Real Estate Market Is Unpredictable
Similar to the stock market, the real estate market isnt easy to predict. Many real estate investors make a deadly assumption and believe if the market is hot today, it must be hot tomorrow. But thats simply not true.
While real estate prices do tend to rise over time, the market could change drastically . Supply and demand, interest rates, and changing demographics all play a role in which way the market will swing. And, though you could buy property in a hot market today, nothing guarantees it will remain hot in the future.
How To Start Investing In Real Estate In Six Steps
All right: Its game on! When youre ready to start buying investment property, here are the guidelines to follow.
Step 1: Pay in cash. This flies in the face of most real estate investing advice. But the truth is, theres no such thing as good debt. No ifs, ands or buts! Taking on debt always equals taking on risk, so avoid it no matter what.
Step 2: Diversify. Have you ever heard the phrase dont keep all your eggs in one basket? The same wisdom applies to your investments. Mutual funds through your 401, Roth IRA and other retirement savings accounts should be the foundation of your wealth-building strategy. After those are locked and loaded, youll be well set up to start investing in real estate.
Step 3: Stay local. Keep it simpledont buy a house in Arizona if you live in Illinois! When youre far away from your properties, youll have to trust a management company to assess damage and make repairs. Now, it might still be a good idea to hire a management group, even if youre local, to help keep things running smoothly. But youand only youare the owner. So stay close and keep tabs on your investments.
Appreciation And Resale Value
Many people bank on the idea of reselling their investment rental property in Mexico at a higher value a few years down the road, especially in popular tourist destinations such as Cancun, Cabo, Playa del Carmen, or Puerto Vallarta. Annual expected appreciation should definitely be included in every investors calculation. Factoring in an expected increase in the value of real estate over a period of time can make a serious difference when deciding whether or not to make the leap!
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Private Equity Funds & Opportunity Funds
Another investment to make money on real estate, you can buy into private equity funds or opportunity funds.
Private equity funds invest in, you guessed it, private companies that dont trade on stock exchanges. These companies can include real estate businesses.
Opportunity funds invest in real estate in Qualified Opportunity Zones, typically low-income areas. Designated by the IRS, real estate in these opportunity zones offer special tax advantages. For high earners, investing in qualified opportunity funds can provide valuable tax breaks.
Unfortunately, many private equity funds and opportunity funds only allow accredited investors to participate.
How To Make Money In Real Estate: 16 Investing Strategies
by G. Brian Davis | Last updated Jan 13, 2022 | Personal Finance, Real Estate Investing, Spark Blog |
One of the largest sectors in both the US and world economies, real estate offers countless ways to make money.
You can invest in it, of course, whether directly or indirectly. A study over 145 years in more than a dozen countries found that real estate offered the highest returns of any asset class with half the risk of stocks. Or you can choose a career that relates to real estate, such as working for a real estate brokerage, title company, or property management firm.
As you explore how to make money in real estate, consider the following options as a starting point, not an exhaustive list.
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Real Estate Limited Partnerships
A real estate limited partnership is similar to a real estate investment group. It is an entity formed to buy and hold a portfolio of properties, or sometimes just one property. However, RELPs exist for a finite number of years.
An experienced property manager or real estate development firm serves as the general partner. Outside investors are then sought to provide financing for the real estate project, in exchange for a share of ownership as limited partners. The partners may receive periodic distributions from income generated by the RELPs properties, but the real payoff comes when the properties are soldwith luck, at a sizable profitand the RELP dissolves down the road.
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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
Our investing reporters and editors focus on the points consumers care about most how to get started, the best brokers, types of investment accounts, how to choose investments and more so you can feel confident when investing your money.
Investing disclosure:
The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal.
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How Can A Realtymogulcom Reit Help Me Get Started In Investing
If the thought of searching for the right rental property, trying to calculate your return on investment, and dealing with tenants leaky faucets sounds like more than youre willing to take on but youre still interesting in investing in real estate one alternative might be to invest in MogulREIT II, which exclusively invests in multifamily apartment buildings.
