Before you even consider buying an investment property, you need to have some understanding about real estate investing. It’s not necessary to have a college degree in real estate to become a real estate investor, but it’s very important to have some common knowledge of the market. No one can succeed in any type of investment which they have no knowledge of.
If you don’t already have some common knowledge to enter the real estate investing business, then you should start learning! Property investors need to familiarize themselves with the different types of investment properties, real estate investing strategies, investment property financing options, and more. Here are some of the most popular questions from real estate investors who are just starting:
Whether it’s through physically owning a building or through a REIT, real estate can be a great long-term addition to a portfolio and there are plenty of ways to get started. We’ll touch some examples to show how the asset class can fit into almost any investors budget. However, given the number of choices and ways to go about investing in the asset classes, finding out where to begin or how much capital one needs is a daunting task. Here are some of the choices available to familiarize you with how much capital it takes to get started.
First created in the 1960s as a way to allow regular retail investors to participate in the commercial real estate market, REITs are some of the cheapest and easiest options for adding real estate to a portfolio. These securities are traded on the major exchanges like stocks and invest in real estate directly, either through properties or through mortgage investment. Some REITs will invest specifically in one area of real estate or in one geographic location. In exchange for offering investors high-dividend distributions, REITs receive special tax considerations and offer a highly liquid method of investing in real estate.
More importantly, REITs provide one of the lowest starting capital cost options for getting into the asset class. Several major REITs offer dividend reinvestment plans (DRIPs). These plans can provide access to a commercial real estate for as little as the cost of one share of stock with little in the way of fees. Furthermore, almost every major mutual fund company offers a REIT focused option. Many of these come with low starting investments between $500 and $2,500.
For those investors looking to own physical real estate as opposed to shares of a company, real estate investment groups (REIG) or private partnerships may be for you. At their core, REIGs allow investors to buy one or multiple units of self-contained living space within an apartment or condo building through an operating company. This operating company collectively manages all the units, taking care of maintenance and advertising. In exchange for this management, the operating company takes a percentage of the monthly rent.
Investors still own the property and REIGs represent a relatively cost-effective way to enter the real estate market. Generally, real estate investment partnerships usually take an investment between $5,000 and $50,000. While $5,000 isn’t enough to purchase a unit in the average building, several partnerships exist that pool money from multiple investors to purchase a property that is shared and co-owned by several investors. Overall, REIGs and real estate partnerships like this provide a monthly cash return on your investment.
Perhaps the most tried and true way of investing in real estate is also the most expensive: becoming a landlord. We are all familiar with the basic idea. An investor will personally buy a property and rents it out to a tenant. The owner of the apartment, townhouse or office building is responsible for paying the property’s mortgage, taxes and maintenance costs. Ideally, the owner will charge enough rent to cover all of the aforementioned costs.
There are plenty of costs. Since the wake of the credit crisis, the concept of a no-doc mortgage is long gone. That means banks generally require that potential property owners come up with at least 20% of the property purchase price as a down payment. That means in some cases you will need a minimum of $20,000 upfront for a property valued at $100,000. That doesn’t even include closing costs, which typically run around $5,000 or any additional funds needed to get the property in rentable condition. Although there are always methods to get these funds in hand, it’s important to be aware of this.
There are many ways to invest in real estate and there are many types of real estate available. Residential, single-family homes are the easiest to understand, buy, and sell. Most beginners start with single-family homes and then move on to larger projects. Some investors love single-family homes and stick with them their entire career, and a few investors start off with the big projects first.
Single-family homes (SFRs) are meant for one family to and can be attached or detached. An example of an attached home is one side of a duplex, and an example of a detached home is a house on its own. Single-family homes are typically easier to obtain financing for, easier to buy due to greater inventory, and easier to sell because both investors and owner-occupants purchase them. The tenants usually pay all the utilities and take care of the yard. The tenants are also higher quality and houses tend to appreciate more.
Condos or townhouses are similar to single-family houses, but they are part of a complex. The complex will have a homeowner’s association (HOA) that takes care of parts of the property and may pay some utilities as well. Condos and townhouses will have attached neighbors. The HOA will usually maintain the exterior of the building while the property owners maintain the interior. Condos and townhouses can be decent investments, but you have to watch out for the HOA fees, and they tend to appreciate more slowly than single-family homes. Patio homes are a cross between single-family houses and condos. Patio homes have an HOA that takes care of the yards and sometimes the exterior maintenance, but the house is usually detached.
