6 Most Important Questions To Ask Before Investing In Real Estate
Real estate is sought, appealing, yet completely new to many investors.
Although it is commonly acknowledged that a sound real estate investment has the potential to yield significant wealth, few investors have had the opportunity to get firsthand experience with the asset class. Real estate, despite its numerous benefits, may be a difficult investment. With today’s abundance of options, understanding how to handle all forms of real estate investing approaches – active and passive, from rental properties to public REITs to Fund-rise — is more crucial than ever.
Knowing how to ask the appropriate questions is the first step toward smart investment. This is where this article can assist you. These are issues you should think about before investing your first cent in real estate, regardless of the method you plan to employ. You may discover some of the key techniques to examine an investment before investing your hard-earned money by reviewing the points and potential risks listed below.
Let’s start with some general questions that any potential real estate investor should address, regardless of the type of investment strategy they’re seeking.
1. Do you have the time and skills to invest actively, or could passive investing make more sense?
Active and passive real estate investment have significant distinctions, and most investors will have a distinct preference for one over the other. However, if you’ve only recently begun to consider real estate in general, you may not yet know where your preferences lay. Once you’ve done that, you’ll probably be able to figure out which choice is ideal for you — or you’ll realize that one type is simply not viable or cost-effective for you.
For instance, do you see yourself as a landlord? Consider the active options. Alternatively, do you just lack the time to deal with properties and occupants on a personal level? Take a look at passive investing. Those choices can have a direct influence on the type of investment you make and how much it costs to get started.
2. What is the time frame for your investment? In the future, how crucial will liquidity be to you?
Any investment must have a time frame, or investment horizon defined, although some are very illiquid (which isn’t always a negative thing!). When it comes to real estate investing, this makes determining a suitable time frame even more critical. Check to see if and when you’ll want liquidity, and if so, whether the investment can meet your specific requirements.
3. What are the possible tax advantages?
Both active and passive real estate investments can provide tax benefits to investors, although the specific tax benefits may vary depending on the investment.
On the passive investment side, for example, the Tax Cuts and Jobs Act allows income produced via pass-through structures like REITs to qualify for a 20% tax deduction.
A 1031 Exchange, on the other hand, allows active investors to defer capital gains taxes on their initial investment indefinitely. While a 1031 Exchange cannot lower an investor’s capital gains tax burden, it can provide a step-up in basis in the event of an inheritance. For some active real estate investors, this feature has made it a helpful tool for estate planning.
Each set of tax benefits might assist an investment in achieving a particular objective. That’s why it’s crucial to figure out which tax deductions can help you achieve your investing objectives.
4. What impact will real estate have on the rest of your portfolio?
The capacity to diversify a portfolio is one of real estate’s most well-known advantages. Diversification, however, is not affected equally. Make certain you understand how the addition of a new investment will affect the total risk and earning potential of your portfolio. For instance, whether an investment is made in the public or private market has a significant impact on its ability to diversify.
5. What attracts you to a certain real estate investment? What does success mean to you?
“Money!” may appear to be the obvious reaction, yet answers vary as much as people themselves. Some people like an adrenaline-pumping fix-and-flip scenario, while others like to remain as far away from hands-on labour as possible. Knowing what matters most to you in an investment can help you define a clear picture of what success looks like in this situation. It will almost certainly contain a return goal, but will it also contain any other factors, advantages, or commitment?
6. In your particular market, which asset class and strategy is best for you?
Residential houses or apartments — are the most visible real estate assets for direct investment. But are there any other factors that can make a different asset type a safer investment? Is it better to invest in retail or office space? Maybe there has been a fresh inflow of young professionals as a result of a change in local policies, and the value of office buildings is rising. However, a change in real estate class necessitates a change in knowledge. Examine your alternatives and ensure that your money is working as hard as it can in any other obvious condition.
So, what should you do next if you wish to invest?
In many situations, only you, depending on your financial situation, personal preferences, experience, and the specific options to which you have access, can answer these questions. But don’t allow the multitude of choices to scare you into doing nothing at all – there’s a good possibility that real estate will add value to your portfolio in a variety of ways. Now is the correct time to start investing in real estate!