Real estate investing is lucrative, and the market is appreciating at a quick rate. Those who are looking to enter the world of real estate investing have to understand its intricacies before losing a lot of cash.
The reason people hesitate when it comes to real estate investing has to do with the considerable capital required starting off.
This detailed real estate investing guide should provide ample information for beginners to understand what this process encompasses and what to look for when starting off.
The right foundation can do wonders for a person and their portfolio at the end of the day.
What Is Real Estate Investing?
Before doing anything else, it is best to start this guide with a brief description of what this investing option involves. The idea is to purchase, hold, and sell a property to accumulate net gains. These properties can vary in shape, size, and type as long as the ownership remains in the investor’s name and they are generating a net positive return.
The investment provides value in multiple manners which will be described later in the guide. These methods of earning money are the reason this investing method can be lucrative and is sought after around the world.
Countless variables come into play when deciding what is the right market to invest in just like it does with stocks and shares. The same methods apply on a grander scale when it relates to real estate as the number of assets are considerably lower.
Real estate investing means to add a high-value asset to one’s portfolio to maintain short and long-term net gains.
How Is Money Earned from Real Estate Investments?
An investor only cares about one thing, and that is the return on their investment. There is no purpose in having a flashy portfolio if there is no goal in sight. What is the end game? What is the investor going for when it comes to the property that has been invested in?
There are countless ways of earning money from the properties that are being invested in. Let’s take a look at these ways.
The first method: Rental Income
This is a simple process to understand. The property is put on rent, and then rent is paid on a monthly basis by a tenant. They can reside in the property based on the lease that has been signed, and all terms are disclosed in this agreement. This is often a good starting source of income for those who are looking to hold onto the property and let it appreciate in value for a long time to come.
The second method: Appreciation
The next method of earning money involves appreciation. This is a long-term strategy. The market continues to blossom (in the right areas) and will see a rise in value. All properties in the area will grow as land starts to diminish and demand increases. This is being seen in most major housing markets around the world. The property owner simply waits for as long as they can and gets a massive return on their investment. The net profit comes from the initial price and what was paid by the buyer. This can often end up being significant as the years roll by (often 5 – 6 figures in profit; means mostly tens of thousands dollars, or even sometimes more than $100 thousands).
The third method: Development of Land
Development of land is a method of earning money too. Those who are purchasing land that has not been developed can create something on it and use that as a means to generate income. It is a viable way to get things to work. The same goes for those who wish to sell the land to developers as some do. This is an investment in its right.
The fourth method: REITs
REITs are an option as well. A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate. Modeled after mutual funds, REITs provide investors of all types regular income streams, diversification and long-term capital appreciation. REITs typically pay out all of their taxable income as dividends to shareholders. In turn, shareholders pay the income taxes on those dividends.
Here is a graphical explanation of REIT:
They can be an excellent way to get greater value as long as the right investment is being made. Some prefer to do this instead of going down the residential route.
The making money methods through real estate are countless, and that is where an investor has to decide what they are comfortable with.
Types Of Real Estate Investments
Let’s move onto the types of real estate investments that a person can look into now that we understand how money is earned. A person that is entering the market will care about understanding these types and then making a decision about where to put their hard-earned money.
The first type is the one most people go for, and that is residential properties. These are houses or condos that are purchased. The property is in the ownership of the investor, and they can rent or sell it as required to make money. This is the one most beginners prefer to start off with.
The next type of investment is in land. This is where undeveloped land is purchased and is held onto for as long as possible. Some prefer to give it to others on rent or sell it outright. This is a great investment in the right areas where land is not as easy to acquire.
Commercial real estate investments are another option for those who are looking to get into this method of earning money. This can be costly at first, but provide a long-term income that is going to be significantly higher. For example, putting together a commercial complex with offices can lead to great rental deals in the buildings. Many downtown skyscrapers are built on this premise, and that is how they earn their money.
The same idea can be applied in retail settings where shopping malls are built. Stores are rented spots in the mall and pay a rental fee to the investor.
REITs can be used as a type of real estate investment as well. The goal is to buy a share in real estate along with other investors instead of purchasing an entire property. This reduces some of the risk and enables the investor to spread their wealth to multiple properties at the same time.
What To Look For Before Investing
Let’s say you have now got the courage to start real estate investing (that’s great 🙂 ), where do you begin? What do you look for when it comes to the variables that are involved in this form of investing? It is good to do your research as all great investors pour their heart and soul into this.
