Most people are content waiting years and years saving up money, hoping to one day have enough cash to purchase their dream car or take a dream vacation or even buy their dream house. What if I told you there is a way to accomplish these dreams and retire rich and early? A way to have passive income that will last the rest of your life? An opportunity to spend more time with your family that doesn’t need a huge capital to begin and can eventually be managed so there’s little involvement needed from you? Investing in real estate is the answer and it’s an awesome business to be in.
Buying real estate is about more than just finding a place to call home. Investing in real estate has become increasingly popular over the last 50 years and has become a common investment vehicle. Not only has housing become one of the best vehicles to invest in to realize returns and attractive yields, but it can also be done by anyone in just about anyway; the possibilities are essentially limitless.
It is one of the oldest forms of investments that existed long before equity investment kicked in. The attractiveness of real estate as an investment opportunity is premised on its cash flow, liquidity, profitability, tax break and the diversification it offers. You get to design your own destiny. If you work hard enough and hang in there, you can have a lifestyle where you get to do what you want to do.
Simply stated, when investing in real estate, the goal is to put money to work today and allow it to increase so that you have more money in the future. The profit, or “return,” you make on your real estate investments must be enough to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities, regular maintenance, and insurance.
Real estate investing really can be as conceptually simple as playing monopoly when you understand the basic factors of the investment, economics, and risk. To win, you buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties. However, keep in mind that “simple” doesn’t mean “easy.” If you make a mistake, there are consequences. Although risks are always involved with investing, many investors feel the risk is well worth it! In this article, we’ll go through different approaches to help you get started as soon as today!
When you invest in real estate, there are several ways you can make money:
This is when the property increases in value due to a change in the real estate market, the land around your property becoming rarer or busier like when a major shopping center is built next door or upgrades you put into your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is like playing a game.
This type of real estate investment focuses on buying a real estate property, such as an apartment building, and running it, so you collect a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.
This is income generated by “specialists” in the real estate industry such as real estate brokers, who make money through commissions from buying and selling properties, or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. This type of real estate related income is easy to understand. For example, a hotel management company gets to keep 5 percent of a hotel’s sales for taking care of the day-to-day operations such as hiring maids, running the front desk, mowing the lawn, and washing the towels.
For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-restricted collection of customers.
There are several ways to buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property. The use of leverage is what attracts many real estate investors because it lets them acquire properties they otherwise could not afford. However, using leverage to purchase real estate can get ugly because, in a falling market, the interest expense and regular payments can pile up if they aren’t careful.
You may have heard of something called the “accidental landlord.” It’s when someone lives in one home, moves, then rents out the old home. The “accidental landlord” never planned to be a landlord. They become one when they buy a second home.
Unfortunately, most single-family homes actually make terrible rental property because they can’t earn a profit. Appreciation alone is a terrible reason to buy property.
To make the strategy work, you need to plan it in advance. You should focus on buying a home in a neighborhood with great rents that are higher than the cost of the mortgage and all expenses.
When it’s time to move into a better home you simply “step up” to the new home and rent out the old one. You’ve just become a real estate investor.
Purchasing homes and renting them out is a great way to produce extra monthly cash flow. Buying an investment property is the basic approach toward real estate investing, with renting being the basic principle around which the approach is built. On buying a property and renting it out to a tenant, the landlord gets enough money to pay off the costs associated with owning a property, namely mortgage payment, taxes and maintenance costs.
Most often, the rent is fixed to accommodate a premium over the costs to the owner of the property, which is virtually the same as his/her returns. However, in some cases, owners prefer to wait patiently to pay off the mortgage before they can seek a return. By that time, most of the rent becomes a profit, while there is also opportunity in the form of capital appreciation.
To do this, you have to purchase a house that has a combined monthly mortgage payment, home insurance payment, and property tax payment lower than the rent the property commands. There are several ways to do this – from buying in an area with high rents, to putting a lot of money down so that your mortgage payment is low.
If you aren’t keen on the idea of moving a lot or living in a construction zone, you may want to consider turn-key investment property. As the name suggests, a turnkey company takes care of almost everything for you. They help you find, analyze, buy and manage the property.
Most turnkey companies have relationships with mortgage brokers or private lenders to help the deal happen. It’s still important that you are financially stable and qualified to purchase. Turnkey companies focus on cheaper properties that can range from $50,000 on up.
It requires approximately $30k to get started, though it can vary. Since you won’t be living in the property, you’ll need a conventional loan and 20% down. On a standard $100-150,000 house, that’s $20-30k plus closing costs. You’ll also need to have some cash available as reserves in case you have any major repairs in the first year. But don’t let this scare you! You don’t need to use your own money to get started. There are many options available such as hard money loans or partnering with other investors to reduce the money out of pocket.
This strategy capitalizes on beaten down prices of a property due to many different reasons such as foreclosure or quick sales. Buying such a property and spending money on renovating it, the buyer would resell it for a profit.
Flipping homes can be extremely rewarding and since property values are back on the rise, this is a good time to get started flipping homes. Flipping a house is the sum of purchasing homes under market value, fixing them up, and then selling for a profit.
To be a successful flipper, you need to hunt down those bargain homes – the less work you have to do the better. The ideal flip home would be one that only needs minor cosmetic repairs. You could then make the home look more aesthetically appealing and sell for profit.
When you decide to flip homes, you have to prepare yourself for the possibility that the home may not sell fast – or for much of a profit. You take a big chance when flipping homes, which is why you have to pay special attention to the homes location, needs, and price. However, if you have the talent for flipping houses, you could find this to be one of the best investments you’ve ever made.
Real estate investment groups are sort of like small mutual funds for rental properties. If you want to own a rental property, but don’t want the hassle of being a landlord, a real estate investment group may be the solution for you.
