Beginner’s Guide For Real Estate Investing
Investing in real
estate can be exciting and profitable, as long as you understand what are you
doing. But how can you deal with real estate investing as a beginner?
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Here is what’s appealing about real estate investing: you can do it with minimal or no formal training at all. You don’t have to have an advanced real estate degree to begin your career. You don’t need to finish some special seminars and workshops or attend conferences to get into it. In fact, you can find a lot of helpful resources online.
Real
Estate Investing for Beginners – How to Start The Business
1. Decide what type of investment strategy you want to
follow. Would you want to go traditional or would you want to go with the
Airbnb craze?
2. Determine the amount of money and
time you are willing to spend on your preferred investment strategy and
rental strategy.
3. Create a working budget. For fund investors, it’s
normally at around $1,000-$5,000 but for a direct real estate investor, it’s a
minimum of $50,000.
4. Choose the investment strategy that fits your
schedule and financial resources. REIT investing requires less time and money
compared to direct real estate investing.
5. Set aside funds for other investment-related
expenses because they are unavoidable.
The
Best Ways to Invest in Real Estate
Although there are plenty of ways to make
money in real estate, rental properties qualify as the best example of
‘real estate investing’. Wholesaling properties and flipping houses can
give you a lot of income but they demand too much, they’re almost like a
regular job.
Rental
properties can keep you earning for years, while wholesale and flipping stop
giving you income once you’ve sold the property.
Keep reading for more detailed descriptions and links
to more information.
1.
Rental Properties
The basic concept of rental property investment is
that it provides you an income through monthly cash flow and the eventual value
appreciation. Cash flow refers to the money you make from the rent after
deducting all the related expenses. The expenses are
usually taxes, insurance, maintenance fees, allowances for vacancies, HOA dues,
and mortgage payments. If you are able to acquire a rental
property below its market value, that is a huge advantage in real estate.
They say that in a case like this, you’ve already made money when you bought
it.
You can also look for properties that need work or
those are poorly managed. You buy and improve them and you can make more
money. Also, you should not really count on appreciation as a source of
income but it is a nice bonus if market values go up significantly. The
downside about rentals is that the market is very selective –
it is not always a good fit for every area. Generally, the more expensive
the area, the harder it is to find good rentals.
What are the different types of real estate property
can you invest in?
2.
Flipping Houses
If you go to its most basic concept, flipping houses
are really simple because it takes just three major activities.
You buy a house, fix it up and sell it with enough margin to give you a
profit. The question, however, is in the execution where things get a bit
arduous. For one, there are many expenses to consider: financing
costs, carrying costs (utilities, insurance, taxes, HOA dues), acquisition
costs and of course, selling costs.
Many new investors wrongly provide funds for the
repairs but that is only part of the total cost of flipping a house. The
mere act of finding a cheap enough house to buy for flipping is hard
enough. You also have a lot of competition for flips but you can search for deals through MLS,
auctions, wholesalers, houses for sale by owners, and direct marketing.
3.
Wholesaling Real Estate
Wholesaling is also pretty simple conceptually.
You get a house either through direct purchase or under contract, but instead
of keeping it or fixing it up, you sell it to another investor. One
unique feature here is that it is entirely possible to wholesale properties
without using your own money to buy it. One way is to get the house under
contract and subsequently assign that contract to another investor who will be
the one to buy the house.
Another way of wholesaling a house is by using a
double close. You buy the house on the same day that you sell it to
another investor. Some title companies will even let you use the money
they paid to purchase the property to pay the original seller when
you buy the same property. Many people have the common perception that
wholesaling is an easy way to make money in real estate without using your own
money. However, it is easier said than done because convincing buyers is
difficult and often, you will need some money upfront.
4.
Real estate investment trusts (REITs)
As you begin your career in real estate investing, we
strongly suggest that you don’t take on high risk. If you are allergic to
business risk, consider investing instead in real estate investment
trusts or REITs.
Simply described, REITs will allow anyone to invest in
large real estate investment portfolios by purchasing stocks. In turn,
shareholders get a share of the profits that the real estate investments
generate without actually having to buy an investment property.
5.
Real Estate Investing Companies
So far, we’ve discussed all real estate investing by
individuals but in reality, real estate investment companies actually own and
control a huge chunk of all real estate. These are companies whose
origins are traditional businesses – corporations, LLCs, LLPs, etc.
Let me explain how real estate investment companies
work. It starts with a group of investors who raise capital by pooling their
money and then use the capital to buy real estate. They hold the
properties either for their long-term cash flow and value appreciation or for
short-term turnaround and quick profit.
These companies invest in real estate basically the
same way as individual investors do. However, the bigger and more
advanced companies normally set their sights on larger and more complex
deals. Individual investors wouldn’t normally have the capacity nor
capability to manage these investments or deals. Many larger real estate
investment companies even purchase land and develop it themselves by building
apartment buildings, condominiums, shopping centers, etc.
However, putting up a real estate investment company
(for legal and taxation consideration), finding capital and then finding the
right real estate deals are quite elaborate activities. The company, with
its network of employees and agents, can do a better job at this. An
individual investor wouldn’t be as effective by himself.
6.
Real Estate Crowdfunding
Crowdfunding (also known as peer-to-peer lending
service), as a platform, has become popular on many fronts
including in the real estate industry. It’s a service that connects
individuals who want to invest in real estate with real estate businesses and
property owners who need to raise capital for their ventures.
Normally, these real estate businesses that are in
need of capital can present their investment opportunities as either debt
or equity financing. So, if you are an investor checking out
real estate crowdfunding opportunities, you can find different
offers. It could be a debt-based investment where you can get a repayment
with interest in fixed installments or at the end of a predetermined
time. It could also be an equity investment where you can participate in
the profit on the real estate deal.
