Your Guide To Getting Into Real Estate Investments
Are you looking for a great way to invest your money but don’t know where to start? Read here for a guide to getting into real estate investments!
Real estate has made many thousands of novice investors build wealth beyond their wildest dreams. So how did they do it?
Well, the answer to that question might seem clear – they invested in real estate, right?
However, the most common thing people want to know when getting into real estate is how did others make their fortune?
There are many paths you can take when investing in real estate.
You can buy and hold investment properties. Or, you can buy commercial property. Property such as apartments or commercial buildings. And, you can buy and flip properties, or you can invest in real estate investment trusts.
Here, we give a comprehensive guide for getting into real estate.
Getting Into Real Estate the Right Way
Real estate has a long history of providing an excellent return on investment.
Markets go up and down, but real estate prices have a solid track record of continuing to rise across the nation. When you invest in real estate, you earn from the equity growth of your asset and the positive cash flow when you rent it out.
Equity is the difference in value between the purchase price of the property (or what you owe) and the current market price. For instance, if you purchase a property for $300,000 and in a year that property rises in value to $350,000, you have built $50,000 worth of equity.
Positive cash flow is what you put in your pocket each and every month after deducting all expenses from your rental property.
During the housing market boom of the early 2000s, people saw the value of their property increase double digits in only a few short months.
This explosion in property prices across the nation prompted many who were just getting into real estate to sell for a profit. And, reinvest those profits into more properties.
The equity they built in their properties offered savvy investors a way to leverage the capital they needed to generate real estate profits, over and over again.
Now, housing prices can go up or down depending on the region where the property is located. Considering local employment opportunities, or the state of the nation’s economy is iméortant. However, what we have seen after the last market decline, and what we continue to see, is that property values will go up – eventually.
Buy and Hold
When you are getting into real estate, you will hear that the buy and hold method is one of the best for creating wealth.
The buy and hold method is the process where you purchase a residential or commercial property and keep it until the price increases or you are ready to sell. Typically, a buy and hold property is one where the investor intends to lease or rent out the property to a tenant and become a landlord.
This strategy can be quite profitable since the tenant is essentially paying down the note (mortgage) held against the property for the owner.
When a person is just getting into real estate, they typically use the buy and hold technique. This is a more conservative approach to investing. And, it is not without its issues.
Remember that owning a rental property comes with certain responsibilities.
The owner is generally responsible for the upkeep of the physical condition of the property.
Some examples of maintenance costs are:
- Trash Removal
- Basic Repairs
The cost of maintenance must be taken into consideration when deciding on the type and location of an investment property.
The property must be located in an area where the owner is able to charge enough rent to cover the cost of any mortgage, plus maintenance costs.
Commercial Property Buying
Commercial property buying is also a good option for first-time investors who are considering getting into real estate.
When people think “commercial property,” what may come to mind is a large office building or maybe a factory. However, many investors typically start with a small commercial building such as a strip mall, or industrial building.
Similar to a buy and hold approach with residential property, most investors purchasing a commercial property intend to lease the property to a business or person. There are advantages and disadvantages to owning commercial properties.
Unlike residential properties where most maintenance responsibilities fall on the owner, a commercial property investor typically allows the tenant to make improvements and manage most of the maintenance of the building. These are called “tenant improvements.”
Tenant improvements are typically performed by the entity leasing the building.
These improvements may include:
- Window Coverings
- Carpet & Flooring
- Offices & Storage
- Light and Plumbing Fixtures
Many times, a commercial property owner will work with a tenant in sharing the cost of specific improvements to the building if they will increase the property value.
Commercial buildings typically demand a higher rental rate than residential properties. This increased revenue may help the investor to pay down the note quicker than would be possible when getting into real estate with residential property.
House flipping has always been a popular way to gain a quick profit in real estate but made more so after the housing bust of 2009.
The nation was in the midst of a foreclosure crisis, and investors were snatching up residential properties as fast as they could find them.
The premise behind house flipping is to find a property under market value – usually deteriorated – and purchase it, renovate it, and quickly resell it for a tidy profit.
House flipping has recently become more popular due to certain reality television shows that tend to make the process look easier, and in some instances, more lucrative than it may be.
The reality for people just getting into real estate is that house flipping takes a fair amount of knowledge about how the strategy works.
If you want to flip houses, you are going to need:
- Expense and budgeting experience
- Knowledge of construction
- Experience with interior design
- Contractor relationships
- Realtor relationships
If you have these qualities, then investing in house flipping may be a good fit for you in earning a comfortable income through real estate investing.
The most challenging part of the house flipping strategy is finding an undervalued property in your local market. Typically, house flippers work with local realtors to find ideal flip houses before they hit the market and are offered to the general public.
Realtors present the investor’s offer to buy the property “as is,” generally using an all-cash offer.
Usually, a cash offer is required because the property is in such poor shape, that the owner would have to spend thousands in repairs before listing it with a realtor. The investor, therefore, has to do his or her due diligence on the property before deciding on buying.
Is the property in a sought after area? Does the house need significant repairs, and if so, what will be the total cost of repairs?
Who will be the prospective buyers of the property after it is renovated? Will it sell quickly?
Answers to these questions play a large part in determining if the property warrants the time and effort, and frankly, the risk of an investment.
