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How To Invest In Real Estate: An Introduction
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Introduction To Real Estate Investing
Real estate investing is the purchase, ownership, management, rental and/or sale of any type of real estate for profit. It refers to any property owned solely for the purpose of generating profit, either through rental income or through market value appreciation. A real estate is an asset form with limited liquidity relative to other investments. Any type of real estate investment requires high amount of capital and is also highly cash flow dependent to call it a profitable investment.
Investing in real estate is commonly touted as a great way to become wealthy. And it is true that it has long been a road to financial success, remaining so even today. There are a number of benefits of buying investment properties over starting your own business. In this article you will get to know why investing in real estate is a great step towards achieving that much desired financial freedom.
10 Reasons Why You Should Invest In Real Estate
1. The Relatively Low Risk
Real estate investing has a relatively low risk. The value of investment properties may decline over time if the neighborhood is going downhill, but you should be able to see that trend and sell the properties long before the home is worth half its prior value. Stocks could lose 50% or 90% of their value overnight after key information is leaked to the public.
Another great benefit is the protection insurance provides you. If a retail business floods, you’re likely shut down until you can clean up, and even then, customers may not come back in time to generate enough cash flow to stay open. About 40% of businesses don’t reopen after a disaster.
If you own commercial real estate, the fact that one business closed doesn’t kill you. You simply rent out the building to a new tenant. If residents move out of a property, there will be new tenants to move in once the rental property is cleaned up. Therefore, this type of investment is relatively safe as compared to other high-risk, high-return strategies.
If you invest in a startup business, you may not have any say in how the firm is run. If the business collapses, you have nothing. If you don’t like your property management company, you can switch. If the tenants are not paying the rent, the courts side with you when you evict them for non-payment. Depending on how you write the lease, you can remove troublemakers rather quickly whether they’re generating constant calls to police or not maintaining you rental property.
2. Inflation Protection
Real Estate Investing by default provides significant protection from inflation. When inflation is at 10%, your property is worth 10% more at the end of the year. If you’ve structured your leases to index at the rate of inflation, you’ll be able to increase your cash flow at the rate of inflation. Compare that to losing money when bonds pay less than the rate of inflation.
3. The High Return on Investment
According to Investopedia, commercial rental real estate has averaged a 6% ROI in recent years while residential and diversified rental portfolios averaged 7.5% ROI. However, that’s an average that takes into account underperforming rental properties with high vacancy rates or a lot of non-paying tenants. It is certainly possible to see 10% ROI on the purchase of investment properties year after year, not including the profit when the property is eventually sold.
4. You Make Money In Multiple Ways
Owners of rental properties receive rent from their tenants. They can see the benefits of investment property’s increased value when they sell it, something they could increase through careful management of tenants or thoughtful add-ons. A less obvious benefit is the fact that they build equity with each mortgage payment. You might be able to offer the rental property to a variety of tenants, though your jurisdiction may limit renting the property out on vacation rental sites like AirBnB.
This may prevent you from earning a killing during tourist season or getting top dollar on a property close to major attractions. In other areas, you could rent it out this way for top dollar but become subject to occupancy taxes and additional regulatory oversight.
5. Significant Cash Flow
If you invest a sum of money in bonds, you’ll get perhaps a little more than the rate of inflation back. If you buy dividend paying stocks, you may or may not receive more money back than the rate of inflation. Note that many stocks don’t pay dividends at all, and those that do may not pay much back. Instead, people hold it out of the hope they’ll be able to sell the stocks at a profit later. Conversely, rental properties generates significant cash flow monthly.
6. The Fact that Others Will Loan You Money to Do It – At Good Rates
Financial institutions see real estate investments as low risk. The mortgage rates for investment properties are lower than you’d pay for the mortgage on a personal residence. However, you’ll pay one to three percentage points more in interest for the rental property. If you’d pay 4% for a personal mortgage, you’d pay 5% to 7% for the rental property.
Conversely, the stricter loan-to-value ratio for rental properties means most people don’t have to pay mortgage insurance because they had to put 20% to 40% down. If you want to invest in real estate with no money, you need to develop the ability to recognize, understand and even take advantage of other people’s money. You may still need some money for making a down payment, when opting for financing through conventional loans.
7. The Favorable Tax Treatment
You can deduct mortgage interest as a rental expense on your taxes. You can write off legitimate expenses for maintaining your investment property, and depreciation could significantly reduce the rental income you have to pay taxes on. You can deduce management costs, cleaning, pest control and insurance costs. You will pay capital gains tax on the increased value of the property when you sell it.
8. The Diverse Strategies Available to You
Reality TV makes it seem like buying, renovating and selling residential real estate or “flipping” the properties is the most common method of making money with investment properties. This strategy is a viable one if you find the true deals, manage expenses and sell the investment property quickly for a profit. However, one must be careful not to end up owning their job as a handyman, earning as much per year flipping houses as you could working for yourself without the risk of losing tens of thousands of dollars because you can’t sell the investment property for what you put into it.
