Investing in real estate is one of the best investing moves that you can make. Real estate almost always goes up in value over time and owning real estate can allow you a lot of financial freedom. Real estate investing also involves a lot of risk, but there are ways that you can reduce your risk. Here are three ways to smartly reduce your risk when investing in real estate.
The concept of leverage is the most important thing to understand when trying to reduce risk in real estate investment. Leverage is simply borrowing money to buy a home or property, rather than paying the entire price out of pocket upfront. Make sure that you aren’t overleveraging yourself with purchases. You should be paying at least 20% down on any property you are buying so that you aren’t overleveraging yourself. Any amount you leverage over that is putting you at a high risk of default.
You need to separate your business assets from your personal assets. If you keep your business and personal assets intermingled, you are at risk for having your personal assets seized in the event of defaulting on your loans or declaring bankruptcy. You don’t want your personal assets, like your car or house, taken by the bank if your investment properties go under. If you are going to be investing in real estate, it is a good idea to register as an LLC. An LLC offers asset protection for real estate and helps avoid double taxation. With an LLC, you limit your personal liability if your business is found liable financially or otherwise.
It may be tempting to buy a lot of property very quickly to start seeing massive returns very quickly. But this is one of the fastest ways to go bankrupt. You don’t want to be taking on too much debt, overleveraging yourself, and biting off more than you can chew. Managing a rental property is a very time consuming and stressful endeavor, and when you own too many properties, or take on too many new ones at once, you can easily overextend yourself and end up in the red. You should take at least a year, and possibly even two years, between purchasing new rental properties. This gives you time to grow your equity in your other properties, pay off the loans, and put you in a safer position to extend yourself.
If you aren’t investing in real estate, you may be missing out on one of the best methods to grow your wealth. But there are risks involved to real estate investing that can bite you unless you buy carefully. Follow these three tips to decrease your risk to make real estate investing as safe as possible.
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