Before taking the plunge, there are important factors you need to consider. In addition to financial stability, you need to honestly access the level of involvement you’re able to commit to and understand the benefits and potential pitfalls of investing in real estate.
When you invest in the stock market, no one checks your credit rating or looks into your financial background. That’s not the case when investing in real estate. If your plan is to invest directly and purchase an income property by obtaining a mortgage, you’ll need to check your credit rating. Ideally, your score should be 740 or above and your total debt including future mortgage payments should be no more 43% of your gross income. Otherwise, you may not be able to get a mortgage and if you do, you will end up with a higher mortgage rate. You will also need to have enough saving for at least a 20% down payment, 25-30% if you want to avoid purchasing private mortgage insurance.
You may be considering investing in real estate on a larger scale by becoming part of an investment partnership. You will first have to learn how much the initial investment is and decide if you are comfortable having that amount of your savings tied up. The investment partnership will also be considering your financial history when evaluating your potential as a partner. Keep in mind, real estate is more appropriate as a long-term investment. It doesn’t normally sell as quickly as stock or a mutual fund.
When it comes to property management, there are really only two choices. Hire someone to manage it or do it yourself. Of course, the return on your investment will be larger if you do it yourself, but you need to be realistic when making this decision. Will the time you spend on property management interfere with your lifestyle. Can you truly devote the time necessary to do it properly? And do you really want to? If not, you still need to maintain and protect your investment, which means you need to hire someone.
Depending on your tax bracket, there are a variety of potential tax benefits to investing in real estate. It is strongly recommended that you consult with your accountant or tax professional when making a real estate investment. They will be able to explain which tax benefit you qualify for and also ways to reduce the amount of taxes your investment income may be subject to.
Everyone’s tolerance for risk is different. Those considering a real estate investment should have a fairly high tolerance. Many people think real estate is a low-risk investment. If not well researched and properly managed, you could face the same risk as investing in the stock market. Like any investment, real estate has its pros and cons. It’s important to understand the risks upfront before making an investment.