Here are the things you should look for:
- Assess Financial Situation
- Analyze Market (Prices, Neighborhood Value)
- Preference In Investment Type
- Proximity Of Investment To Your Home
- Asset’s Fit With Your Earning Strategy
Start with these five things and you will be well on your way.
Let’s break down each of these things that you will be looking for to see why they are important. A beginner investor has to look at these things and make sure they are paying attention as they do matter a lot.
Let’s begin with your financial situation. The main questions you should be asking yourselves are:
- Is your credit score in good shape?
- Do you have a pre-approved mortgage?
- How much can you pay in down payment?
- How much can you afford when it comes to monthly expenses (insurance, mortgage payments, bills, etc. ,)?
You want to have all of this mapped out as soon as you can.
The next thing is the market. You should start looking around as early as possible:
- Which areas are rising?
- What are the prices in that area?
- What would be a fair deal for the size you are looking for?
- How about the neighborhood and its value?
You want to have these things mapped out as well.
Now, move onto the next step which would by your investment type. Another set of questions to be answered:
- What are you looking to get into?
- Residential investments?
- Commercial investments?
- General land investments?
You want to have an idea, or you are not going to have a clue as to what you are aiming for.
Move onto the proximity of the investment you are going with. It should be closer to your home when you are starting off.
You want to have good control over it rather than winging things as you go. You don’t want to branch off to far away lands too early as it can be hard to manage – especially at the beginning of your real estate investment career. Of course, over time you can streamline everything and let a property management service take over, but that is not right now.
The last thing you will be looking for has to be the asset’s fit into your strategy. Make your real estate investment goal clear:
- What are you aiming for?
- Are you going for a rental income?
- Are you just looking to see an asset appreciate?
- Do you want a lot of leasing agreements?
- Are you just looking for a buy and flip deal?
It has to be decided before you jump in.
Benefits Of Real Estate Investing
What are the advantages of real estate investing for those who are on the outside looking in? You always want to know what the benefits are as that is what you are looking for more than anything else.
The main advantage is always going to be the money being earned. Whether it is a rental income or a general sale, there is money coming in and -potentially- lots of it. The earning potential is ideal for those who make the right investment.
The second main advantage is easy management. Easier to manage the real estate investments, as there is only one asset to look at. You are not moving from one share to another as other investment options can require. This is easier on the mind at times and can make things better for those who are doing this for the first time.
Another benefit is the idea of getting your home. Some people invest because they need a home anyway, so why not think about earning a bit as well. They know appreciation is great, so this is the investment to go with as time goes on.
Myths Associated With Real Estate Investing
Let’s move onto the myths as they do come up from time to time. Some things get passed on when they should not be. It is smart to dispel those myths and for investors to ignore them.
Multiple myths do get passed around, and they can do a lot of damage to an investor’s psyche as they misunderstand what is happening around them in the market.
The myth #1:
There is too much competition in real estate investment area, or you are too late to the game.
This is untrue because the market is rapidly growing. Some areas are still needing to be tapped into. Those who are not ready to look will regret it when they see how properties and their value increase down the road.
The myth #2:
The next myth is the idea of the economy going down and causing damage.
Real estate tends to be fine with the economy because things do go up. You have to understand risk is involved in anything, but to automatically assume a recession will smash everything into pieces is the wrong way of thinking.
Trust this real estate investing guide because these myths are untrue.
Risks Associated With Real Estate Investing
What are some of the risks an investor will have that are not myths? It is important to note down tangible risks that a person can have as an investor in the real estate market.
The Risk #1:
The first risk is the “object quality”. This is the idea of your property being an object that can decay. It might require maintenance over time, and these costs do add up. If the maintenance is not being done, the risk will rise and over time, it might lead to negative returns.
The Risk #2:
Tenants are another risk for those who are looking to go out and get a rental income. In the perfect world, tenants would not give a problem and checks would roll in at the end of the month without a word. It does not work like this, and those management issues have to be handled by the investor.
The Risk #3:
Financial risk is there. If the investment does not work out, a lot of money will have gone into the property. This is a risk that comes with assets that can provide massive value.
It is essential to look at this detailed real estate investing guide as the one-stop solution when hoping to get great results in the future.
There is one more thing to consider: Will you take your real estate license and cut the costs during the transactions (How to become real estate agent?)? Or you will work with experienced real estate companies, and utilize their knowledge (How to Utilize Real Estate Companies for Flips and Foreclosures)?
If you are new in this investment, I strongly suggest you to work with a Real Estate Company. You can find your future partner from our Real Estate Companies List.