How Do You Make Money With Rentals
Many people will say the stock market is a better investment than rentals because the historical price of stocks has gone up more than the historical price of real estate. However, the price of a home is only a very small fraction of the investment when buying rentals. I love to see my rentals go up in value, but I think of appreciation as a bonus. Here is how a good rental property will make you money.
By Owning Shares Of Real Estate Investment Trusts
A REIT is a real estate investment trust. REITs have several advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold. When you own shares in a real estate trust, it is generally as easily sold like shares of stock. You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls, and industrial parks. It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything.
The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders. A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too. They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies. Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an E TF that invests in REITs. You’ll have lower returns, but there is less risk than investing in a REIT. In every case, you don’t have to invest in real estate directly, much less manage it.
Dig Into Books And Podcasts
There are a handful of books that are, in my opinion, must-reads for the newcomer to commercial real estate.
I wont dive too far into them, since we put together a list of the best books on commercial real estate, but they are packed with knowledge that will, at the very least, expand your thinking.
And dont even get me started on podcasts!
Im constantly amazed by the amount of content that is coming to the market now that wasnt available when I first kicked off my career.
There are a number of incredible shows out there covering all aspects of commercial and multifamily real estate. Shameless plug – check out my show with The Apt Guy, Bruce Petersen: Commercial Conversations Over Coffee.
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Investing In Commercial Real Estate
This is a variation of rental property where you invest in office, retail or warehouse/storage property. It follows the same general pattern. You purchase a property and rent it out to tenants, who pay your mortgage and hopefully generate a profit.
Investing in commercial property is generally more complicated and expensive than investing in real estate rentals on the residential side of things.
So why invest in real estate at the commercial level?
Well, the principle of risk vs. reward determines that commercial properties are thereby more lucrative. Not knowing how to invest in property, especially on the commercial level, can be a very expensive learning curve.
For someone with experience and capital, Investing in commercial real estate is one of the best ways to invest in real estate because of the remarkable gains that can be made if done right.
On the plus side, commercial real estate usually involves long-term leases. Since the property is being rented to a business, theyll want a multiyear lease. This will ensure the continuity of their business.
A lease can easily be for 10 years or more. The cash flow will be more steady since you wont be changing tenants every year or two.
Leases can be structured to give the landlord a percentage of the profits of the business as well.
On the downside, commercial property is often subject to the business cycle. During recessions, business revenues decline, and your tenant may have difficulty paying the rent.
What Education Do You Need
Education is a key component of investing in rental properties, but it is not the only part. In order to invest quickly, you have to take action, not just educate yourself. While you are learning about rental properties, there are many things you can do to speed up the buying process.
- Talk to a lender as soon as you can. If you have a credit or qualifying problem they can help you get that solved. The sooner you talk to them the better.
- Start looking at houses in your market area with a real estate agent.
- Start locating contractors and insurance agents.
- Start looking for portfolio lenders.
- Start attending REIA meetings.
Not only does performing these tasks get you involved in real estate, many times these contacts can help you learn about rental properties as well. Local contacts like real estate agents and lenders can educate you about local customs and local markets.
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Citi Double Cash Card
Although the other credit cards on this list are small business credit cards, the Citi Double Cash Card is a personal credit card. Cardholders receive up to 2% cash back on every purchase with no limits on the amount of cash back you can earn. You can also transfer balances to take advantage of the 0% APR offer for 18 months ). This card could be great for you if you have real estate project expenses on another credit card that are incurring interest charges.
Success story: Our resident award travel and real estate expert Brandon Neth combined his two passions. Heres how he used credit points to buy a multi-family investment property.
Id Be Intensely Strategic About Networking
I didnt really start networking until my third year in the business. That year, I tripled my income and made six-figures for the first time.
My first couple of years in the business, I spent 100% of my time cold calling and door knocking. Not that theres anything wrong with that, by any means, but Ive found networking to be far more fruitful – especially if youre able to brand yourself and your business.
They say that your network is your net worth, which makes sense – the more people you know the more opportunities youll have to do deals.
So networking with as many other professionals in the industry as possible will help you earn a higher income when first getting started and will give you a head-start when you jump into investing or developing.
