15 Things to Consider Before Investing in Real Estate Right Now

It's natural to think about investing in real estate, as properties are all around us, no matter where we are. Real estate investments can diversify our portfolios and provide income. But investing in real estate successfully can be tricky, so go into it with your eyes open. Here are 15 things to consider.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

If you're carrying a lot of debt -- or even a somewhat modest amount -- at high interest rates, such as those charged by credit cards, you will likely be best served by paying down that debt before investing in real estate. For one thing, you might not qualify to buy properties if you're deep in debt, and even if you did, your financial condition could be precarious.

ALSO READ: The 10 Best Places to Buy Rental Property in 2021

Next, do you have an emergency fund? Unless you're independently wealthy and can handle any major expense that comes your way (such as a new transmission for your car) -- or a job loss -- you'll want to have an emergency fund stocked with enough funds to pay all necessary bills for at least a few months. That includes not only housing and food, but insurance, taxes, transportation, utilities, and so on.

Give some thought to liquidity before you jump into real estate. Liquidity refers to how easily something can become cash. Stocks, for example, are pretty liquid: If you need cash, you can place a sell order with your brokerage and shares can be sold immediately (or as soon as the market reopens). It's not so easy with real estate -- selling a property can take weeks or months. And while you might sell just some of the shares of stock you own in a company, you can't just sell half of a house.

If you want to invest in real estate, but you also want a more liquid investment, consider REITs -- real estate investment trusts. REITs are companies that own and lease out real estate. They're required to pay out at least 90% of their income in dividend form in exchange for tax breaks. Many REITs have a particular focus, such as apartments, medical facilities, office buildings, storage buildings, retail centers, data centers, and so on, while others have a more mixed portfolio.

ALSO READ: How to Buy Your First Investment Property With 5% Down (Or Less)

If you want to invest in actual physical property, you have choices to make. For example, just as with a home you might buy for yourself, you can buy a turnkey one that's in great shape and move-in ready, or you might buy a fixer-upper. You can pay less for fixer-uppers, and improvements you make will increase the value of the property. So think about what kind of property you want to buy.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Understand that vacancy risk comes with the territory if you're planning to have tenants in your properties. Depending on the state of your local real estate market, some properties may sit empty for several months until a new tenant signs a lease, and you'll be without your expected income for that entire period. Even if there's quick turnover, you might have a month go by without a tenant -- perhaps because you're using part of that time to paint or otherwise refresh the unit.

Just as you need to be careful and do your homework when buying a home for yourself, you need to do the same with investment property. Think about whether you want to buy a house, a multifamily house, an apartment building, a commercial property, or perhaps something unusual, such as a parking lot. Dig into what such properties are going for in the area where you want to buy, and how much income you might collect from them. Consider the condition of the property, too.

ALSO READ: How to Find Off-Market Property Listings, and Why You Might Want One for Your Next Investment

Understand that it's not always easy to be a landlord -- you may not be able to just sit back and collect regular checks. Landlords have to find tenants, collect rents, and address problems that occur, such as repairs needing to be made. They may have to deal with troublesome tenants who turn out to be hard to evict. If you own the property, you'll need to insure it and pay taxes on it, and you're responsible for maintenance, too, such as if it needs a new roof or regular yard maintenance.

Fortunately, if you want to go the landlord route, you may be able to hire a property management company to do most of the work for you, such as finding (and vetting) tenants, collecting rents, and managing repairs. They will take a cut of the rent for this service, though, and may charge other fees for various services.

Understand, too, that while some regions have seen property values skyrocket in recent years, that's not the overall norm. According to real estate researcher Robert Shiller, national housing prices averaged an annual growth rate of less than 1% between 1890 and 2019, adjusting for inflation. (It's more like 1.5% in more recent years.) So go ahead and look forward to rental income if that's what you're after, but don't assume that the property will appreciate at a rapid clip -- unless you know it's in an area where property rates are rising quickly. (Know, too, that overall property prices can fall.)

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Before investing in real estate, be sure that you've learned enough about the stock market and its long-term average annual returns, so that you can make the best investing decisions for yourself. For many people, the stock market will produce more portfolio growth over long periods.

ALSO READ: Investor’s Guide to Real Estate Market Research

Another way to make money in real estate is to buy, remodel, and flip a property. You'll need to be good at all kinds of renovation and repair work, though -- or you'll have to hire and oversee professionals, who might send your costs soaring. You can work this strategy over and over, taking profits from one flip and using them to buy another property, but note that this will keep some of your assets tied up in each property until it sells.

If you're planning to buy property, find out if you're in a buyer's market or seller's market, and factor that into your decision making. In periods of overall low inventory of buildings, demand can send prices up, producing a seller's market. That's not the ideal time to buy. Having plenty of properties and/or relatively few buyers means it's a buyer's market, which can produce more bargains.

Don't forget to think through your financing plans. Are you going to buy a property with a mortgage? Find out how much of a loan you qualify for, as that will limit the properties you can consider. Think about what kind of mortgage will serve you best, too -- fixed-rate or adjustable-rate? (In low-interest-rate environments such as this, fixed-rate loans are often best.) Do you want a 30-year loan, or a 15-year one, with higher monthly payments?

ALSO READ: How to Find Emerging Real Estate Markets: An Investor's Guide

Finally, do a lot of research before becoming an investor in properties. Find out what real estate laws will affect you -- such as ones dictating the rights of tenants versus landlords. Find out what kind of insurance you'll need and what it will cost. Look into the taxes you'll face. And try to talk to a bunch of people who own investment properties, to get their suggestions and advice.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Investing in real estate can be terrific and wealth building, but it's not for everyone. Think it through to see if you have the temperament and skills required. Remember that you can always choose to invest in stock-like REITs without any kind of big down payment or mortgage -- and in any other kind of stock, too, for that matter.

The Motley Fool has a disclosure policy.