How to Start Investing in Real Estate: The Basics
The goal of property investing is to allow your investment to grow with time and earn you a profit. The profit that you make should be good enough to cover the risk you are taking by buying the property. This includes things such as paying taxes, maintenance of the property, insurance, and utilities.
When you are well informed about what it takes to own property, then you will realize how simple it is. It can be as simple as playing a game of monopoly. The foundational elements that you need to understand include risk, economics and how to invest in property well.
If you don’t go about this process well, you could end up going bankrupt. Just because this process is simple doesn’t mean that it is easy. If you don’t handle matters right, you could end up losing a lot of money, or you could end up with a major disaster in your hands. If you want to avoid losing money, then your goal should be to purchase real estate, avoid going broke by investing in real estate for rental income, so that you can cover your expenses and save enough money to buy even more properties.
Top 4 Ways on How to Make Money in Real Estate
How to get into real estate business? There are multiple ways people who invest in real estate can make money.
Real Estate Appreciation
This works when the property that you buy appreciates in value and ends up costing more than the price you paid for it. As good as this sounds it can also be a risky affair. In fact, it is the riskiest way of making money from property. Property value can increase if you make upgrades to your property. Also, if the land around the area is scarce while demand is high, then the property value will go up. Also, if a major development takes place close to your property, like let’s say a major shopping mall is built there, it will cause an appreciation in the price of the property.
Cash Flow Income
You can make money by renting out your property. You will collect the money on a regular basis from your tenants. Your work will be to manage the property and ensure that it is in good working order. You can turn your property into an apartment, storage unit, office, car wash, rental houses among many other things
Real Estate Related Income
If you act as an agent, you can make money by being paid a commission whenever you buy or sell a house. You can be a real estate agent or broker or a property manager. As a property manager, you will be paid a percentage of the commission paid as rent. Your work will be to manage the day to day workings of the property. For instance, a hotel manager can get paid 5% of sales made by the hotel for their work of taking care of the property. This includes doing things like hiring janitors, cleaning linens, managing the front desk and maintaining and mowing the lawn.
Ancillary Real Estate Investment Income
You can make money by starting a mini business within your own rental property, to make more cash. For instance, you can set up a vending machine in an office space, or you can set up a Laundromat and make money from the tenants who live there.
Advice on Buying Real Estate Investment Properties
How to get started in real estate.
When buying your first piece of property, there are various ways you can go about financing your purchase. One of the options you can use is by using a mortgage. This means that you borrow money to finance your purchase. This is a great way to get to own property even if you don’t have the whole cash up front. This is a strategy that is used by many investors in this industry. However, this option has several disadvantages. This includes if things don’t work out right and you fail to keep up with your regular debt repayment schedule. This can cause you to become bankrupt, especially if the interest rates shoot up.
It’s not advisable to buy property in your name. The best way is to buy it in the name of a legal entity. To do this, you need to work with a qualified lawyer, who is well versed in such kind of transactions. The lawyer can even advise you whether you are better off buying the property in your name or in the name of a legal entity such as a limited company or a limited liability company. This is to help minimize risk.
The reason for doing this is to protect your assets in case you are ever involved in a legal lawsuit. For instance, someone can sue you in case he or she gets hurt while on your property. If your property is not protected, you could end up losing your property and all your other assets. But if you bought the property in the name of a limited liability company, in case the company collapses or you are sued, the most that can happen is that you will lose the money you invested, but your other assets, such as your property, 401 (k) Roth IRA investment and retirement funds will be safe.
What You Need to Know Before You Buy Your First Property
There are different kinds of real estate investments. But before we even talk about that, there are some crucial things that you need to know first. This includes the fact that it is important that you do not buy the property in your own name. This is so that in case something happens, let’s say you are ever sued, you will not lose your property. If you buy the property in the name of a legal entity, then in case a lawsuit exceeds what your insurance covers, you can still protect your assets. In case the company is in financial trouble, you can instruct your lawyers to file for bankruptcy. This way, your assets will still be safe.
It is best to talk to an accountant or a lawyer to advise you on which the best legal entity to use is. Most people use a limited liability company or a limited partnership.
