How To Become A Real Estate Investor In 8 Easy Steps
Thinking of entering the real estate field and starting a career as an investor? Thatâs great, but one thing you need to know is that real estate investing is not as easy as many advertise it to be. Yes, itâs one of the best ways to become wealthy, but itâs still a challenging business. It takes lots of planning, research, and skill to invest in real estate and obtain the financial rewards that everyone desires.
However, the great thing about it is that once you know how to get started, you can easily overcome these challenges and succeed. Weâve laid out 8 simple steps to becoming a real estate investor that you can use in order to buy your first rental property, grow your portfolio, and become a successful investor!
To learn how to become a real estate investor in no time, watch out video below:
Try Home Equity Loans/lines
Do you own a home right now that has equity in it? In other words, is your home worth more than what you owe on it?
If so, you can potentially obtain a home equity loan or line of credit and get access to that money, which you can use as a down payment or maybe as funds for the entire thing if its enough. Pretty cool, right?
OK, on to number three.
Invest In An Online Crowdfunding Platform
Crowdfunding has become a buzzword in recent years. It refers to the practice of funding a project by raising small amounts of money from a large number of people.
These days, many crowdfunding investing platforms allow you to own a percentage of physical real estate from rental properties to commercial buildings to parcels of land. Their popularity has been growing wildly because they cater to different types of investors with various budgets.
Some options are targeted at accredited investors, and some platforms allow them to participate in individual deals with minimum investments that reach into the tens of thousands of dollars. To be an accredited investor, you need to have a net worth of over $1 million or an earned income that exceeded $200,000 in each of the past two years.
If you are not an accredited investor, there are many options that let you invest small sums if you like even $100.
Such platforms make real estate investing more accessible to the general public by simplifying the process and lowering the barrier to entry. Rather than putting tens of thousands of dollars toward the down payment for a house you want to rent out, you can invest the sum of your choice to buy shares in properties.
Sponsors of crowdfunded real estate deals usually charge fees to investors typically in the range of 0.5% to 2.5% of whatever youve invested.
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Why Invest In Real Estate
Real estate can enhance the risk-and-return profile of an investors portfolio, offering competitive risk-adjusted returns. In general, the real estate market is one of low volatility, especially compared to equities and bonds.
Real estate is also attractive when compared with more-traditional sources of income return. This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low.
Borrowing Money To Buy
If you borrow to invest, you will have to pay the property mortgage. Don’t rely on rental income to cover the mortgage there may be times when your property is empty.
Many people buy investment property with interest-only loans, but remember the interest-only period will end after a certain time. This means your repayments will increase to pay the amount borrowed, plus the interest. See interest-only home loans to find out how they work.
See what an interest-only loan will cost you.
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Costs To Own An Investment Property
Ongoing costs of investment properties include:
- council and water rates
- property management fees
- repairs and maintenance costs
Tax on your investment property
Although you may be able to claim tax deductions on expenses, you’ll still have to pay them up front. For positively geared investments, you may pay tax on your rental income.
Visit the Australian Taxation Office for how tax works for investment properties.
What Is Real Estate Investing
Real estate investing is the purchase of real estate. To fully understand this definition, we must first define real estate. Real estate is essentially any piece of land and property attached to that land. Anything natural or man-made that are a part of this land, including trees, buildings, or fences, are considered real estate.
You might hear people use the words land, real estate, and real property interchangeably. However, there are slight differences between each term. Land is any natural surface and airspace anything that you could attribute to being a part of Mother Earth. Real estate is this land plus any permanent man-made additions, such as a home. Finally, real property is the set of incentives and benefits that come from owning real estate.
Thus, investing in real estate is the act of purchasing a piece of land plus any man-made additions made to that land. There are several categories of real estate investing. The most popular ones are residential, commercial, and industrial real estate investing.Investing in real estate can seem expensive at first, but it is one of the most proven ways to build wealth. We discuss how you can make money by investing in real estate next.