Multifamily properties can be great rentals or can be flipped. A multifamily property is any property with more than one unit. It could be a duplex where the owner owns both sides of the property, or it could be a 300-unit apartment building. Many investors love multifamily properties because there are many units under one roof. This can cut down on maintenance costs, but multifamily properties often have higher maintenance, utility, and vacancy costs. Some multifamily properties offer a lot of opportunity for increased value through repairs and rent increases. The properties are valued based on the income they produce.
College rentals can be single-family properties, condos, or multifamily apartments, but they are primarily rented to college students. College rentals can produce higher rents but also come with more maintenance and tenant turnover.
Vacation rentals often look awesome on paper because they are rented for a lot of money each week or month. However, seasons can play a huge part in the amount of rental income realized. Management fees can also be much higher than a typical rental. A lot of people want a vacation rental because they will save money on vacations for themselves. But remember, you will be losing rent if you use the rental yourself, and you might feel obligated to go to the same place over and over.
Commercial investing can be very complicated and is probably not the best place to start for most beginners. There are many different types of commercial real estate, from retail space to office space to industrial space to raw land. Commercial leases can be very complicated and extremely different from residential leases. However, there is some opportunity to add value to commercial properties that are not utilized correctly or under rented.
Many real estate investors make a lot of money buying and selling land.
When you invest in mobile home parks, you own the land – and sometimes the mobile homes. People rent both the land from you as well as the mobile home. Also, mobile home parks are not built anymore, and there is the opportunity to make money on mismanaged or under-rented parks.
Real estate investing is a very general term that includes renting out properties, flipping houses, wholesaling properties, and much more. You can also invest in either commercial real estate or residential real estate. There are a variety of investment properties available, including single-family homes, multi-family apartment buildings, condos, retail space, office buildings, college rentals, and so on.
The basic idea of a rental property is that it makes you money through cash flow and potential appreciation. Cash flow is the money you make from the rent that comes in after paying all expenses. The expenses may include taxes, insurance, allowances for maintenance and vacancies, HOA dues, and mortgage payments. If you buy rentals below market value (which is a huge advantage of real estate) you can make money as soon as you buy the property. You can also buy properties that need work or are poorly managed and improve them to make more money. The unfortunate thing with rentals is not every market is ideal for them. Usually the more expensive the housing market, the harder it is to find good rentals.
The idea behind flipping is simple. You buy a house, fix it up, and sell it for a profit. However, executing a successful flip is quite difficult. There are many expenses that must be accounted for, such as financing costs, carrying costs (utilities, insurance, taxes, HOA fees), buying costs, and selling costs. Repairs are only part of the cost of a flip. Finding houses that are cheap enough to flip is not easy either. There is a lot of competition for flips, but you can find deals through MLS, auctions, wholesalers, for-sale-by-owners, and through direct marketing.
Wholesaling a property is when a real estate investor buys a house or gets it under contract, but instead of keeping or fixing it up, they sell it to another investor. It is possible to wholesale properties without using your own money to buy the property. One way is to get the house under contract and then assign that contract to another investor who will actually buy the house. Another way to wholesale houses is to use a double close. The first investor buys the house on the same day that they sell it to another investor. Some title companies will let the first investor use the money from the second sale to pay the original seller. Wholesaling is often taught as an easy way to make money in real estate without using your own money, but it is not easy and you will need some money up front.
Property investors should be aware of how much they can afford to spend and set a budget to ensure that they don’t go broke after buying an investment property. As a real estate investor, you need to have enough money to close the deal and keep going after the purchase is made.
Property financing is the main concern for many beginner real estate investors. If you’re planning on buying an investment property with a loan instead of paying fully in cash, you need to know which investment property financing option works best for a successful real estate investing business. One of the biggest advantages of real estate is that you can get loans to buy properties. There are loans available for flips and rentals, but they are very different. Rental-property loans can be very similar to owner occupant loans, which have terms as long as 30 years. The interest rates are usually a little higher than owner-occupant loans – but not by much.
When flipping houses, the loans are much different. Banks do not like to loan money that will be paid back right away. For flipping loans, the term is usually one year or less and the rates much higher. Hard-money lenders are an option for fix-and-flippers, which allow investors to finance part of the purchase price and repairs.
Conventional mortgage loans are the most common in real estate investing for beginners. Other investment property financing options are hard money loans, owner financing, and real estate syndication.