Doing this can save you from financial trouble in the future. You should hope for the best but prepare for the worst.
It doesn’t take much to set up such a legal entity. You might spend a couple of hundred dollars or thousands of dollars, depending on whether you use an attorney in a small town or in a big city. There isn’t too much paperwork to be filed. Therefore, it is best that you use a separate entity for each property that you purchase. This is what is known as “asset protection.” It helps to keep your assets safe. In case the entity runs into problems, you can simply file for bankruptcy without necessarily affecting your other entities. Just take care that you don’t sign a promissory note that compromises your liabilities. Now that we have sorted out that issue, we can move on to discuss the different kinds of real estate investments.
What Kind of Real Estate Should You Invest In?
When you are ready to buy property, you should think about which kind of property is the best one for you. You can decide to own your own property or to flip properties, develop or acquire your own property. To do this, you need to have a good understanding of the various categories of real estate.
Income-Producing or Non-Income-Producing Property
There are various kinds of property that are income producing. This includes office space, residential houses, retail and industrial spaces. Other not so well-known properties include hotels, parking spaces, mini-storage and housing for the elderly. The main thing about this kind of investment is that they generate income.
Non-income producing properties – vacation properties, houses, vacant commercial spaces – are just as good as income producing properties. When you invest in this kind of property, you need to realize that you will not be making any money from rent; therefore, you should be making money by having your capital appreciate. In case you borrow funds and use your non-income-producing property as security, just make sure that you can make debt repayments out of your own personal income considering that the property won’t be generating any income.
Getting office space is quite prized among property owners. These are some of the best investment types due to their strategic locations downtown or in expansive out of town parks.
A company’s need for office space depends on how many workers it has. Most office-based workers, such as accountants, insurers, service providers, real estate workers, managers, and administrators need somewhere to work from. Therefore, as most companies hire white-collar workers, it means that there will be a need for more office space.
How much money you make from the office space depends on the market. In good times, you can make a considerable amount of money considering that office space is always in demand. If there is a demand for more office space, then rent goes up. It takes time to put up a building so you will reap greatly from the market at such times. However, if there is an economic downturn and your office space ends up unused for an extended period of time, you can suffer great loses. This is considering that office spaces have high maintenance costs. Therefore, even if one office is unoccupied, it can have a great impact on your financial returns.
There are different kinds of retail businesses. This includes expansive shopping malls to single shops. Now, the most preferred model is where lots of retailers are based in a big and enclosed mall. This gives the retailers more visibility, especially among passersby.
How it works is that there must be an anchor retailer in the mall. An anchor retailer is a major shop that attracts buyers, and then there are smaller retailers. For instance, Wal-Mart is an anchor retailer. If the anchor retailer mainly sells food, then the mall is said to be food anchored, and if the anchor retailer sells groceries, then the mall is grocery-anchored. The anchor helps to increase the value of the property and makes it more attractive for other retailers to want to rent space there.
You will get better returns from a retail space than from office space. Some of the things that define retail space include its location, income level of the people who live there, population and economic growth. Retailers do well in growing economies.
Industrial spaces can be used for warehousing, research and development, and manufacturing. Such spaces are usually less costly to manage as compared to retail stores and they do not require a large investment at the start.
When investing in this kind of property, key things to keep in mind is that it should be highly functional, close to major roads, space should be configured properly, and there should be loading and unloading space, e.g. even for the use of cranes. An outdoor space that is covered might also be good in some cases.
Multi-Family Residential Property
The good thing is that people will always need space to live. Therefore, there is always a high demand for houses. And with a multi-family unit, it means that loss of income if you lose a single tenant can be small.
With residential property, it is the owner who will cover the costs of housing maintenance, but in commercial markets, the property can pass along these costs to his tenants. In some countries, the government provides insurance for such kinds of houses, therefore helping to lower mortgages substantially.
When it comes to real estate, there are so many possibilities. We have looked at different kinds of properties; however, this was just a tip of the iceberg. There is still so much more to be learned about properties. Do not assume that buying property is always going to be a winning game. You need to carefully evaluate your options and think about the costs and what you stand to gain.