While there is plenty to be made on flips, many an investor getting into real estate have lost a bundle on house flips that turned out more costly than first realized.
House flipping can be lucrative but are typically reserved for savvy, well-seasoned real estate investors who understand the costs of renovation.
Real Estate Investment Trusts
Real Estate Investment Trusts or “REITs” are another way that people who are getting into real estate can get solid returns on their investment.
REITs are an investment vehicle – a fund, that focuses on owning, holding, and churning commercial or residential property.
An investor can take part with as little as $1000, $5,000 or $10,000 and receive monthly, quarterly or yearly dividend payments (also known as distributions)based on the fund’s annual profits.
The investor participates via a private placement memorandum. The memorandum provides a prospectus of the fund, including the amount of return expected and the types of properties held in the trust.
The fund manager acquires real estate assets for the trust. Many REITs concentrate their core portfolio on office space in urban locations across the U.S. with higher rental rates.
However, REIT properties could include:
- Office Buildings
- Medical Centers
- Industrial Buildings
The fund then collects rents and manages the properties, ensuring full occupancy and competitive lease agreements are in place. After three to seven years, when values increase, the properties are sold off at a profit.
Depending on the type of REIT, an investor can expect returns based on the gross income received by the trust. The gain can be a set rate, say 6%, or annualized based on revenues.
Although a trust is not guaranteed to make money, a REIT can provide a safe vehicle for those just getting into real estate investing.
Real Estate Financing
Now comes the fun part, finding the financing for your investment.
In the real estate business, there is a term that often gets lobbed around – “other people’s money” or “OPM.”
Using financed capital when getting into real estate investing is the most popular path that most investors use.
There are several types of financing for those looking to buy investment properties.
Use Your Equity
If you are already a homeowner, you can tap into the equity of your primary residence to help fund you getting into real estate.
When taking this route, the property owner must consider the cost of funds. The principal and interest loan payment and fees you are paying on your borrowed start-up capital must be calculated into any prospective investment.
Since a mortgage on a primary residence usually comes with a better rate than if financing an investment property, some investors use this process as a better option to offer start-up funds when getting into real estate.
One thing to consider when pulling equity out of your primary residence is not to overburden yourself with excessive debt on your home.
In other words, don’t bust your budget.
It is a good idea only to borrow what you need, and keep your loan to value well under the full value of your home. This way, you can better survive any potential financial difficulties, should they arise.
Traditional financing includes working with a bank or residential lender to get a loan against a prospective investment property.
Financing rates are typically higher on investment properties and the loans may take longer to fund if you are just getting into real estate investing.
Investors must also understand that a bank will not loan 100% of the purchase price on an investment property, requiring a buyer to put up a down payment.
The maximum loan to value offered for an investment property purchase is roughly 85% of the purchase price. The investor, therefore, must come up with 15% of the purchase price as a down payment.
This type of situation is where an equity loan might come in handy. An equity line of credit or loan against your primary residence can help fund this down payment, as well as renovation costs with a lower rate than hard money.
Hard Money Loan
A private money loan or “hard money” refers to investment financing available to qualified borrowers from private lenders or an investment fund.
The money comes with a higher interest rate (sometimes double that of traditional financing) and higher fees than conforming loans.
House flippers seek out a hard money loan when they find a “quick flip” property or other deal requiring immediate financing, as these deals can close in as little as ten days.
This option allows investors to borrower more money than traditional financing, that can then be used to renovate the property or pay for upgrades.
However, this benefit is not without a cost. Private money lenders often tack on extra points (fees) or require a minimum number of payments, which allows them to recoup more interest on a short-term loan.
Private lenders often base their approval decision not on the credit history of the borrower, but instead on their experience with house flipping, past successes in real estate investing, or the neighborhood where the property is located.
Hard money lenders have more flexibility in loaning money to those getting into real estate because they don’t have to adhere to bank rules. It’s their money, so they make the rules.
Building a strong relationship with an experienced and established hard money lender, will pay dividends down the road for when you come across that “perfect deal” that just can’t wait.
Risk and Reward
Real estate prices vary based on a variety of indicators. A shaky economy, high unemployment, disasters, international crisis, access to capital, all contribute to the ebb and flow of property values.
Investing in some aspects of real estate, especially property buying, takes a fair amount of money up front or an investment partner.
This fact leads many investors to pull money from retirement, from savings, or from the equity in their home to get started.
While this is a sound approach and can offer better returns, it is still essential for each investor to understand how their situation is affected by this type of investment.
As long as the investor understands the risks going in, does his or her research, performs the proper level of due diligence, and is not afraid to learn from others, the rewards could be life-altering.
While challenging at times, real estate investing presents a financial opportunity that doesn’t come around too often. Essentially, a chance of achieving financial freedom.
If you are ready to get rolling, start by learning more about the various investment strategies. This should make you feel most comfortable undertaking, and taking the steps towards investing.
Talk to others who are considering getting into real estate. Join a local real estate investment group or an online community to hear what others think.
The real estate market is booming, the economy is moving forward at a good clip, unemployment is low, and there is currently a shortage of properties available to buyers.
There has never been a better time to begin your journey into real estate investing.
So why wait?
Start your research, use online tools to run the numbers, and begin developing an investment strategy that will help you reach your goal of financial independence through real estate investing.