Real estate investing can be a strenuous and tricky task.
There are so many factors that go into making a real estate investment that it is vital to be sure about your decision.
However, it can be difficult for some people to be confident about investing if they are not knowledgeable.
In this guide, we will be going over the 15 most essential questions that every investor should ask themselves before getting into real estate investing.
To begin, let's go over what investing in real estate consists of.
What Does Real Estate Investing Consist Of?
Investing in real estate is not always as straightforward as it seems. Real estate deals can be in the form of stocks, funds, properties, or even ancillary investments. Each one of these is a different asset class. If you do not know about asset classes, no worries, we will be discussing it later in more detail.
Below, we have outlined the basic steps of investing in real estate, no matter the asset class.
Considering Personal Finances
The first step in investing in anything is to consider your personal finances. Investing in real estate, especially an investment property, can be very expensive. And even worse, it is very difficult to liquidate.
This is why it is extremely important to first consider your personal finances before making any decision. It is always a good idea to clear any high-interest debts and save up a good amount of money before getting into real estate investments.
The next step in the process of investing in real estate is coming up with a strategy. This can range from a lot of things, like a private real estate investment, investing in a new real estate syndication, or just going with passive real estate investments. There are many possibilities when it comes to investing, so it's important to choose the right strategy for you.
Below, we will be discussing choosing your strategy. The bulk of the decision is choosing between passive real estate investing and active real estate investing. If you want to find the answer to this question before reading the rest of this guide, be sure to visit DoorLoop's Full Guide On Active vs. Passive Real Estate Investing.
Assembling A Team
After figuring out which strategy you want to take on, you're going to want to recruit some real estate professionals to help you start. This could include:
- Real estate agents
- Property managers
- An investment manager
...and anyone else that can help you on your investing journey.
If you feel that you have a high enough level of expertise to advise yourself, then this step is not necessary. However, for most beginners, the help of professionals in the real estate market can help tremendously.
Analyzing The Deal
Once a team is assembled, and the strategy has been chosen, it is time to analyze the deal. Analyzing the deal means studying the offer that you are being given, like an asking price on a property, and determining whether it is worth it or not.
This is where your team of real estate investing professionals comes in. A good team will advise an investor on what investments to make and which ones to not make. If they have a proven track record of successful investments, it may be wise to listen to their advice.
Closing The Deal
Once the team has spoken, it's time to close the deal. For a passive investor, this may just be some numbers on a screen that tell you how much is invested. For an active investor, this may be a rental property or a commercial real estate investor. Whatever investment it is, it doesn't matter, you are now a real estate investor.
Now, obviously, the process is not always as easy as described, but it will typically boil down to these steps. However, before investing in any sort of real estate, there are some questions that investors should always ask themselves.
Below, we have compiled a list of the 15 most important questions, divided into specific categories, investors should ask themselves before investing in real estate.
3 Questions Investors Should Ask Before Investing In Real Estate
In this section, we have included 15 of the most essential questions that investors should ask themselves before investing in real estate. After answering all of these questions, investors should know exactly what kind of investments they would like to make.
1. Have You Weighed The Pros And Cons?
The first step in determining if real estate investing is a good idea for you is by weighing the pros and cons. There are a variety of pros and cons to real estate investing, but most of them are in the form of risk vs. rewards.
Some of the most notable advantages of investing in real estate include:
- Can build significant passive income
- Various tax benefits
- Potential for large returns
On the other hand, some of the cons of real estate investing include:
- High starting expenses
- Time-consuming and stressful
- Inability to liquidate assets
- Potential to lose money on large investments
Before getting into anything about real estate, make sure to thoroughly research all the risks and rewards associated.
2. Are Your Personal Finances In Order?
After deciding that you want to go forth with the real estate journey, it is important to make sure that your personal finances can support it. This is because investing in real estate can be a very expensive thing, and it may require a lot of money.
Before beginning to invest, investors should clear all high-interest debts that they have. This is to make sure that they have enough capital in the long run to support their investments. For this same reason, investors should also have a good amount of money in savings. For the initial investment, liquid cash is usually required. So, without cash or capital, it becomes a lot more difficult to make investments.
3. What Are Your Financial Goals?
Another important factor to consider is your future. Your personal financial goals can greatly affect your investing strategy. It can also affect nearly every other aspect of your investments, like the asset class, the expected return, the cash flow, and much more.
If you are not sure about what your financial goals are, it is important that they be identified. Without financial goals, there is no way to know what kind of investing should be done as well as how much time should be invested.
Now that we have covered some of the questions to answer before investing in real estate, let’s go over some questions for when you already have your mind set on real estate investing.
9 Questions Every Real Estate Investor Should Ask Themselves
After establishing yourself as a real estate investor, it is important that you continue to evaluate each and every decision. Below, we have compiled a list of questions to ask yourself after already deciding to invest in real estate.
1. How Much Experience Do You Have?
This question goes hand-in-hand with various other questions on this list. Measuring how much experience you need is best for determining how much help you will need. It may also be helpful for determining what the best investment strategy for you is.
In terms of real estate investing, an experienced investor may not need as much help from other people, like a real estate syndication sponsor, agents, managers, etc. Essentially, they will be able to do more of the work themselves and save money on advice from other people.
