If you’re thinking of investing in real estate, there are certain steps you need to take to make sure you build your portfolio the right way.
If you’re looking to start your real estate investment portfolio, there are several steps you need to take before actually purchasing a home.
First, meet with your financial advisor or lender to find out what you can afford. Also, make sure you’re not struggling financially with your primary residence—I recommend having at least 35% equity in it. Real estate investing is intended to provide financial security for later on in life, and you don’t want to end up pulling your hair out because you can’t finance multiple properties.
Second, find out what your goals are. Are you looking for appreciation or cash flow? If you’re looking for appreciation, a lot of people here in San Diego have had considerable success waiting for a market downturn to start buying. Since we’re still near the top of the market, now might not be the best time to be buying for appreciation.
If you’re looking for cash flow, you might have to get a little more creative. If you have bigger pockets, for example, you could buy a commercial property. If you live a more active lifestyle, you can consider buying a vacation rental property, though that takes a lot more hands-on work.
Speaking of hands-on work, you need to decide whether you’re going to manage the property or you’re going to hire someone to do that for you. If you plan on collecting the rent yourself, obviously you need to buy local. If you’d rather hire a property manager, you can widen your search radius considerably. One of the benefits of buying outside of San Diego is that you can find properties that require much less capital.
Once you’ve figured these things out and you’re ready to buy, I recommend starting small. For example, you could buy a property and put, say, 25% down so you can get used to the ownership aspect of it and see if you’re really cut out for this sort of thing.
You should also spend that time paying the mortgage down. You want to build up at least 35% equity in that property before you buy another one, and if the market goes south, you want to be able to hold on to it until conditions improve again. Where people really get hurt in real estate is when they have to sell at the bottom of the market but there are no buyers.
Once you have multiple properties in your portfolio, you can start thinking about trading up into a larger property and taking advantage of tax-deferred exchanges, but that’s a topic for another video.
If you have any questions about real estate investing or there’s anything else I can help you with, don’t hesitate to reach out to me. I’d be happy to help you.
P.S., today’s topic was suggested to me by San Diego resident Alberto Lara, who will receive a $25 gift card to either Starbucks or Amazon for his contribution. If you’d like a chance at winning your own $25 gift card, don’t hesitate to send me your video topic ideas!