A company will buy or build a set of apartment blocks or condos and then allow investors to buy them through the company, thus joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all the units, taking care of maintenance, advertising vacant units and interviewing tenants. In exchange for this management, the company takes a percentage of the monthly rent.
There are several versions of investment groups, but in the standard version, the lease is in the investor’s name and all of the units combine a portion of the rent to secure against occasional vacancies, meaning that you will receive enough to pay the mortgage even if your unit is empty. The quality of an investment group depends entirely on the company offering it. In theory, it is a safe way to get into real estate investment, but groups are vulnerable to the same fees that haunt the mutual fund industry. Remember, research is the key.
If you think real estate is a great investment but don’t want to get quite so hands on, you could take your real estate investing to the stock market. REITs, an investment vehicle for real estate that is comparable to a mutual fund, allowing both small and large investors to acquire ownership in real estate ventures, own and in some cases operate commercial properties such as apartment complexes, hospitals, office buildings, timberland, warehouses, hotels and shopping malls.
Real Estate Investment Trusts (REIT) are great ways for you to invest in real estate without being actively involved. A REIT is a fund that is set up to invest in mortgage instruments, bonds, and stocks in the real estate niche.
A REIT can be a publicly traded company, which is added to the investment portfolio for diversifying risk. It could also be a private company. Compared to the other asset classes forming part of the portfolio, a REIT vests the twin advantages of generating higher returns and minimization of risk.
Investing in REITs can also be made through real estate-focused ETFs and mutual funds. Returns from a REIT is in form of dividend income as well as capital appreciation.
There are a few different types of REITs; equity, mortgages, and hybrid. An equity REIT invests in properties, a mortgage REIT invests in mortgages, and a hybrid is the mixture of the two. All three typically offer high yields – basically you get paid back from the interest others are paying on their mortgages.
If you’re short on time, investing in REITs is probably the way to go.
Crowdfunding allows rich investors, having a net worth of over $1 million access to the real estate through crowdfunding, which is a form of peer-to-peer lending. This brings down the price of entry for investors. Apartments costing millions of dollars could be part-owned by investors by contributing as little as $5,000.
If you’re familiar with companies such as Prosper and LendingClub (which connect borrowers to investors willing to lend them money for various personal needs, such as a wedding or home renovation) you’ll understand the concept behind investing through a real estate crowdfunding site.
Companies including RealtyShares, RealtyMogul and ifunding connect real estate developers to investors who want to finance projects, either through debt or equity. Investors hope to receive monthly or quarterly distributions in exchange for taking on a significant amount of risk and paying a fee to the platform. Like many real estate investments, these are speculative and illiquid — you can’t easily unload them the way you can trade a stock.
The rub is that you need money to make money. Real estate crowdfunding is generally open only to accredited investors, defined by the Securities and Exchange Commission as people who’ve earned income of more than $200,000 ($300,000 with a spouse) in each of the last two years or have a net worth of $1 million or more, not including a primary residence. So keep this in mind for when you’ve already started making the big bucks.
Trading in real estate is acting on behalf of a consumer to buy or sell real property, which includes land and any dwellings attached to or included with the land, such as houses, apartment buildings, condominiums, commercial space and mobile homes. Trading also includes commercial leasing and commercial property management.
Trading does not include residential leasing and property management, selling timeshares, businesses without land (like a mobile food truck), business equipment not including land (like hair salon furnishings), facilitating a new construction on already owned land and trailers or mini homes without land.
This would include instruments such as options, which allow the buyer an option for purchasing a real estate asset at a predefined sale price over a fixed period. An options contract is usually entered into by property developers or investors in the commercial real estate or high-valued residential property.
The buyer of the option, who purchases the option by paying an option premium, which is a relatively smaller amount compared to the transaction price, can choose to or not to exercise the options or sell it to a second buyer before the expiry of the option.
Real estate traders buy properties with the intention of holding them for a short period of time, often no more than three to four months, whereupon they hope to sell them for a profit. This technique is very similar to flipping properties and is also based on buying properties that are either significantly undervalued or are in a very hot market.
This real estate trading provides flexibility and low-cost trading opportunity for the buyer.
If you aren’t sold on the thought of purchasing a home only to regain your money little by little, you could first test the waters by renting a portion of your house. You have a couple of options to do this.
First, you could rent a spare room in your home or you could rent the basement. If you’re yet to purchase your first home and like this idea, you could even buy a duplex and live in one apartment and rent the next.
The advantages of renting a portion of your house are that you get to watch your tenant closely. It’s less likely that a tenant will try to stiff you for the rent payment when you’re in the same household. Renting a portion of your house also gives you the ability to get a feel for what it’s like to be a landlord without making such a huge financial investment.
Companies such as Airbnb allow people to generate money to pay off mortgages or the rent through renting out rooms. Additionally, they also make a decent, neat profit.
Leases from real estate is a steady stream of income for investors. Usually, this lease is higher than the dividend income associated with stocks.
Real estate prices historically follow an increasing trajectory compared to most other asset classes. The rationale is this – The net operating income from a real estate asset gradually increases along with rent increases and the scope of better management of the asset.
Rental income from tenants are sometimes indexed to inflation and so when the rent revision comes up, the impact of inflation on the returns is taken care of.
Real estate is favorably treated by the U.S. Tax code. Some of the provisions that work in the favor of this asset are:
If you have been thinking about trying your hand at real estate investing, it’s good to know that there’s more than one way to go about it. Nevertheless, it’s important to do your due diligence before beginning with any new investment. Regardless of your risk tolerance, investing style, or available cash, there is some type of real estate investment that can work for you. Find the kind of real estate that works for you and try it.