However, it is important to note that even the most experienced investors can use the help of a good team. Although their financial advice and analysis may not always reflect actual future performance, an expert opinion is still worth a lot to investors.
2. Which Industry Will You Target?
Knowing which industry to target applies to both passive and active investors. Different industries may have you doing different things for investments. Some examples of different investment industries include:
- Rental properties
- Medical offices
...and many more. Every industry has its own set of requirements as well as different market trends for each one. Investors will typically search for industries with stronger returns and growth rates.
3. What Is Your Risk Tolerance?
Investing, in general, is pretty risky. But there are some forms of investment that are much riskier than others. At this point, it is important to determine how much risk you want to take.
For example, buying properties and selling them for a profit carries a big risk. This is because you are carrying the assumption that you will be able to pay back the initial investment and make a profit as well. If the market falls while the property is in your possession, your profit margin becomes very thin and might just disappear.
4. Do You Have A Good Team?
As mentioned before, having a team of real estate investing professionals to help with your investments is extremely useful. If you don't have the right personnel to help propel you through the world of real estate, you may struggle a lot. This is why it is so important for beginner investors to seek the help of advisors and analysts to mitigate the risk of large investments.
5. Should You Invest Your Own Money Or Seek Finance?
Depending on the kind of investment, using your own money may or may not be the best idea. This all depends on the investor's financial goals. For example, an active real estate investor may choose to use financing to make a down payment on a property and receive higher returns as a result.
On the other hand, a passive investor may choose to make a minimum investment in a real estate fund. This investment is relatively safe but will return a much lower cash flow.
6. What Investment Strategy Will You Use?
As has been mentioned throughout the article, one of the most important choices an investor makes is concerning their investing strategy. In this article, we have mentioned both passive and active real estate investing.
The basic difference between the two is that active investing requires a lot more time and attention than passive investing. However, it can yield much higher returns. If you are not sure about which strategy to choose from, that's not a problem. Simply head over to DoorLoop's In-Depth Guide On Active Investing vs. Passive Investing.
7. What Kind Of Assets Will Be Purchased With The Investment?
The kind of assets that will be invested is also an important thing to consider before investing. This point mostly applies to investors who will be investing in physical properties as opposed to other kinds of funds.
When investing in physical property, there are various factors that must be considered. Some of these factors include:
- Property type
- Value of the property
- Investment purpose
- Cash flow potential
...and some more. This is the kind of decision that a professional team would be able to help with decisions like these.
8. Who/What Will Manage The Investments?
If you are handling a large number of investments, it may be wise to find someone, or something, to manage them. If you are going with this option, you may incur additional expenses, like an asset management fee or any other fee charged by the investment manager.
However, physical investment managers may not be the best idea if you want to be more hands-on with your investments. For those who want to manage their investments themselves, property management software is a great choice. And in terms of property management software, the best choice is DoorLoop.
DoorLoop has all the features that a real estate investor could want to manage their investment properties. Some of these features include:
- Easy rent collection
- Robust accounting features
- Maintenance management tools
- Tenant portal
...and a whole lot more to make real estate investing so much easier. If you are interested, simply head over to DoorLoop and you can get started for as little as $49 per month when paid annually.
9. How Will You Screen Tenants?
Screening tenants only applies to those real estate investors that have actual investment properties. When choosing tenants for your investment property, it is extremely important that the investor or landlord thoroughly screens the tenant to make sure that they deserve to be accepted.
Some of the things that a tenant will be screened for include:
- Eviction records
- Credit score
- Background check
- Rental history
It is very important that all of these things, and possibly more, be checked before accepting a tenant. If not, the landlord is risking a troublesome tenant that can cost them thousands in the long run.
With these questions, you should be able to establish a solid position in the world of real estate. However, where do you go from here? In the next section, we will be going over some questions investors should ask themselves after they have been invested for some time.
3 Questions Long-Time Real Estate Investors Should Be Asking Themselves
It may be difficult for investors to know what they are going to do with their investments or how to improve. Below, we have listed some questions for investors to ask themselves after they have been invested in the real estate market for quite some time.
1. What Will Be Done With The Properties?
If you have set your mind on investing in properties, it is important to know exactly what will be done with these properties. If the goal is to renovate them for a profit, the investor must know what needs to be done to the property and how much more money they will be investing. Alternatively, they can invest in a third-party company to take care of the renovation.
If the goal is to rent out the property, the investor must be quick to start finding tenants because, the longer that they wait, the more they have to pay out of their own pocket. Investors must always have a plan of what is coming next and be prepared at all times.
2. How Accurate Have Predictions Been?
After investing for some time, it is important to look back at the past and ask yourself:
How accurate have the predictions been?
If you notice that there were a large number of incorrect or inaccurate predictions in your past, that may be a signal that it is time to rethink your strategy. In the case that an analyst was used, it may be time to look to other people. Either way, it is good to look back and reflect in order to learn from your mistakes and grow as an investor.
3. How Long Should Your Money Be Invested?
Finally, the last question that you should ask yourself is how long your money should be invested. This typically comes after you have been invested for some time and you begin to think about the time for taking it out.
For some people, this may be when their kids go to college. For others, it may be for when they retire. All of this depends on the individual's financial goals and what they need the money for.