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Investing in real estate property is probably one of the biggest milestones you will ever make especially in a city like Hong Kong. It’s a complex business and getting ready to buy your first ever real estate property as in investment opportunity can be terrifying. Daunting. There’s so much to learn about, and the industry jargon can cause your head to spin. Credit scores, down payments, mortgages, appraisals, appreciation, closing statements, contract rent, co-ownership, buyer’s agent, listing agent, fixed rate, adjustable rate mortgages, pre-approvals, closing costs, title insurance…the terminology list goes on and on. What are all these terms? Where do you even begin? Getting your feet wet in the real estate industry is absolutely overwhelming if you are a newbie, and fear is what stops the majority of the people out there from ever getting started in real estate investing. There’s the fear of the unknown, it’s a whole new universe to learn and understand. And then there’s the fear of failing. The fear of failure is the number one fear that stops people from achieving their dreams of becoming a real estate investor.
People are scared to fail. They would much rather stay within the confines of their comfort zones than to ever step out and take a risk. Truthfully, the biggest risk you can take in life is to never take a risk. I wanted to rationalize why people are so afraid of the real estate world, and it seems to come down to fear. So what is it that most people are afraid of when it comes to real estate investing?
Ultimately, fear is the barrier to entry - the one thing that’s stopping the majority of the people out there from reaping the rewards that the real estate market can offer. Now the question is, “how do we get past this irrational feeling of fear?"
It boils down to knowledge and execution. How have you come to know how to do everything you currently know how to do? How did you decide on your major in University? How do you know how to drive a car? How do you know how to prepare a meal? How did you figure out how to work your smartphone? Everything we know in life, we have had to learn by accumulating knowledge and experience. We choose the things that we are willing to learn, but when it comes to real estate, people say, “ No way! I will never understand how to do that!”. But how do you know if you’ve never tried? Every expert had to start somewhere. Every master was once a beginner, a student. Likewise, real estate investment follows the same principles. You first have to learn and understand real estate investment fundamentals before you can start investing. It’s not rocket science, but it does take dedication to learn through trial and error. Some of you will argue, “well, investing is so risky! I could lose all of my money if I don’t do it right!” You are absolutely right. Investment comes with its many risks, but everything else you do in life also has risks. Think about it. When you drive a car, you put yourself at risk of getting in to an accident. You job has risks too. You put yourself at risk of not having true financial freedom by working a nine-to-five job - a never-ending rat race. How do you reduce any risks in life? You reduce those risks by learning, by accumulating knowledge. If you know that speeding down the highway at 150 mph will likely either get you in to a road accident or have you arrested, you learn to watch your speed. The same mechanics are implemented in real estate investment. You cannot learn and execute your knowledge if you ever even take the first step to start. And you know what the great thing is about learning? You can learn about real estate investment before you even start investment. The more you know, the more you will become aware of the obvious newbie mistakes and pitfalls. The more knowledge you have, the more at comfortable you will be and the less afraid you will become. So, when the day comes when you actually are financially ready and capable of investing in to property, your accumulated knowledge will have replaced your fear.
Knowledge is power. We know that. Do you know what’s even more powerful than knowledge?
The Execution of your knowledge. With that being said, it’s time we start talking about the actual methods to prepare yourself for investment in your first real estate deal. You have to get started at something if you want to join the wave of real estate investing and reap the harvest. The best way to dive in to any industry while minimizing your risk as much as possible is through preparation. In order to steer clear of failing, you must learn to prepare. We are not saying that it’s an easy road. The road can be challenging and arduous, but the silver lining? There is a reachable destination if you are persistent enough and navigate intelligently enough.
Why is it so important to prepare you might ask. Why can’t you just dive head in and figure it out as you go? You could, and a lot of people do exactly that. The problem with this method is that you will have to be okay with losing a lot of valuable time and possibly lots of money in the process of figuring out what works and what doesn’t in the real estate world of investing. If you have no idea what you are taking on, how can you calculate the potential outcomes and risks you will meet along the way? You don’t need to be an expert to start, but you do need the basic knowledge to feel confident enough to start. This is what we are aiming to do with this article. We want to equip you with the foundation of real estate investment that you absolutely MUST understand before your first investment deal.
We understand that buying your first property can be one of the most exhilarating - overwhelming - stressful - joyful - moments of your life. But equipped with the right information and preparation, you can make your first real estate investment and close the deal with confidence. Owning property can pay off financially if you do it smartly. If millions of people are able to live off the returns that they make from real estate investment, why can’t you? It’s time to get over your fear and get started on your new journey of financial freedom.
Read on to learn what these factors are, so that you can be properly ready to make one of the biggest purchases of your life when the time comes.
Real estate investment has everything to do with the understanding of numbers. We cannot stress enough on how important this is. I mean, come on! It’s investments we are talking about, and the whole point is to make money, and money happens to be quantified in numbers. If you are even entertaining the idea of investing in real estate, you first have to understand how numbers work. You need to know how to calculate and work with numbers. You cannot just go in in blind and make decisions based on your gut feelings and instincts. There are certain terms you have to know even as a beginner in investment. You have to understand how to calculate your financial budget and cash flow. If you don’t know what these terms are, you need to start from the very basics and work your way up. It’s perfectly okay if you don’t currently have the knowledge of what these terms are or how to calculate your numbers. That’s why we are here.
