Investing in the property that generates stable income is a good way to diversify a portfolio, have a source of passive income or means for retirement in the future. Despite a wide range of benefits, purchasing a property usually involves some risks, especially for beginner investors. These risks may result in money losses or some negative tax consequences.
In this article, we will review three major ways to avoid the pitfalls of investing and some approaches to gain higher returns from the investment property. Also, we will describe the characteristics of the cost-effective piece of real estate that generates income.
There are three essential rules for real estate investors:
- Design a backup plan;
- Use your individual retirement account to invest in real estate;
- Measure the future potential of the property for investing.
Let us have a closer look at each of these strategies.
Design a backup plan
Investing in properties is a risky venture due to the fact that market prices always fluctuate, and it is difficult to predict the final outcome of the investment. The experienced investors have the exit strategy that allows minimizing the potential negative consequences.
Many novice investors purchase properties taking into account the affordability of the piece of real estate. However, choosing an affordable property does not mean that it will be a good investment.
The investor needs to keep in mind some negative scenarios before buying the investment property. For instance, the case if the property would not bring the desired profit, the collapse of the real estate market or economic crisis.
Use your IRA to invest in real estate
Self-directed IRA is a good source of funds for investing in real property instead of taking out a mortgage loan to buy the property. IRA will allow you to diversify your investment portfolio through the purchase of real estate, not only investing in stocks and bonds.
The retirement fund can be used for investing in vacant land, residential homes, income-generating real property, and even commercial property.
However, there are some pitfalls that you need to take into account to avoid negative tax consequences. The IRA should have the balance that allows covering various expenses, including repairs and taxes. In addition, the landlord is not allowed to live in the property or use it for personal purposes.
Measure the potential of the property
In real property investing, it is important to apply cost-effective methods to receive higher income. The investors may look for the properties sold with discounts and also take into consideration the location. Slightly distressed properties can be a good choice.
When you are looking for an investment property, the traffic is no less important than a location. The more traffic, the better because the transport infrastructure is one of the benefits that are critical for the tenants.
One of the common mistakes, committed by beginner investors is the purchase of the house at market value. This mistake results in great money losses, as the investor does not consider the whole picture of the housing market.