7.
Short Term Rentals/Home Rentals
If you already have your own property, you can already
make money off it without selling it. You can use your own home and
become a landlord. Short term rental websites like Airbnb give you the
opportunity to earn by renting out your home anytime you
want.
You can earn extra cash and you get to meet people
from all walks of life and you might have visitors from other countries as
well. If you are not yet ready to dive into the traditional real estate
businesses, consider Airbnb to learn about the business. Who knows, you
might be launching a stellar real estate career right from your own home?
The
Special Benefits of Real Estate Investing
It is true that no type of investment can offer a
guarantee of a profit or even retention of the capital. Historically, however,
real estate has proven to be one of the safest asset classes for investors
while averaging consistent gains over the years.
Real
estate investing is unique in the sense that it offers other benefits that you
may not find in other types of investments.
Here are some of them:
The
Power to Leverage
One of the most distinctive features of real estate
investing is its ability to allow investors to leverage their capital many
times over. Real estate investors will have the power to use borrowed
funds to invest in a parcel of real estate they are not in a position to
purchase outright. But even so, they still can realize all of the
potential profit from the property inherent to its owner. A word of
caution to investors: with increased leverage comes additional risks too,
so be prudent.
Tax
Benefits
Remarkably, an investment in real estate opens several
types of tax benefits to the investor. For one, the IRS
treats real estate profits as capital gains which carry a lower tax
percentage than employment income. Accordingly, as years pass, the tax
basis of your investment properties can go down due to depreciation.
The tax code allows investors to claim an annual
depreciation expense as a reduction in income. And, if you are generating cash
flow from a rental property, you can potentially claim the profits without
paying self-employment taxes.
Control
Your Investment
Another valuable aspect of real estate investing that
appeals to many is that they enjoy increased control over their
investments. In stocks or mutual funds investing, you
purchase and then you wait passively for the assets to (hopefully) increase in
value. If you are just one of the minor shareholders of the company, you
will not have much say in the business operations. From the point of view of an
investor, there is nothing you can do to increase the value of the stocks or
shares that you have.
On the other hand, if you invest in real estate, you
have some authority over your investment. You can improve your knowledge
of the business, negotiating skills
Aside from these things that we mentioned, there are
still a lot of possible benefits of real estate investing. We have not
discussed protecting your capital against inflation, tax write-offs against
your other income, etc. If you want more information on this, visit our
Resource Center.
The
Keys to Real Estate Success For Beginner Investors
Real estate has great potential for an investor – it
can be your passport to enormous wealth, early but comfortable retirement or
financial independence for the rest of your life.
New investors are usually fearful and very careful but
you can also be confident and decisive. At the end of the day, none of
that matters. It will still boil down to goals, abilities, and resources
of each individual investor. These major aspects can complete
what’s missing, even up the shortcomings and further enhance the strengths of
any real estate transaction.
There are many important tips we've already
published – let's focus on the most important ones.
Here’s how to make them work to your advantage:
1.
Set Your Goals
Don’t even begin to look at properties without setting
specific goals for yourself as an investor. Forget about being an expert
in the terminologies, practices, computations, analysis, negotiation or any
other specifics at this point. Simply resolve what you really want to
accomplish. Ask yourself what you want to see happening as a result of
your investment. It’s not just about making some or a lot of money
because that is obvious. What we mean is: do you want to be an active,
hands-on investor who is very much involved in the daily operations? Or
would you rather have a real estate investing on the side while you continue on
with another career that’s closer to your heart?
Blindly jumping in without really knowing why has
brought many investors to disaster. Some eager beavers put too much on
their plates all at once and end up having to hire out other people to manage,
make repairs and maintain the property. As a result, his cash flow goes
to pay for these people and pretty soon, he’s forced to sell out his property
to get himself out of the messy situation.
2.
Think Long-Term
Here’s a nugget of truth: income-producing
properties provide long-term wealth. Knowing that it is therefore practical
to purchase only properties that you deem will appreciate in value.
The next step would be to hire a property management company. Just keep
the property and check its value every year. It will just be a matter of
time before the increase in the property value will give you immense returns.
Don’t hold your punches on a good deal: when you
chance upon an opportunity, grab it by the collar! Once you have secured
the contract, there are many ways to terminate the agreement (if you need to)
and get your earnest money back. This period will give you extra time to
size up the property. Missing out on a good property because you waited
too long could be a huge opportunity lost because another investor may come and
take it.
3.
Improve Your Abilities
After you’ve set your goals, you need to take stock of
your abilities or the useful skills, talents, and traits that you have. In case
your list turns out short, do not be discouraged from implementing your plan.
The process actually transitions you from the goal-setting stage to the actual
act of investing. You won’t be able to determine what additional help
you’ll need unless you know the things that you can do yourself. Here is
a list of important activities that will demand the applicable skills:
An honest-to-goodness personal assessment is integral
to success. Don’t overrate yourself but don’t put yourself down
either. It is better to err on the side of conservatism when it comes to
evaluating your abilities. You can always hire or partner with other
people to handle anything you can’t (or don’t want to) take care of.
Additional
Resources
You now have a clear goal and a realistic assessment of
your abilities. You are definite about what you want to accomplish.
Also, you know what you can and cannot do on your own. The next step is
to make provisions on how to fill in the gaps. This is basically a
question of resources – what you need, where to find them and how to use them.
Veteran real estate investors know that for things like market knowledge, area
demographics, and local and national market trends, it meant a trip to the
library.
Nowadays, whenever the word ‘research’ surfaces, the
Internet usually comes to mind. Sure, you can still go to the library
and hit the books but the latest and freshest information will still
be on the Worldwide Web. Learn how search engines can make the work
easier for you, bookmark useful sites and build your own database of
information.