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Purchase A Rental Property
The residential real estate investor with time to commit canbuy a property and become a landlord.
This means monthly income, as long as you can find tenants, and its one of the most common ways to make consistent money in real estate.
You can choose between single-family or multifamily properties. Michael Albaum, a Program Manager at Roofstock, an online real estate investment marketplace that frequently works with new investors, recommends single-family properties as a good starting point.
Youre going to make mistakes, and its better to make them on a smaller deal where theres less at risk.
Residential properties may technically be passive investments, butthey require pretty active involvement. So make sure youve got the time as well as the money. Many landlords outsource building maintenance to management companies others handle repairs themselves.
The good news is if youre on top of building upkeep, the property should increase in value over time.
- Your tenants are essentially paying your mortgage down for you.
- You could live on the property while renting other units out.
Investing In Real Estate Through Lease Option
The second proven way to invest in real estate with no money is through the lease option. Under the lease option, the property owner charges the buyer a monthly or yearly premium, in the form of higher rental payments. The excess rental fee will then be channeled towards the purchase price. With this type of agreement, the investor can purchase an investment real estate using a slightly higher rental fee.
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Identify Your Financial Stage
Real estate investing is simply a vehicle to improve your finances. So, before we get into the details of real estate, lets think about your overall financial picture.
Most new investors eventually want to reach financial independence. You can think of this like the peak of the mountain where your living expenses are all covered by income from investments.
The fundamentals of climbing this mountain are the same whether you invest in real estate or anything else. To reach the peak of the mountain faster, you simply have to increase your savings rate. You can then invest those savings into your chosen assets, like real estate.
Ill suggest a couple of specific real estate strategies that help with your saving rate in the next section. But for now, you need to identify where you are on the financial mountain. Are you at the very bottom ? Half-way up? Or near the top?
My article Real Estate Investing For Beginners explains these wealth stages in more detail.
You want to know your current stage because depending on where you are, certain real estate strategies will make more sense than others. Ill explain some of those strategies in the next step.
So, after thinking for a moment, decide which stage fits you best. Dont worry, it doesnt have to be perfect. Then lets move to Step #2.
What Do Real Estate Investing Groups Do
Within the broad category of real estate investment companies are a subset called real estate investment groups. These organizations perform a very specific function they purchase or build a group of properties, and then sell them to other investors, who can rent them out. Because they are generally highly sophisticated and knowledgeable, these real estate investment groups also help the investors find tenants and act as property managers, in exchange for a percentage of the rent.
How To Invest In Real Estate
There are countless ways to invest in real estate, including flipping houses, wholesaling real estate, and purchasing shares of a real estate limited partnership or limited liability company .
For real estate investors seeking a balanced blend of potential risk and reward in their portfolios, here are 4 common strategies used to invest in real estate.
Other Frequently Asked Questions About Investing In Real Estate With Little Money
Youve now learned 15 different ways to start investing in real estate with little or no money! If youve found a strategy that works for you, go ahead and get started right now!
But I also know that some of you will have some additional questions. So, Ive collected some frequently asked questions and done my best to address them below.
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Refinancing Or Brrrr Strategy
Another option to lower the amount needed to buy a rental property is to refinance the loan after you have owned the property for a little while. The BRRR strategy stands for Buy, Rent, Repair, Refinance, Repeat. If you get a great deal on a rental, you should be able to refinance it soon after you buy it and take some, all, or even more cash out than you have invested in the property. You can usually refinance a property for 75 percent of the value. If I would have refinanced my first rental a year after buying it, I could have pulled out most of the money I had used to buy it.
- Value $150,000
- New loan of 75% of $150,000 is $112,500
That new loan is more than what I bought the property for plus any repairs I made. I spent about $30,000 buying my first rental, but I could have refinanced it and taken $42,000 out or $40,000 once you take out the closing costs on the refinancing.
Tips For Breaking Into Real Estate Investing
1) Look for a good investmentSo what is a good real estate investment? A good real estate investment is any real estate property that increases your net worth through a fair rate of return on your equity.
