Your Guide to Real Estate Investing for Beginners
Real estate investing offers an amazingly diverse array of options for building wealth. Possible ventures range from purchasing lucrative "turnkey" rental properties to participating in Real Estate Investment Trusts (REITs), which act like mutual funds that use real estate rather than shares of stock.
As with most investment opportunities, real estate investing comes with different levels of risk, cost, and interaction. An investor in a REIT can "set it and forget it" once the investment is made, but the buyer of a rental property may need to act as a landlord or hire a property management company like ourselves.
Common Types of Real Estate Investments
New real estate investors have five types of investments from which to choose, and each option makes sense for a particular kind of investor. For example, an investor may want to fix & flip a house, which requires renovating an existing property to sell it quickly for a profit.
This "house flipping" strategy is an excellent option for investors who aren't interested in long-term investments and aren't risk-averse either. Conversely, an investor may purchase a rental property with the intent of keeping the investment for several years with a primary goal of wealth building and saving for retirement. This is one of the more common forms of real estate investing. We started our property management company to serve investors looking to build wealth through this form of real estate investing.
A third option is to purchase a vacation property, which allows the investor to use the property occasionally for his or her own purposes, as well as offset the cost of the property through short-term rentals with companies like Airbnb. Vacation rentals are an excellent option for new or inexperienced real estate investors.
Advanced investors will often consider investing in commercial real estate or industrial real estate where investment requirements are usually much higher than those required to purchase single-family homes or vacation rentals. Business owners and wealthy investors may transition from residential properties to commercial properties to increase their return-on-investment.
A final type of investment strategy involves using the Real Estate Investment Trusts (REITs), which are ideal for investors who want to keep their investment money "liquid" with the option to sell at any time to other investors. REITs are also a suitable place to begin for investors without significant capital at their disposal. This is perhaps also the easiest form of real estate investing.
How Does Real Estate Investing Make Money?
Real estate investing offers more than one way to grow a portfolio and build wealth. For long-term investments, a property owner can enjoy real estate appreciation, which is what happens when a house increases in value over time. Property may increase in value in a competitive housing market after improvements are made to the property, or when the location experiences growth and prosperity.
Another way real estate investing makes money is through rental income, which can occur in residential, commercial, industrial, or vacation properties. Rental income in some markets can exceed the amount a property owner pays on his or her mortgage, which means an investor doesn't need to raise the entire purchase amount to enjoy the benefits of real estate investing.
Real estate investors may also consider ancillary investment income in the form of laundry facilities in apartment buildings or vending machines on commercial properties. Small ancillary features can help real estate investing reach a positive monetary return. Some property owners are experimenting with vending machines that act as self-contained convenience stores offering much more than chips, candy, and soda.
How Much Money is Required for Real Estate Investing?
There is no "one size fits all" real estate investing, which means there's no single dollar amount a new investor must reach to begin investing. Some investment strategies may begin with a mortgage and rental income. Other real estate investing opportunities may work through group investing where a limited liability company or partnership pools money together to invest.
For investors who want to actively manage their property rather than invest in a REIT, which is a rather "hands off" approach to real estate investment, single-family dwellings are usually a good place to start. Condo properties will often require the smallest level of oversight due to the assistance of the unit's condo association, but condos aren't always the highest earners as far as appreciation and rental income are concerned.
At any time, a property owner who feels overwhelmed by the responsibilities of acting as a landlord can hire a property management company, which can help maximize return-on-investment when the management company finds responsible tenants who pay their rent on time. A management company can also help a real estate investor manage multiple properties, which can help an investor expand his or her portfolio.
Finding a Property for Real Estate Investing
Real estate investing can begin with the assistance of a real estate agent, a financial advisor, or with a simple search on the internet. Investing in a REIT is probably the simplest way to become a real estate investor, but even that option requires a search for the best-performing trusts.
Not only can an investor research costs like property taxes, interest rates, and available listings, but he or she can also estimate the expected return on investment of different properties. A home in an older neighborhood might offer the most affordable option for a new investor, but a house in a new community or a more expensive area may provide better return-on-investment and appreciation.
It's also essential to consider that banks tend to place higher income requirements on loan applicants for investment properties. The traditional down payment of 20 percent may not be enough for an investment property. A bank may require a down payment of 25 percent or more, as well as collateral, a cosigner, and a spotless credit rating.
Investment property loans also tend to come with higher interest rates that may sit a percent or more above what one might expect from a standard home loan, as well as costs like property taxes, mortgage insurance, and utilities.
Despite these costs, however, real estate investing remains an excellent and diverse option for earning investment income. Purchasing property can add wealth and prosperity to anyone's portfolio, but finding and buying the property are just the first two steps in becoming a successful and thriving real estate investor. Finding a great property management company to manage your real estate portfolio is also paramount.