Let’s take for example, rental properties. If you are investing in rental properties, you have to first determine if a property you are looking at is even potentially going to give you profitable returns, and also take in to consideration the market fluctuations. The point of real estate investment is so that the passive income you generate from the properties is greater than the expenses you are putting in to it. In order to understand real estate investment, you first have to grasp the concept of cash flow. Calculating numbers isn’t so much about talent, you just have to learn how to do it. Of course, you can hire someone to calculate the numbers for you but if you don’t even understand the bare fundamentals, how can you ensure that you don’t get cheated or taken advantage of?
Numbers! Understanding numbers is crucial to your success in real estate investment. Start from here.
Real estate investment is not random. It’s not a gamble. You could argue that its a calculated gamble, but it’s not a gamble in the sense that you are just tossing dice and hoping for the best. There are so many paths to real estate investing, and each path requires different strategies. Every investment strategy will lead you to different results, different goals and different degrees of risks. Before you start to invest, you need to understand your financial goals. What do you wish to accomplish with investing? What are your ultimate end goals? What levels of work, effort, money, and risk are you prepared to take on. If you cannot answer these questions, you are not anywhere ready to start investing in real estate. Without proper strategy, you are essentially setting yourself up to fail. It’s crucial to take the time to understand what your goals are first and then implement the appropriate strategies and solutions to see the best fit for your investment plans.
How much time realistically do you want to spend on your investment portfolio? Investing takes time, especially when you are first starting out. You need to draw up your investment routes in order to figure out what real estate investment strategy is most suitable to your financial budget, lifestyle needs, and schedule. If you have no idea what strategy is most suitable for you or which route you are most interested in taking, then don’t invest in any property yet. Having a structured plan with strategies and solutions to those strategy will put you in a better position to invest. Don’t worry if you are not sure which route to go with investing. Everyone who first starts out has to face this question. The thing is that we cannot give you the answers. It’s almost impossible for anyone other than yourself to answer that for you. You know yourself the best, and your answer is depending on your life goals even if you don’t know it yet. There are numbers of different ways to invest in real estate and there’s no clear cut path. The trick is to find the investment strategies that are right for you. The best way to answer the question is to start exploring and researching as much as you can about the industry. Eventually, a niche will resonate with you and that will be a telling sign for which avenue to start pursuing.
Once you have figured out your strategy, you need to invest time to learn and understand everything you can about it. The more knowledge you have about your niche, the better. The first thing to do is to understand the proper steps involved in your chosen real estate investment strategy before you start investing. This may take some time, and you will hit some roadblocks along the way. You will have to do a lot of exploration and learning on your own. There are right ways and wrong ways to invest in any given niche, and you won’t know until you try it or learn from others who have already tried it. Finding a mentor in your chosen niche can be your golden ticket - but ensure that you find something respectable and proven in their strategy that you are interested in and follow their guidance.
It’s better to find a niche and get really good at it than to dabble in every niche but be average at it.
By now, you should understand how important thorough research and study of the market is. After all, that’s where your knowledge comes from. Part of learning what factors make or break a real estate investment is by learning about market fundamentals and trends that pertain to that strategy. While your chosen strategy may work in one work doesn’t necessarily translate to it being as favourable in another market. While a particular market might be perfect for your investment strategy, it doesn’t always mean that you can use the same strategy in every market. There are traits and characteristics that differ from market to market. Knowing what these are will set apart the good investors from the mediocre investors. You have to thoroughly assess your market to minimize your investment risks, because in real estate, location is probably the most important factor. Location, location, location! This is all part of studying and understanding the trends of the market. Markets change constantly and you need to stay up to date with all the happening and fluctuations.
If you have a thorough understanding of the different traits that can vary between markets and how they may impact your property investments, you will become a much more successful investor in the long run.
Risks! The thing that all investors try to avoid, well, at least minimize as much as possible. Are you aware of how the factors in an investment strategy can affect your risk level? The lower your risk levels are, the higher chance of success you will have in your real estate investments. Returns tend to be projected higher on investments that are valued as higher risk, because the higher return is compensation for taking on the higher probability that the investment will fail. Basically, the higher the risk, the higher your projected returns will be. It’s similar in gambling. You have to calculate what the odds are and if the odds work for you or against you. You need at least understand how to best counter certain risk factors when you are playing the investment game.
The takeaway from this is to understand what factors will directly affect your risk, whatever investment strategy you take. You need to calculate it before you can even attempt to mitigate them.
What is your end game?
Why is it so important to know your end game? Here’s why:
It is great that you have plans and strategies before investing, but it is even more important to know how to exit those plans should they turn sour. Investment is not a sure thing, that’s why there are so many risks involved. If the results don’t go as you had planned, you need to have exit strategies set in place. If you are left with an unsuccessful investment, you need to know how to dig yourself out so you don’t lose even more. Don’t just prepare for buying an investment property, prepare for the end of your investment property as well. Always have a backup plan incase your original plan does not work out. Getting in to real estate investment takes some trial and error, and luckily you can learn a great deal from self-education and experience. Getting started in real estate is not the hardest part, it’s implementing how to know when to stay in or exit your strategies that’s even more crucial.
Planning your real estate exit strategy can ensure that your goals will be met when you reach the end of the line as a property investor. Positioning yourself with a solid plan is the best way to make sure you will be successful as an investor. It’s a step that you just cannot afford to skimp on. Before buying an investment property, all experienced and seasoned investors plan for a specific exit strategy.
Do you need more advice and guidance on starting out as a real estate investor? Our team at Engel & Voelkers will gladly help you. If you are an experienced real estate investor, what other tips would you give to someone who’s just starting out in the industry? What are some things you did to prepare for your first real estate investment purchase? We would love to hear your thoughts!
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