A good real estate investment can help to accelerate wealth, as well as to diversify your overall financial portfolio. Just like any other type of investment, though, moving forward with the purchase of a property should entail making several good choices up front.
Even if a particular piece of real estate may seem like a “good deal,” it is essential to first run the numbers in order to determine whether it may truly generate the cash flow that you require, and to decide if managing the property will take up an inordinate amount of your time.
With that in mind, there are three important criteria that will help you with knowing whether or not to pursue the deal, or to pass on it and move on to something else.
1) Cash on Cash Return
Buying real estate will typically require an investor to take money out of other financial assets. These are usually liquid assets, such as savings, stocks or bonds. Those funds will then be placed into an illiquid asset.
If you were receiving a certain amount of return on these assets, such as 4%, then you should ideally run the numbers and determine whether the property will return at least that same amount for you.
Even though it may not always seem risky – especially in comparison to a volatile stock market – the purchase of property does involve taking a risk. This is primarily because there are a long list of items that could go wrong, such as unexpected maintenance and repairs, or a tenant who ends up not paying rent. Given that, it will also be important to assess your risk tolerance, as well as factor in a certain amount of funds for potential emergencies and risky situations.
While some real estate investments may not require an abundance of your time, others will. In order to help ensure that you spend less time managing tenants, you should put a system in place for screening individuals prior to moving in.
You could also hire a property manager to tend to the property’s maintenance issues, and to deal directly with the tenants on a regular basis. This can help to free up your time significantly, yet still allow you to reap the benefits of your investment.
For more information on how a property manager can reduce the headaches of day-to-day property investment issues, Contact Us.