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Buy Rental Properties To Generate Income
This is one of the most time-honored ways to build long-term wealth. The same forces that make your own home such a great investment mortgage amortization and real estate appreciation also work with rental properties.
But investing in real estate rentals also adds an income component to the mix.
At a minimum, the rent that you receive on an investment property should cover the expenses of owning it. If it does nothing more, your tenant will effectively be paying for your investment. When the rent is higher than your expenses, the property will generate a positive cash flow.
If it does produce a positive cash flow, the income can come to you tax-free. This is because you can take depreciation expense on the property. Since its an investment property, youre allowed to expense the improvements over many years. But since depreciation is a paper expense , it can offset your net rental income.
As rents rise while the monthly payment stays relatively flat your net income will rise. Once the property is paid off, the rent income will be mostly profit.
This is why investing in real estate rentals is one of the best ways to invest in real estate.
There are some things that you need to be aware of with rental properties:
How To Get A Mortgage For Rental Property
Though a rental property mortgage is basically the same as a primary residence mortgage, there are some key differences. For starters, there are higher rates of default on rental property loans because borrowers facing financial troubles tend to focus on a primary home’s mortgage first. The added risk means lenders typically charge higher interest rates on rental properties.
Then there are the underwriting standards, which tend to be more strict for rental properties. In general, mortgage lenders focus on the borrower’s credit score, down payment, and debt-to-income ratio. The same factors apply to rental property mortgages, but the borrower will likely be held to more stringent credit score and DTI thresholdsand a higher minimum down payment. Additionally, the lender may take a closer look at the borrower’s employment history and income and want to see prior experience as a landlord.
In general, here’s what lenders require from borrowers to approve a rental property mortgage:
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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.
Crowdfunds For Real Estate
Real estate crowdfunding platforms offer investors a way to place small amounts of capital in large real estate projects, such as single-family rental home developments, apartment buildings, office properties, and shopping centers.
However, unlike publicly traded REITs, money invested in a crowdfund may be locked up for several years, and in most cases crowdfund shares are illiquid and difficult to trade. Another potential drawback to crowdfunds for real estate is that some opportunities are restricted to accredited investors with a net worth of at least $1 million or with an annual individual income of $200,000 or more.
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What To Know About Investing In Real Estate
Investing in real estate is the pinnacle of investment achievements in the eyes of many new investors. Unlike stocks and bonds, real estate can be touched and stood upon regardless of market conditions. When the market tanks, you still have a piece of the planet thats not going anywhere. For plenty of investors, this is a sort of comfort they cant find in other types of investments that may seem more ethereal — even if theyre secured by very real companies.
Unfortunately, a lot of people have the flawed idea that real estate can only increase in value, which is wholly untrue. If a property falls into disrepair or an area is no longer popular, you could see smaller returns or even a collapse of your propertys value. Unlike stocks, you have to maintain real estate — whether you do it yourself or hire someone — and you have to pay other expenses, such as taxes and insurance, even if youre not making a profit.
Although real estate does tend to retain some kind of value even in the worst of times, its hardly a sure thing. Like any kind of investment, its important to understand your real estate market, your competition, your potential clients, and your propertys potential for income. Most real estate investing isnt very sexy, but it can serve as a balance to riskier stocks and other investments such as cryptocurrencies.
What Sort Of Rental Property Should You Buy
A key part of deciding whether to invest in rental property is determining how much money you have to spendand whether youll pay in cash or take out a mortgage.
If you use financing, lenders will want to know your , how much money you have for a down payment, your debt-to-income ratio and if youll use equity in a current home you own to seed your investment.
So long as buying a rental property makes sense for your financial situation, it can be a unique opportunity to grow your wealth, Dolan notes. Most middle class Americans are not going to be able to walk into a bank and say, I want to borrow half a million dollars to invest in the market, he says. You can leverage somebody elses money to make that investment .
As you compare the pros and cons of various real estate investments, be sure to make a reasonable estimate of the amount of rent youll be able to charge so you can put together a realistic cash flow plan, Walsh recommends.