Buy, hold and lease is a far more common money-making strategy in real estate investing. The investor may buy the property and have it fixed up, but they then rent it out to tenants and receive steady cash flow from the property. Another strategy is buying a property someone else bought, fixed up and leased out. The new owner doesn’t have to search for a tenant, and the seller can sell the property to another investor for more with the tenant generating steady cash flow from the rental property than if they tried to sell it on the open market.
9. Its High Upside Potential
A piece of real estate can have significant upside potential. Commercial properties, for example, can be renovated and underutilized sections developed to generate far more cash flow than it was in the beginning. Management changes like evicting those that don’t pay rent, improving the security of the building and little “best in class” features that don’t cost much but attract a higher class of tenant are ways to earn far more from a property than the prior owners.
This is true whether you’re talking about commercial or residential real estate. For example, you could renovate both a mother-in-law suite and main residence to create two rentable units. Or renovate the break area on the first floor of a commercial building, renting it out to a third party to sell concessions. Another option would be renting space in high traffic areas out to vending machine route owners.
10. The Opportunity to Minimize Costs
Owners of investment properties have a number of potential ways to minimize their costs. One is the triple net lease. The investment property owner still owns the building but doesn’t have to pay the mortgage, basic property insurance or property taxes for it. The tenant receives a lower rental rate in exchange for taking on this burden. They may end up taking care of many small repairs in the property because it is to their benefit. Property owners can also benefit from economies of scale, such as when they hire a property management company to manage all of their rental properties.
How To Invest In Real Estate For Beginners
How do I start investing in real estate? This is the question that haunts many people who want to invest in real estate but have never invested before. Investing in real estate is a tried and true way of building wealth. Forget the infomercials on tax liens or books talking about how you get a house free from the government. In this article we shall list and discuss 8 great ways to invest in real estate in 2019 that really work.
Investing in real estate is definitely a good idea because real estate offers a unique combination of safety, steady cash flow and strong odds of high capital gains. You may earn less than investing in the stock market at its peak, but neither can you lose everything. Investing in real estate can generate an ongoing passive income, and it can prove to be a good long-term investment if the property value increases exponentially over time. You may even use it as a part of your overall strategy to begin building wealth.
If you are a beginner in real estate investing, it very important to read good real estate books and learn from the savvy investors who have made fortunes by investing in some of the best real estate markets in the country.
Following the housing market decline in 2007, single family rental properties became favorable options for investors, saving in construction or refurbishment prices. The quick turnaround for an owner to rent out their property means cash flow is almost immediate. Single family rental homes have grown up to 30% within the last three years. Almost all the housing demand in the US in recent years has been filled by single family rental units.
8 Simple Ways To Invest In Real Estate
1. Buying Properties and Renting Them Out
This is the classic approach in real estate investing. You could buy a house or condo and then rent it out to tenants. The tenants pay the rent, and if you have a mortgage, their payments help pay down the property. This method of real estate investing has a number of advantages.
It is seen as rather low risk by banks, so they’re almost as willing to lend money to you to become a landlord as they are for you buying a new home of your own. If you’re moving out of a house, you can easily become a landlord by renting out your old residence. Or you could learn about land-lording by renting out your garage apartment or mother-in-law suite.
Another version of this strategy is tapping into short-term rental sites like AirBnB. You can buy condos, townhomes and single family homes to rent out on these sites. Note that this is only an option if local regulations don’t prohibit it. If the rules do allow it, you may still have to register with the city, pay hotel taxes and meet other legal requirements.
If you live in the house, you’ll almost certainly be able to rent out the guest bedroom while you’re there or the whole house while you’re vacationing without any additional paperwork, including in cities that outlaw buying a house to rent out to a series short term visitors.
2. Buying Properties and Offering Them as Rent-to-Own
This strategy is similar to the classic model of renting out the property but with a twist. The difference is that the tenants are paying money toward the final purchase of the home. This tactic has a number of benefits. The tenants who take that deal are much more likely to take care of the property. If you want to invest in real estate knowing that the tenants won’t wreck the place, this is a good option.
They’re less likely to move out into a home of their own, because they probably don’t have the good credit necessary to get a mortgage in their own name. You can draw up rent-to-own contracts that result in them owning the property in 20 to 30 years, so you’ll be out of the landlord business when you’re probably ready to retire. If they fail to pay the rent, it is generally easier to evict them than if they weren’t paying their mortgage payment to you.
3. Buy and Rent Out Vacation Property
This real estate investing strategy may give you the ability to enjoy a house on the beach or lakeshore when you want, while you’re still paying the insurance and mortgage via short term rentals during the rest of the season. If you already own a vacation property, you could ease into land-lording by renting out the vacation property you already own.
You have to be careful drawing up the rental agreements, especially if you want to be able to use the property from time to time. The income you’ll receive for the property depends on how desirable it is to tourists. The downside with this approach is that the property has to be maintained year-round, though it only generates income part of the year.
Furthermore, relatively few properties are attractive to tourists. If you make a mistake in pricing your property, you may miss out on the few weeks of the year where you’d otherwise generate income or you’re earning less than you might have made.
4. Buying, Renovating and Flipping
This is the real estate investing method you see touted as a guaranteed money maker on many reality shows. In theory, if you buy the property cheap because it needs renovations and make the renovations, you can sell the property for a hefty profit.
