Investing in real estate can be an excellent way to diversify your portfolio, enjoy a steady stream of current income and build long-term wealth for the future. Even so, becoming a landlord is not for the faint of heart, and not something you want to rush into. Before you buy your first apartment building and cash that first rent check, you need to do some research and understand exactly what you are getting into.
As with any type of investment, one of the best ways to avoid common pitfalls is to learn from the experience of others. Teaming up with a trusted mentor who is already a successful real estate investor is perhaps the best way to learn the ropes and avoid common first-timer blunders. Having the right team around you is so important that I discuss it daily on my radio show. Here are some other smart tips to help you become a successful first-time real estate investor.
Keep Your Own Counsel
You will want to work with a real estate agent eventually, but it is important to keep your own counsel. Doing your own homework is essential, and the legwork you do now could stop you from making an expensive mistake later.
The advice and guidance of a real estate agent can be very valuable, but always remember that the agent is trying to sell the property. A good agent will take your needs and circumstances into account, but there is no substitute for doing your own research.
Research Local Property Management Firms
If you do not want to spend your weekends patching up damaged decks or your nights unclogging stopped-up toilets, you will want to find a quality property management term. In exchange for a percentage of the rent roll, the property management firm will take care of everything from needed repairs to collecting the rent, freeing you up for more productive endeavors — like finding additional investment properties.
Not all property management firms are equally experienced, or equally responsive, so it is important to do your homework and get the opinion of fellow investors. Finding a great property management firm is not always easy, but it is an important cornerstone of building wealth through real estate as it allows you to scale operations.
Protect Yourself With The Right Business Structure
While some investors choose to hold rental real estate in their own names, establishing a separate legal entity for those holdings is typically the best alternative. The right business structure allows real estate investors to minimize their taxes, reduce their liability and maximize the return on their investment.
It is important to work with an experienced real estate attorney and a good tax accountant when setting up your new business. A good attorney can help you choose the right business structure, while an accountant can help you understand your tax liability and how to best structure your rental income.
Consider Alternatives To Direct Ownership
If you are interested in real estate as an investment, buying an apartment building or rental home is not your only option. A real estate investment trust (REIT) allows you to pool your money with those of other investors, and those funds are used to purchase commercial and residential properties. The rental income generated by the REIT is distributed to the investors in the form of dividends or reinvested into building the real estate portfolio.
If you think that a real estate investment trust is right for you, it is important to choose one that trades on the open market. Non-traded REITs can be difficult to liquidate and hard to value, so stick to publicly traded funds with a reasonable cost and low management fee.
Investing in real estate can be a great way to build long-term wealth, but being a landlord is not right for everyone. Understanding what is involved in a real estate investment, how to protect yourself and your money, and deploying the right strategy that makes sense for you is the best way to enjoy the benefits while minimizing the risks.
Abhi is Chief Investment Officer of Summit & Crowne and a 2x nationally-syndicated radio host on The Wall Street Business Network.