Real estate investing offers a unique opportunity to build wealth and secure your financial future. Whether you’re a seasoned investor or just starting out, understanding the key factors in choosing the right investment property is crucial. While this list isn’t exhaustive, it provides considerations to help you on your journey.
Phase I: Research
Consider locations, prices, and the level of involvement you want to have
When starting your real estate investment journey, it’s important to consider the locations, prices, and level of involvement you want to have. Real estate prices can vary significantly across different regions and states. For instance, if you’re priced out of your local market, it might be worthwhile to explore out-of-state investments.
Our Self-Directed Real Estate Market Report displays where many of our clients grew their wealth with real estate in 2023, along with trends over the past 10 years, and what other investors can learn from them.
There are many different places to find properties if you’re not sure where to look for real estate investments. Besides local real estate professionals, there are networking groups like Real Estate Investors Associations, or REIAs, that often have local meetings. Some investors search for potential properties on their own by exploring neighborhoods for fixer-uppers.
Another great option for property searches for those who want less involvement include online or hands-off tools. Investment District, Equity Trust’s online marketplace, lists potential turnkey real estate providers that offer passive investing opportunities.
Consider funding options
Many people don’t realize there are multiple ways to fund the purchase of an investment property. Retirement accounts are an option to purchase real estate that can help investors grow their savings. Self-directed IRAs allow investors to buy assets outside traditional stocks, bonds, and mutual funds in their retirement accounts. These accounts need to be with a self-directed IRA custodian.
If you don’t have enough funds in your IRA, there are other ways to incorporate your IRA into the purchase. You can with another IRA or even non-IRA money. Partnering to purchase real estate in your IRA is a great way to grow your retirement funds to a degree even when they can’t fund the entire purchase.
The other option is a loan. However, IRAs can’t borrow money with a traditional loan from any institution. In this case, a non-recourse loan is necessary. You’ll need a lender, like IRA Power Loans, an Equity Trust affiliate, that is able to provide financing since not all financial institutions have the ability.
Phase II: Property identified
Watch out for inspection red flags
Home inspections are vital to ensuring your property doesn’t have any hidden issues or safety concerns that can create costly repairs in the future. They also give buyers peace of mind that you are making an informed decision.
When completing a home inspection or reviewing an inspection report, it’s essential to watch out for certain home inspection red flags that could indicate significant problems with the property. These could include findings like drywall cracks or faulty electrical. If you discover any issues, getting these checked out could determine whether you move forward with the property purchase or not.
Know the closing costs
It’s important not to get caught off guard with closing costs. Depending on the cost of the property, they can add up to tens of thousands of dollars onto your total payment. These costs will vary depending on where the property is located along with the broker’s fees, so it’s important to determine these ahead of time.
Check out our blog where James Schlimmer of Equity Real Estate Services, an Equity Trust affiliate, breaks down anticipated closing costs and the different categories under which they fall to help you better understand your closing costs.
Using an IRA to invest? Plan ahead
Before you have the property identified, ensure that your funding is ready to go. If using an IRA, make sure your account is open and funded to avoid delays. If you find a property first and then open an account, you may miss out on the property while you wait for the account to be established.
If you’re considering checkbook control in your IRA to manage your property and expenses, you’ll need to get your LLC set up. Managing your property through a real estate checkbook IRA LLC at Equity Trust can provide limited liability protection as well as quicker access to funds to pay for property expenses faster.
Phase III: Managing the property
Consider property insurance
Many real estate investors rent out their properties and hold that property under a homeowner’s policy, which can lead to potential insurance claims being denied. This is because owner-occupied properties and rental properties carry different risks as rentals are considered a temporary residence. Because of this, it’s important to be certain that you have the correct property insurance, especially if the property is held in your IRA.
Know where funds go
If you hold the property in your IRA, remember that all expenses and profits must flow to and from the account. This includes expenses like maintenance, taxes, and utility bills and profits such as rent. You can pay these expenses by requesting the funds from your custodian, or if you have a real estate checkbook IRA LLC, you can pay them directly through your integrated business checking account.
Consider a 1031 Exchange
If you’ve decided to use non-IRA funds for the purchase of the property, a 1031 exchange may be an option. If you currently have an investment property you want to sell when purchasing a new property, and the new property is of equal or great value, a 1031 exchange could be a great way to defer your capital gains tax.
1031 exchanges are subject to IRS guidelines under Section 1031 of the U.S. tax code and have strict timelines they must follow. To determine if you qualify for a 1031 exchange, contact Equity 1031 Exchange, and we will help determine if this is an option for you.
