You can make money in real estate by investing in four different ways: By real estate appreciation on properties you own, via cash flow from rentals, from commissions if you are a real estate agent or broker, and by investing in services offered in commercial buildings such as apartments complexes or businesses you have an interest in.
The Pros and Cons of Real Estate Investing
Buying property is one of the most lucrative aspects of real estate investing. However, there are risks involved. The risk is lower than the stock market and you could have steady cash flow. You also earn tax breaks and benefit from long-term ventures. However, the cons include:
- Returns are not as high as those in the stock market.
- You need quite a bit of start-up cash.
- Properties are not easily liquidated.
- If you invest in apartment complexes, maintenance and dealing with tenants are often challenges.
Tips for Beginner Real Estate Investors
Before you even start with your first investment, you should do thorough research on investing. These tips are just some of the factors you should know before you plunk down your hard-earned money.
1. Know and Understand the Costs Involved in Any Type of Real Estate Investing
Regardless of how you decide to invest in real estate, know what costs are involved. If you are investing in REITs, know if and what fees you need to pay. If you buy a property to flip it, make sure you know how much you will need to fix that property up so that you can get the best return on the property. For services, you should know what licenses your city, county and state might require. And, with any type of real estate investment, know how your investments will affect your taxes.
2. Determine How You Want to Invest
How you want to invest means you select certain property types. If you want to become a landlord, you can choose apartment complexes, commercial properties, or you can buy several single family homes to rent out.
3. Know Your Location
It’s easy to decide to buy a less expensive home in a less-than-stellar neighborhood. But, you have to take several things into consideration, including the value of the property. If you have to put $60,000 into a property to get it ready to rent or sell, can you get enough to make a profit? If you paid $25,000 for a house and put $60,000 in it, but you can only sell it for $75,000, you’re going to lose out. Furthermore, if you can only rent it for $500 per month, but your mortgage payment is $550, you’ll end up losing out instead of creating an income.
4. Risk Management
As with any business, investing in real estate comes with legal risk because you are dealing with people. Setting up a company helps you mitigate some of that risk. If you set up a corporation and have the properties buy the corporation, those who may want to sue you cannot come after your personal assets as long as you set the corporation up properly. You should always discuss risk mitigation with a business attorney. A company also helps you control and manage your finances since you cannot co-mingle the money with your personal money.
Plan to start out small. While there is a sharp learning curve when going into real estate investments, it doesn’t have to be intimidating. When you start out small and do your research, you’ll be more likely to succeed.