Real estate investing is a common and popular way to create an income. It is done in a variety of ways:
- You can purchase property in a residential area.
- You can buy commercial or industrial real estate.
- Purchasing retail and mixed-use property is also a type of real estate investment.
The entire process can seem like a risky endeavor due to the volatile nature of the economy and the housing and commercial real estate market in association with the economy. Losing money on a real estate investment can happen to anyone. However, knowing the real estate investment fundamentals can put you on the right track.
There are a variety of ways for Real Estate Investing. What are they and how do they work?
Investing in Rental Properties
One way in real estate investing is to become a landlord. That means that you buy a property, residential or commercial, and then rent it out to a tenant or tenants. Because you own the property, you are responsible for all costs associated with the property including the mortgage, the costs of keeping the property maintained, fixes, as well as taxes and more.
The rent that your tenants pay will ideally cover these costs. To make a profit, there are two common ways.
- You can choose to charge more to produce a monthly profit.
- Or, you can opt to charge only enough to cover your costs so that when the property’s mortgage is paid, future rental income will be profit.
However, anytime you are a landlord, there is a risk of tenant problems.
For example, if a tenant fails to pay the rent, you have to cover it. Also, you will need to take the steps necessary to warn the tenant, and, if needed, to remove the tenant. This process is not always smooth. Removing a tenant, for example, can be a challenging and lengthy process. For such cases, it is a good idea to work with a Real Estate Attorney.
Also, if you are unable to replace a tenant once a tenant has left, those costs still need to be covered.
Furthermore, if a tenant damages property, you’ll have to pay to fix it. Plus, property repairs will fall on you unless you hire a property manager to do the jobs for you.
Real Estate Investment Groups
Investment groups for real estate are ideal for people who want to own rental property but who don’t want to be landlords.
The way it works is that a business buys or builds apartments or condominiums, for example. They then sell spaces from these properties to investors who become part of the real estate investment group. However, the investors do not have to manage the property. That falls on the company who initially purchased the property. The company will, however, take a percentage of the monthly rent each investor receives.
Flipping Property as Real Estate Investing
Another way to invest in real estate is by “flipping.” This means that you buy property with the sole intent of selling it for a profit.
Flipping is a short-term investment opportunity that may or may not work as planned. Basically, you are betting that the area where you bought the property will increase in value, giving you a profit on the amount of money you spent.
However, if the area does not increase in value, you could be stuck with a property that you can’t sell. When the economy is healthy, house flipping is a great endeavor. But when the real estate market is slow, flippers can sit on property they purchased for months or even years.
What Are Some Tips For Sound Real Estate Investments?
1. Speak To An Accountant Before Buying Or Selling Any Property
Before you purchase real estate, it is highly advised that you talk to an accountant who specializes in the real estate market. Such an accountant will advise you on the costs involved in real estate investing including taxes and depreciation.
He or she can help you come up with a budget and a plan for earning the highest possible income. They can make sure you’ve allowed for all costs and all debt that enters into play. They can let you know if the property you want to buy is a reasonable investment or if you should look into something else.
2. Understand The Pricing Of The Areas You’re Interested In
It is critical to study pricing as a real estate investor.
- What is happening to the price of homes in an area, for example?
- Are they increasing or are they decreasing?
- What are the costs of the homes as compared to the costs of homes in neighboring areas?
- Are there new developments going up, such as shopping centers or banks? This could mean that the area is doing well financially and is attracting new buyers.
- Or, have things become stagnant in an area?
Better to study on an area before making a real estate investment. I suggest you to focus in only 1 area, especially when you are just starting to the real estate investments. After some time you will be an expert, and then you can start looking other areas as well.
3. What Are The Taxes Like?
Another consideration when investing in real estate is understanding taxes in the area. Does the area have lower property taxes compared to neighboring areas? Or, are there any signs that taxes will go up?
After purchasing a property, you must have money set aside to take care of any and all tax obligations that come up.
4. What Are The Schools Like?
The quality of schools in an area is essential for a real estate investor who is investing in homes or condos. Areas with good schools are attractive to home buyers and is a main reason for people with families or who wish to start families.
5. Think About Unexpected Costs That May Arise
There are upfront costs in real estate that you must be prepared for when investing, but there are also unexpected costs that you must manage.
A tenant may damage property, but what about other costs that you weren’t expecting? There may be problems associated with mold, electrical work, roofing, plumbing, heating and air-conditioning, and more. Once you have bought a property, these costs are your responsibility.
6. Choose a Property But Don’t Wait for Perfection
The goal in buying real estate is not to buy the first thing you find but also not to wait until you have the “perfect property.”
Your goal is to find a property that best fits what you’re looking for and then to have the resources and tools to settle on that property if your gut instinct is telling you it’s the right one.
Buying real estate is not like shopping for a car. There will not be lots of identical property available for you to purchase. That one property that you like is one you should choose if the factors of the property fit what you’re looking for.
7. Pass on Property That Requires Too Much Time or Management
The flip side of choosing the right property is not purchasing a property that requires too much time or management. Buying a property in a bad neighborhood could prove to be a bad investment. Purchasing a property that is populated by transients who have no real interest in the space can prove to be a bad investment. Start with a good foundation when you are investing in real estate.
The best way to succeed in real estate investing is to do your homework and to understand what is involved in the property that you wish to purchase.
Avoid risky investments that have the high possibility of leaving you with less than what you started with. Don’t forget; investing in real estate is intended to be a money-making enterprise. Make all your decisions logically. If the numbers don’t add up, move on to other real estate properties for investment. There is always another opportunity.