for long-term gains. On the downside, they can take months or even years, to convert to cash. So you should not go and dump all of your liquid assets into an apartment building complex tomorrow. Don’t put all your eggs in one basket and later find the basket wasn’t the safest place to store them in the first place.

What kind of loan can you obtain?

Scraping together the money to take advantage of an investment property doesn’t have to be an obstacle if you know where to look. Depending on the type of investment, you may not need very much money at all. A conventional bank loan requires your credit score, and closer to 30% down for an investment property. Fix-and-flip loans are a type of short-term loan that allows the borrower to renovate the home and put back on the market as quickly as possible. It is a hard money loan. While it is easier to qualify for such a loan, but the interest rate can be as high as 18%, and the time frame to pay it back is short. A third option is to draw on your home’s equity. This option allows you to borrow up to 80% of the home’s equity to purchase an investment property.

It’s important to know what the short and long-term costs of each loan are and how that will affect your investment’s bottom line.

money real estate investment

Do you have enough money to invest in real estate?

Before you decide to make any investment decision, sit down and take an honest look at your entire financial situation, especially if you’ve never made a financial plan before. Just like you decide how much house you can afford, you need to decide what type of investment is in your budget. There is no guarantee you’ll make money from your investment, so you should predetermine your budget, goals, and risk tolerance.

And before you think about taking on another loan, pay off any high-interest rate date and build a sufficient emergency fund.

How would you define success?

The answer to this question can be a way to define your investment goals. With your investments, you set the bar for your success. Becoming a successful real estate investor requires a plan and developing tools for success. Get educated, select a niche, find a mentor, write a business plan, and get your investment plans funded!

Beginning your real estate investment journey? Don’t do it alone! We at Clever only work with the top-rated agents, helping you get the house you want faster. Call us at 1-833-2-CLEVER or complete our online form to get connected a top-rated local agent that will list your home with a discounted commission rate.

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