5 Crucial Questions to Ask Before Investing in Real Estate

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So, you have made the important decision that it is time to sink some hard-earned money into real estate.  Congratulations! Before moving ahead, take some time to ask yourself five key questions. The answers will help determine your real estate personality and lead you toward the investment category that is right for you.

1. Are You Better Suited for Active or Passive Investing?

Active real estate investors locate, evaluate, acquire and often manage their own properties.  They are “hands on”, “boots on the ground” people who wish to be actively involved in every dimension of real estate ownership.  Even when they hire professionals to assume responsibility for some or all of the everyday chores associated with owning real property, they maintain control and make key decisions.  A passive real estate investor prefers to spend the bulk of their time on other career, family and lifestyle pursuits while still reaping the benefits of owning property. To achieve this, they can either invest through REITs (Real Estate Investment Trusts), or crowdfunding platforms such as IMBY – relying on the experience and expertise of others to choose, develop and manage the right properties.

2. What is Your Timeline?

When do you hope to realize a return on your investment?  Are you a 20-something looking to build a nest egg or a baby boomer looking for additional income during your retirement years?  Every investment carries a different timeline for maximizing returns. In general, house flippers and developers need to move as quickly as possible in order to maximize returns.  Their timelines, as a matter or necessity, must be as short as possible. Those looking to build equity through appreciation should understand that success is usually found through long haul holding of assets, but cash flow and liquidity concerns must also be taken into consideration.  The trick is to find the real estate investments that are the best match for both your short-term and long-term goals.

3. What are the Potential Tax Benefits and Consequences?

It is critical that you understand exactly how your investment and potential income from the investment will be treated under applicable tax codes.  There are a myriad of tax benefits available to real estate investors. It is always wise to talk to an accountant and understand all aspects of potential tax benefits and liabilities.    

4. How Will this Investment Mesh with Your Overall Portfolio?

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Many experts advise that diversification is the key to long-term success.  Even within the realm of real estate, it makes sense to diversify holdings across the spectrum of residential, commercial and industrial space.  Crowdfunding platforms offers built-in diversification in that it allows you to spread relatively small amounts of money across many properties vs. putting all your money into one property and hoping for the best.  Don’t forget to consider how a real estate investment will complement and enhance your overall investment portfolio.

5. How Do You Define Success?

Success in real estate equates to something very different for everybody.  An active full-time real estate investor will certainly have different goals than a couple buying their first home or a casual investor looking to supplement income and build equity for the future.  Success can only be measured in relation to the personal goals set at the time of initial investment. Define your goals and go for it!

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Now that you have asked yourself and others the important questions that will influence your investment choices, keep in mind that your real estate persona will undoubtedly change over time.  As the circumstances of your life evolve, so will your goals.

 

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