Checklist for Evaluating Real Estate Investment
1. Formulating a Financial Plan
- Assess current financial status, focusing on income and day-to-day expenses.
- Allocate a portion of monthly income to long-term investments, including real estate.
- Develop a comprehensive wealth-building strategy.
2. Preparing for Real Estate Investment
- Research and understand the requirements for purchasing rental property.
- Develop a financial plan specific to real estate investment.
- Cultivate patience and readiness for hard work.
- Compare real estate with other investment types (stocks, mutual funds).
3. Understanding Real Estate’s Potential
- Recognize the potential for periodic cash flow through rent.
- Acknowledge long-term appreciation potential.
- Learn about tax-deferred compounding of property value.
- Understand the concept of positive operating profit from property.
4. Recognizing Investment Caveats
- Be aware of the rarity of high returns (few home runs).
- Understand the challenges of upfront operating profit.
- Recognize the potential for market volatility.
- Acknowledge the high transaction costs and tax implications.
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5. Returns, Risk, Liquidity, and Capital Requirements
- Research the average returns on real estate investments.
- Assess personal risk tolerance in relation to real estate market fluctuations.
- Understand the illiquidity of real estate compared to other investments.
- Evaluate personal capital availability for real estate investment.
6. Diversification and Value Addition
- Consider real estate’s role in investment portfolio diversification.
- Identify opportunities for property improvement and value addition.
- Explore low-cost real estate investment options (REITs).
7. Tax Advantages
- Understand tax deductions and depreciation benefits.
- Research tax-free rollovers and installment sales.
- Learn about special tax credits for specific types of property investments.
8. Personal Suitability Assessment
- Assess personal time availability for managing real estate.
- Evaluate ability to handle property-related problems and stress.
- Gauge personal interest and passion for real estate.
- Determine financial readiness for potential market downturns.
9. Integrating Real Estate into Personal Financial Plans
- Ensure optimal personal financial health before investing.
- Eliminate high-cost consumer debts.
- Secure comprehensive insurance coverage (health, disability, life, homeowner’s, auto, umbrella).
- Consider retirement account funding and its impact on real estate investment.
- Develop an asset allocation strategy incorporating real estate.
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