However, this approach comes with a number of risks. If you pay too much for the property, it is almost impossible to make money. If you spend too much on the renovations, you’ll wipe out your profit margin. If the property is simply slow to sell, every month you pay carrying costs like the mortgage likewise eat into your profit margin.
If you overdo the renovations, whether putting in too many bedrooms or installing a luxury kitchen and bathroom in a modest working class neighborhood, no one will pay the price you’re asking for the property.
Another factor to consider is the risk of owning your job.
A number of general contractors and handymen think that house flipping is a great way to monetize their skills. The problem is that they may clear as much money a month as they do at their jobs fixing and flipping homes, but they risk losing everything if they are late finishing the project or make design choices that scare away home buyers.
5. Owing Shares of Real Estate Companies
A REIT is a real estate investment trust. REITs have a number of advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold. When you own shares in a real estate trust, it is generally as easily sold as shares of stock.
You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls and industrial parks. It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything. The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders.
A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too. They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies. Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an ETF that invests in REITs. You’ll have lower returns, but there is less risk than investing in a REIT. In every case, you don’t have to invest in real estate directly, much less manage it.
6. Being an Investor in Real Estate Projects
Once you’ve hit about ten rental homes, the work managing them is so great that you have to hire a property manager. Around this point, you could sell all of the investment properties and invest in a bigger piece of real estate. For example, you could use that money to buy an apartment building.
Or you could invest in commercial or industrial real estate. When you invest in real estate, you’ll have a say in the project from the very beginning. What type of renovations will they do? What criteria will they set for clients? How will the property be marketed?
The potential risk of being a partial owner of rental property is that if someone sues the building owners, you could be on their list unless a carefully constructed legal liability company shields every investor. The legal problems of these deals can become nightmares, whether you have to find a way to liquidate someone’s share to meet the terms of their divorce or settle their estate. Another consideration is liquidity.
With this form of real estate investing, the money is typically locked in for the long-term. You can’t get that money out before the building is sold or someone else buys you out. Problems can arise when different partial owners disagree on what to do with the property, such as when some want to sell and others want to hold the property.
When you invest in real estate, it is best to either have an air-tight legal document that covers all the contingencies and an expert project manager or a close partnership with equally good legal documents.
7. Becoming a Lender to Investors
Instead of owning 30% of a house being fixed and flipped, you could simply become a lender to those doing the work. One advantage of this tactic is that the borrowers owe you the money regardless of the success of their project. You don’t lose money if the house doesn’t sell for as much as expected.
Conversely, if they do a bad job and go bankrupt, you might not get your money back. A strategy with less risk is serving as a hard money lender, offering the modest amount they need to renovate the property instead of giving them all the money they need to buy the property. The biggest benefit of this type of real estate investing is that you have no liability.
If the investors who own the property are sued, you aren’t liable, because you’re simply a creditor. If you take the time to draw up the proper paperwork, you could protect your real estate investment by having a lien against the property, too.
If you invest in real estate this way, recognize that you can diversify your holdings by investing modest portions in several different projects. The people buying the property then either need to find other investors or invest their own money.
8. Becoming a Bundler
Bundlers are the ones who gather together a group of investors to fund a project. Bundlers may take an equity stake in the project like the other investors, or they may be paid for their efforts. This is an advanced strategy for investing in real estate, and it requires good legal advisors by your side. The legal complexity of these deals is a risk in and of itself. Yet filling this role allows you to bypass nearly every aspect of the process of finding, buying, renovating and renting out the real estate.
We’ve addressed the eight most common methods of investing in real estate, though other, more esoteric and high risk methods exist. We’ve outlined the pros and cons of each proven method of investing in real estate so that you can find the one that works best for you.
Maybe you have done a bit of real estate investing but want to take things further and make it into more than a hobby on the side. It’s only wise to think about how you can and should be investing your money. If you invest wisely, you could secure your future. If you are a beginner in the business of cash flow real estate investing, it very important to read good books on real estate.
Most investors naturally gravitate to residential property investment. When looking for the best real estate investments, you should focus on markets with relatively high population and employment growth. Both of them translate into high demand for housing. If housing supply meets housing demand, real estate investors should not miss the opportunity since entry prices of homes remain affordable.
Buying an investment property is different from buying an owner-occupied home. Investment properties are designed to make money as rentals, which means you must look at it solely as an income producing entity just like any other business.
Whether you are a beginner or a seasoned pro you probably realize the most important factor that will determine your success as a Real Estate Investor is your ability to find great real estate investments.
According to real estate experts, buying in a market with increasing prices, low interest, and low availability requires a different approach than buying in a cooler market.
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*Remember, caveat emptor still applies when buying a property anywhere. The information contained in this article was pulled from third party sites mentioned under references. Although the information is believed to be reliable, Norada Real Estate Investments makes no representations, warranties, or guarantees, either express or implied, as to whether the information presented is accurate, reliable, or current. All information presented should be independently verified through the references given below. As a general policy, the Norada Real Estate Investments makes no claims or assertions about the future housing market conditions across the US.
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