Real estate investment is a great way for you to start to build a high net worth. However, like most investments, there is much to analyze and much to consider before jumping into a real estate investment. You need to consider your purpose for investing in a particular piece of real estate, what kind (residential, commercial, land, etc.) of real estate in which you want to invest, the price range in which you are willing to invest, and your risk tolerance. All of these factors need to be carefully considered before you invest in real estate. But, how do you choose a “good” real estate investment?
“Good” is a relative term to your purposes and your goals. If you are looking for instant equity, a foreclosed property may be your best bet. If you are looking for long term growth, you want to consider a residential property. If you are looking for large amounts of cash flow, commercial property may the best investment for you. It all depends on your situation. However, just because a piece of real estate may be strong in one category does not mean that it is the best investment for you. For example, commercial property may offer the best opportunity for a large cash flow, but commercial real estate can be highly expensive. If you do not have that much capital to invest, or cannot get a loan to cover the capital investment requirements, a commercial property is no longer a “good” investment. All of the factors that are involved in a real estate investment have to be weighed against you ability to accomplish these factors and your understanding of these factors in order to establish what is a “good” investment.
In my opinion, a good place to start investing in real estate is in residential property. A house can offer you the benefit of cash flow (albeit, usually small) and the benefits of tax deductions and appreciation. Owning one residential unit will also help minimize any losses should you fall onto hard times. For example, if you have one investment property, you only need to rent out that one property. If, however, you invest in something like an apartment building in which you have several units, you must fill most of the vacant units in order to prevent losses. In my opinion, it is easier to find one tenant that it is five, or six, or more.
This is not to say that apartment buildings are “bad” investments. In fact, apartment buildings are one of the best investments you can make. However, unless you have or can get the large amount of capital that is required to purchase one of these properties, and have a great property management firm to run the building, you may want to start with a smaller investment first, then work your way up.
As I stated, what is a “good” investment to you depends on your situation. Acknowledge that real estate investment takes understanding and careful analysis, and do those careful analyses of a property before you invest.