Moreover, the property investor needs to have a clear idea of where to obtain these loans and the requirements and outcomes of each property financing option. This will help them determine the best way to finance buying an investment property.
In order to finance fix and flips, you have to find short-term financing, which is usually much more expensive and harder to find. There are many different kinds of short-term financing. Hard money, private money, and portfolio money can all be used in the short-term. Short-term financing is usually much more expensive than long-term financing because it is considered riskier and there is a much shorter period of interest collection.
The tax benefits that come with investing in real estate are endless. Becoming a rental property owner, however, is arguably the easiest way to receive these benefits; but certainly not the only way. When you rent a property, you can deduct a number of expenses including, but not limited to, depreciation, repairs, interest, and taxes that relate to the common property.
Not every expense on rental properties is deductible, but many are. Since rental properties are considered a business; travel expenses, accounting fees, management and many more expenses are debatable.
If you make repairs on your rental properties they are deductible as well, but improvements are not. If you repair a leaky faucet that is deductible, but if you add-on a second floor it is considered an improvement and not deductible.
Rental properties provide awesome tax advantages. When you own rentals, you can deduct many expenses, including the interest you pay on the mortgage. You can also depreciate improvements and the value of the structure of the property. This is because you can depreciate the value of the structure, which you can actually make money via rentals yet realize a loss on your taxes. If you ever want to sell your properties, you usually only pay the long-term capital gains tax rate, which is much lower than ordinary income.
Flipping houses can be a very lucrative business, but in most cases, you have to pay a lot of taxes. There are ways to pay fewer taxes flipping, but it takes some sacrifices from the investor and a lot of time. Most flips are taxed at the ordinary income tax rate, but in some cases, you may be able to pay only the long-term capital gain tax rate.
This question usually comes up when an individual has a defined amount of money they want to invest. It likes asking whether vanilla or chocolate is superior or if an Aston Martin is better than a Porsche. There really isn’t an answer because a lot of it comes down to your personality, preferences, and style.
Here’s what several key factors of a passive investment looks like in real estate and the stock market:
With the stock market, you are at the mercy of the fund and management. With private lending, you control who you invest with, the rate of return, the length of time you want to invest and approval of the asset your money is secured by. With rental properties, you are in control of what you buy, the improvements that will increase rents and what costs are passed onto the tenants, such as shared utility expenses and landscaping.
With the stock market, you lack anything tangible. With private lending and rental real estate, your funds are secured by a physical asset.
With the stock market, if we hit a down cycle, your profits are instantly lost. In real estate, in any economic downturn, private lenders have up to 50% equity already built in, and investors with rental properties keep netting their monthly cash flow from their tenants despite the dip.
With the stock market, you invest your retirement savings or cash on hand. The same is true for private lending. You can leverage rental properties four-to-one, sometimes five-to-one, meaning your $50,000 investment can buy you $200,000-250,000 in real estate. In a rising market, this is a good thing and will maximize your cash on cash return.
If you purchased $50,000 in stock that is now worth $200,000, you will pay taxes on that amount when you sell it. Rental properties provide opportunities for multiple tax advantages such as depreciation, deductions and a 1031 Exchange.
You don’t get to factor in added appreciation when investing in the stock market or private lending, but you do with a tangible asset like rental real estate. When you bring together the advantage of real estate being tangible, there’s really no comparison for the passive investor.
Assuming a $50,000, 15-year investment in the passive opportunities we’ve discussed in this article:
While both methods of investment allow investors to achieve real estate exposure, it’s a bit like comparing apples and oranges. One represents direct ownership, while the other is characterized by owning shares in a company whose sole purpose is to own and operate a portfolio of real estate assets.
It’s easy to fall into the trap of poor cash flow management as a beginning property investor.
Understanding all of the costs involved in acquiring and holding property can be difficult and you should always seek the advice of a professional accountant who knows about real estate investment to ensure you know exactly what you’re getting into financially.
You also need to make sure that you can afford to hold onto any property you buy.
– In other words, how much income will your investment(s) generate and will it be enough to cover your outgoings?
– If not, can you manage any shortfall?
Don’t forget to account for any contingencies, such as extended vacancy periods or unexpected maintenance costs.
A good rule of thumb is to allow about 10% of the property’s value for costs such as rates, land taxes, insurance, maintenance, and management fees
Real estate investing is a business that anyone can join. Making money in real estate is not an illusion created by successful real estate investors hoping to make a sale. It is a reality that can be your reality if you put in the effort and never stop asking questions.