It’s no secret that one of the keys to being financially independent is having multiple forms of passive income. That means the money is earned from making an investment or a completed project from the past that presently requires little to no work in order to generate ongoing revenue. Investing in property has gained a lot of attraction in many individuals as a reliable and tangible asset with promising passive income potential. However, it is important to know exactly what you’re getting into as it’s common for first-timers to make costly mistakes. Here are a few simple dos and don’ts to consider when you’re getting started.
Not All Your Eggs in One Basket
When people think of earning cash off an investment it usually refers to stocks or land. Nowadays investing in stocks is as easy as downloading an app onto your phone versus the more intensive process of buying property. However, it is important to view land investments as a tool to diversify your investments portfolio. Since the stock market and real estate market are not directly correlated to one another, owning assets in both arenas could be very lucrative and maybe even crucial in some cases. You should also keep in mind that diversification in assets works best if one does not represent a majority of your net worth.
Not Most of Your Eggs in One Basket
That being said, don’t concentrate all your real estate holdings in one area. While influenced by a variety of different factors than the stock market, the real estate market is just as volatile and sometimes unpredictable. Beginner investors may be at a higher risk of losing their capital if all of it is concentrated in one property or one neighborhood. Pay close attention to market trends and any potential changes in the community that could largely affect the value of the property.
Long-Term Cash Flow is a Must
Another reason not everyone jumps into the world of real estate is that it typically requires a large amount of cash upfront. If you just so happen to be in an excessive surplus at the end of each month then yes, investing in property could be a great way to make that money work for you. However, this is a long-term plan that, depending on what type of land or property you buy, may need ongoing maintenance. You should have a strong enough cash flow prior to making the investments to support you along the way. It’s not like owning stocks or bonds that you can sell off piece by piece, it’s a package deal. If your portfolio is already well enough diversified then you may be able to raise some capital from your other assets to alleviate any unforeseen setbacks.
Have a Solid Plan
Being objective about your income during the initial investment phase is also vital to its success. Consider building a cash flow model to help it all make sense. This is where doing the necessary research will pay off the most. Consider all possible taxes, expected vacancy rates, staff salaries if you plan on hiring a property manager, and so on. Remember, monetary returns in real estate may have a longer shelf life than stocks but unlike stocks, they can have a negative value. The numbers need to make sense.
Discuss with Your Piers
Lastly, you should definitely speak with someone already in the business and went through the same process you are. They will most likely have valuable insight into the work to come. Owning an investment property is not as easy as it seems on TV. If you don’t plan on hiring staff, be sure you’re ready to be a landlord and are fully aware of all the local federal laws in the area.