2) Buy cash flow-positive propertiesWhen looking for an investment property, you need to calculate the estimated cash returns on the property for that area to make sure youll be getting a good deal.
3) Buy a property that you loveReal estate ownership takes a lot of time and effort. Its a lot easier to part with time and money on a property youre fond of.
4) Go from personal residence to rentalA great way to get your feet wet with real estate investments is to put your personal property up for rent. If you plan to live in a house for a few years before turning it into an investment property, youll be better equipped to handle repairs on the house. Living in a property and making changes along the way is a cost-effective, long-term solution for getting started in real estate. Youll also get better interest rates on the property if its your primary residence when you buy it.
5) Dont buy fixer uppersFixer uppers are tempting to purchase as a real estate investment because of their lower price point on the market. When looking for a rental property, though, unless you plan to live in the fixer upper first, its much more cost-effective simply to buy a solid, reliable home that needs little to no repairs.
Stay on top of your investments
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Special Us Govt Schemes Like Usda Loans
With an end goal to fill underpopulated zones of the U.S., the U.S. Department of Agriculture’s Rural Development office gives mortgages with down payments as low as 0%. These loans are offered only in towns with populations of 10,000 or less. All things considered, 10,000 is very sizable for most towns, so 97% of the U.S. is secured.
USDA loans are zero-down-payment mortgages for rural and suburban homebuyers. These loans go to those who qualify as having a low or moderate-income. Theyre mainly for borrowers who aren’t wealthy and cant get a traditional mortgage. To check whether your area qualifies for this loan, you can visit USDA.gov and read their terms and conditions.
Is Real Estate Crowdfunding A Safer Investment
No investment is guaranteed, and there are risks with all investing including Real Estate Crowdfunding. However, the more sophisticated crowdfunding platforms thoroughly review every real estate deal as well as the team behind it before making it available on their sites for investors.
Additionally, the real estate opportunities offered on crowdfunding platforms do offer the general comfort of investing in a physical piece of property, as opposed to a stock or bond or other nonphysical asset.
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How Can You Minimize The Risks Of Real Estate Investing
Theres no way to eliminate risk completely when you invest in property, but you can take steps to minimize it.
- Research the market carefully
- Pick the best places to invest in real estate, such as desirable cities or up-and-coming neighborhoods
- Conduct a detailed inspection before the sale
- Use a real estate attorney to vet the contract
- Order a title search to ensure there are no liens or other people who have a legal claim to the property
- Purchase liability insurance
- Comparison-shop to get the best mortgage terms
Find The Right Location
The last thing you want is to be stuck with a rental property in an area that is declining rather than stable or picking up steam. A city or locale where the population is growing and a revitalization plan is underway represents a potential investment opportunity.
When choosing a profitable rental property, look for a location with low property taxes, a decent school district, and plenty of amenities, such as restaurants, coffee shops, shopping, trails, and parks. In addition, a neighborhood with a low crime rate, easy access to public transportation, and a growing job market may mean a larger pool of potential renters.
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Form A Real Estate Llc
A limited liability company refers to a business structure set up to protect business costs from interfering with an investors personal finances. The designation allows investors to purchase and own real eshttps://www.fortunebuilders.com/forming-a-real-estate-llctate, without involving personal liability. Each state has different fees and regulations associated with establishing an LLC, though the overall process is largely the same:
Confirm the regulations in your state before getting started
Choose a unique business name
File an Article of Organization with your state
Create an operating agreement for the business
Publish an intent to file
Apply for a tax identification number through the IRS
After you form your LLC, a few other permits may be required before you can officially open for business. Confirm with your state what these are, and youll be on your way to securing your first deal.
Invest In Real Estate Mutual Funds
Just like you can invest in real estate ETFs, you can also invest in real estate mutual funds. A colleague of mine, Taylor Schulte ofDefine Financial in San Diego, says he swears by a real estate mutual fund known as DFREX. Why? Because its low costs and track record help him feel confident about future returns. In addition to low costs, Schulte says the strategy of DFREX is backed by decades of academic research from Nobel Prize winning economists.
TIREX is another real estate mutual fund to consider with $1.9 billion in assets, broad diversification among real estate holdings, and low fees.
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