Accounting for Risks and Compliance While Investing in Real Estate
Investing in real estate has often been considered to be one of the most lucrative investments you can make. Despite this, however, an investment comes with a lot of factors you need to consider as well as its fair share of risks. You need to know what to expect and what you’re getting into before you can invest. In this article, we’ll be covering how to invest in real estate and what you can do to be prepared.
What Does it Mean to Invest in Real Estate?
Before we get into the how, it’s important we go over what it means to invest in real estate. Real estate investment is when an individual or company uses a property to turn a profit. There are many ways you can go about this with each method having its own unique set of requirements to fulfill. There are five forms of real estate investments:
- Residential real estate
- Commercial real estate
- Real estate investment trusts (REITs)
You’ll need to choose which method you want to do before anything else. Make sure to research further on what you chose, so you have a better understanding on how to start. One type of investment you should also be aware is house flipping. House flipping is when a person buys houses that usually require a lot of repairs, holds on to it for a few months, and then resells it. This is somewhat similar to another investment called day trading. It’s the high-risk, high-reward for real estate investments.
When purchasing these types of properties, you’ll be spending a rather low amount of money to get it. But once the property is habitable again, you can then place it on the real estate market for a larger price. Interestingly enough, flipping houses is actually considered to be a good investment for beginners as the process is relatively simple compared to others. However, you must be ready to invest in the repairs as well as have realistic expectations about it. Many things can go wrong very quickly if you’re not careful or prepared.
Learn More About Compliance
Real estate compliance is basically the rules and regulations you have to follow to prevent violations from occurring. Learning about compliance can be the trickiest factor to learn as there’s a lot to know. This is especially true when you combine it with types of investment. Furthermore, real estate compliance heavily differs on both the location and jurisdiction of that region. To help you understand this better, let’s say you were looking to invest into REITs.
REITs were originally created during the 1960’s as a way to make it easier for tax efficient people to invest in real estate as a whole. However, there are potential trust fund violations you need to be wary of with this. There have been REIT shareholders that have been cheated out of a profit because of improper distribution of the funds. But in 2017, a new law passed called the Tax Cuts and Jobs Act (TCJA), which basically made turning a profit for REIT shareholders much easier than before. It also allowed owners to keep more of what they earned, so they could easily invest it into their business as well as the economy.
Find a Suitable Location
The location is among the most important factors to consider as you begin investing into real estate. What’s more is that you can probably guess why location is so important. When you purchased your house or rented an apartment, what were you looking for at the time? Amenities, easeofaccess, the amount of greenspace, alternative methods of transport are just to name a few reasons why you need to choose the best location you can. They’re what’ll ultimately help you see a good ROI on your investment.
Assess the Current Value of the Property
Obviously, it’s not a smart idea to just wildly purchase a property without assessing its value first. Real estate valuation is basically an appraisal, or a type of estimate, that predicts the value of a property. The value is typically determined by where the building is located, the current state of the real estate market and what it’s going to be used for. Successful investors often use appraisal reports for buildings they currently own to plan their next move.