Investing in your first property can be nerve-racking, but you can set yourself up for future success by timing the purchase just right. The timing of your first property purchase will depend on several factors, including the state of your personal finances, the current real estate market, and even the state of the economy. Because there are so many factors involved, it’s wise to look for a few key indicators. You’ll know you’re ready when you’ve done the following:
You’ve Increased Your Knowledge
Jumping into real estate investing without doing your homework is a little like taking off in a car without ever passing a driving test. Sure, you might be able to get to your destination, but it’s going to be scary, and you might arrive with more bumps and scratches than if you’d prepared carefully.
The more you learn about how real estate works, the better off you’ll be. We recommend reading books like Peter Linneman’s Real Estate Finance & Investments: Risks and Opportunities and Charlie Sullivan’s The Gen X Landlord in order to get your bearings and learn the industry’s lingo.
Property blogs are also great resources for increasing your knowledge about property investing. You’ll familiarise yourself with “cap rates” and “ROI,” and you’ll stay on the cutting edge of what’s happening in your area. Talking with local property investors is another way to learn about investing, and locals can be indispensable for helping you to find lenders, appraisers, and contractors to help you with your next purchase.
You’ve Developed a Strategy
As you learn more and more about investing in property, you’ll start to make decisions about how you want to do it. There are many ways to get involved. Some start investing by buying land for capital growth, and others look for positive cash flow with high rental income.
As you do your research, you’ll automatically start to focus your vision. Until you begin to focus, it will be difficult to develop your strategy. Avoid jumping into a deal before you have a strategy worked out. Your strategy should consider cash flow and ensure a buffer for unexpected expenses.
You’ve Prepared Your Finances
As you hone your strategy, the numbers will start to become clearer to understand. You’ll narrow your focus down to a certain kind of property and this will give you a price range to focus on. Once you have a price range, you can calculate other associated costs such as repairs and maintenance, lending fees, property management fees, insurance and taxes.
Playing around with these numbers will help you to zero in on exactly what kind of property you’re looking for. It will also give you a target amount of cash necessary for making the purchase.
You’ve Committed to Your Plan
Until you’re committed to sticking to the plan you’ve created, hold off. It can be tempting to purchase the first property you find appealing, even though the property is more expensive than you’d planned for or isn’t the right fit for your investment strategy.
Have the self-discipline to walk away from deals that don’t meet the requirements you’ve established for your project. This discipline is necessary for long-term success. For example, if you purchase a property that is $25,000 more than you’d planned, it could be years before the property cash flows the way you want it to. In the meantime, you may not be able to leverage your equity and continue to build your property investing business.
Taking the Plunge
If you’ve learned about property investing, developed a strategy, prepared your finances, and committed to your plan, you’re probably ready to take the plunge. With all of this preparation, you can feel safely comfortable that your first real estate investment will lead to many more.
For more information about investment readiness, or to talk about any other financial planning topic, get in touch with us at Full Financial Services.