The money coming in each month needs to cover expenses, including mortgage payments, insurance and unexpected costs, so do the math, says Walsh.
Identifying your goals and objectives may also help you decide which property to buy. Do you plan to use the home occasionally and rent it out the rest of the year? Or are you looking for a property thats solely an investment to generate passive income that could eventually become your sole source of income? Begin with the end in mind, Halverson advises.
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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.
Purchase A Rental Property And Become A Landlord
If youre ready to step up to the next level, you might try your hand with a residential rental property such as a single-family home or a duplex. One of the bigger advantages of this kind of property is that you know the standards of the marketplace and the market may be easier to gauge, as opposed to commercial properties, such as a shopping center.
Another advantage is that it may take a lower investment to get started, for example, with a single-family house. You may be able to get into a property with $20,000 or $30,000 instead of the potentially hundreds of thousands required for a commercial property. You may be able to buy it even cheaper if youre able to find an attractive distressed property via a foreclosure.
Youll generally have to put up a sizable down payment to start, often as much as 30 percent of the purchase price. So that may be prohibitive if youre just starting out and dont have a huge bankroll yet. One way around this may be to buy a rental property in which you also live.
Another downside is that youll need to manage the property and make decisions as to what needs upgrading, for example. While owning property is considered a passive activity for tax purposes, it may end up being anything but passive as a landlord. And if a tenant ducks out on rent, you still have to come up with the monthly payments, lest you go into default on the loan.
How you make money: Capital appreciation, growing rents and equity over time, 1031 tax-free exchanges
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Research The Real Estate Market And Its Trends
It’s important to research real estate market trends, including your local market. This may involve getting your real estate agent on board to help you outline your wishes, but don’t take your own research out of the picture.
You may spy a house that isn’t on your real estate agent’s radar or decide to look at a home in a neighboring suburb. Know your area’s popular neighborhoods, desirable amenities and more.
Look at current market values of properties comparable to a property you are looking to buy and talk to other investors as well. They may have ideas for you.
Online Real Estate Platforms
Online real estate platforms, also called real estate crowdfunding platforms, help connect borrowers with investors. Developers will post deals and projects that they need financing for, and investors can then finance these projects through debt or equity. This creates a mutually beneficial arrangement investors can enjoy the benefits of real estate investing without having to deal with ownership or labor. The developers can get the financing they need for projects.
Keep in mind that financing real estate deals can be just as risky and speculative as directly investing in real estate yourself. Always do your homework before you strike a deal. Investors benefit from receiving monthly or quarterly distributions, and they can choose to invest in standalone projects or a portfolio of projects. Its also a great way to diversify your real estate investments geographically. Potential downsides to using a real estate platform are that the funds can be illiquid with lockup periods, and investors have to pay platform membership fees.
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Top 10 Traits Of Successful Real Estate Investors
As a first-time real estate investor, it can be easy to begin to doubt yourself and wonder if you really have what it takes to be successful. However, no success story begins with perfection. As the real estate mogul Warren Buffett says, the most important quality for an investor is temperament, not intellect. it is entirely possible to learn from experience and reinvent yourself time and again. The following describes some common traits of successful real estate investors that you can start to channel today:
Ability To Leverage Funds
Lets face it! You cannot afford to buy real estate properties in full. Thats where leverage comes in. Leveraging funds in real estate means you use other peoples money to purchase properties. Here, you will take money from banks as a loan, and mortgage lenders, and pay them back over time. This way, you can add to your real estate holdings without investing the full amount youd need to buy them on your own.
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Plan Your Business Marketing
Having a successful real estate business is synonymous with having a successful marketing strategy. What is your unique value proposition? Answering this question will help you establish a brand for your business and any subsequent marketing campaigns. This is also a great time to settle on a logo, core values, and a mission statement. These components will help inform how you reach out to potential customers and serve as a jumping-off point for your marketing materials.
After creating a foundation for your real estate business, it is time to start your first campaign. Read through the following list of common marketing materials for some inspiration: