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.
If you’re interested in getting involved with real estate investing, you have a vast number of ways to go about it. Today, one of the biggest trends in real estate investing is purchasing cheaper properties in order to make renovations and flip them for a profit. However, one of the long-standing methods of purchasing properties with the intention of renting them out to generate a steady flow of income continues to be popular. Before you embark on this type of investment, there are several rules you need to learn so you can be successful in your real estate investment venture.
Establish an Exit Strategy
Although buy and hold real estate investing is intended to be used for longer term gains, it’s still important to have an exit strategy in mind, even before you begin buying property. By creating a plan for how or when you are likely to exit this type of investment, you can clearly get an idea of whether this type of investment is the right choice for you. It also ensures you have done your research and are fully prepared for your duties as a landlord. Be sure to consider what you will do if the housing market experiences another crash or what you intend to do if the property isn’t turning a profit as expected.
Utilize Your IRA
While most people try to get a traditional mortgage loan in order to fund their buy and hold real estate investments, this may not be your wisest choice. If you have a self-directed IRA, you are able to choose the ways your money is invested, including buying investment properties. You may be able to purchase residential or commercial property, as well as undeveloped land, as part of your investment portfolio through this type of IRA. However, it’s important to proceed carefully because you could incur tax penalties that aren’t worth the investments you’re trying to make. Keep in mind you won’t be able to live in the property if you take this path and you must have a balance in your IRA that can also cover future expenses, such as repairs and taxes. You also cannot give yourself a salary for managing the property yourself.
Evaluate the Property’s Potential
Just as you would carefully consider all factors before buying a home to live in with your family, it’s important to put the same amount of consideration into buying rental properties. After all, you don’t want to invest money into a property that is in a poor location that is unable to perform in a way that not only gets back the money you’ve spent, but also turns a profit. When you’re purchasing commercial properties to rent out, you will need to evaluate traffic patterns and ensure the right number of people have access to that property in order to attract customers. Residential properties should be located in areas in high demand and with reasonable average rent prices in order to be successful. These are all factors any lenders will also look at before they approve you for a loan.
Purchasing property as a buy and hold real estate investment can be a lucrative option, especially if you’re more focused on longer term investments. However, this isn’t a process that should be taken lightly. In fact, there are rules that should be followed and considerations to make to ensure you’re getting the best possible return on your investment.
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