With an investment in MogulREIT II through RealtyMogul, you can enjoy many potential benefits including the chance to realize a long-term return through appreciation of the properties included in the portfolio, and the chance to enjoy ongoing income typically paid out quarterly.
Additionally, because a MogulREIT II is a truly passive investment real estate and property management professionals find and then manage the day-to-day operations on these deals such an investment gives you the potential to enjoy both the short- and long-term returns of investing in a rental property without having to do any of the work.
Of course, as an investor you should carefully consider the risk factors involved in MogulREIT II before purchasing shares. Risk factors include the overall risks of the real estate market as well as the minimal operating history of the REIT and the ability of the REIT to implement its investment strategy. For a more complete set of risk factors please review the Offering Circular.
You can learn more about investing in MogulREIT II here.
How Real Estate Market Cycles Work
While there are plenty of potential benefits to real estate investing, there are also challenges to be aware of as well.
Although it may be difficult to believe based on the performance of the market over the past several years, the real estate market historically moves through phases where home values decrease as well as increase.
In an article titled How to Use Real Estate Trends to Predict the Next Housing Bubble from the Harvard Extension School, researchers revealed that as far back as 1818, the real estate market has generally moved through 18-year cycles with four specific phases:
- Phase I: Recovery from a recession with no new construction in the market, declining vacancy, and occupancy below the long-term average.
- Phase II: Expansion as new construction begins, vacancy continues to decline, and occupancy grows above the long-term average.
- Phase III: Hypersupply caused by significant amounts of new construction, increasing vacancy, and occupancy moving below the long-term average.
- Phase IV: Recession characterized by increasing vacancy as an oversupply of building hits the market, pushing occupancy well below the long-term average.
During the economic downturn during the Great Recession of 2007 to 2009, the median sales prices of houses sold in the US declined by nearly 20%, according to the Federal Reserve Bank of St. Louis .
Other potential drawbacks to consider before investing in real estate include:
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He Paid More Upfront To Save His Time And Energy
Ultimately, McGlown’s entire goal was to have as passive an income stream as possible. In order to achieve this, he knew it would be more costly. He initially experienced this when researching mortgage lenders.
“I started looking into different interest rates, seeing what I could get,” he said, but nothing seemed fully like the right choice. Eventually, he decided to try working with a mortgage broker, which helped him find a much better interest rate in a shorter period of time.
“They came back with substantially better opportunities than I ever found,” he said. “A mortgage broker is definitely worth the money.”
Once he started looking for the actual property to purchase, he was also willing to pay a little more for a turnkey property in a popular location that he was sure would rent out. That way, he didn’t need to worry so much about the risk that comes with financing.
“I would rather pay a premium for a property that is in the right location than get a good deal for the property,” he said. “Even if you get a bad deal, location because of the appreciation.”
He also hired a property manager to deal with any issues that his tenants experience, in a continued effort to keep the investment passive. He pays the property manager a percentage of the rent price.
For McGlown, this setup is exactly what he wanted: Recurring monthly income with little active energy on his part.
Should I Invest In A Multi
In some areas, there could be advantages to investing in multi-unit properties like duplexes and triplexes over single-family homes. In other cases, the opposite is true. Lets go over a few examples.
Scenario 1: In one particular town, you may have found a great duplex with two one-bedroom, one-bath apartments for $125,000. In the same town, theres a two-bedroom, two-bath, single-family home with similar square footage selling for the same price. Both were built in the same year, and while the duplex will make $700 for each unit so a total of $1,400 the single-family will rent for $1,500. The single-family makes sense, right?
Not exactly. In this particular town, the vacancy rate is fairly high. If one unit of your duplex is vacant for 2 months out of the year, youd still collect 92% out of your maximum possible rent. But if your single-family home is vacant for 2 months, youd be losing more money. There are ways to keep your vacancy rates low, and the demand for single-family homes may be higher in certain areas, but sometimes, its simply the luck of the draw. Other times, you get lucky with great long-term tenants!
Scenario 2: In another instance in the same town, a different duplex has connected utilities. In the county, theres an ordinance stating that utilities arent allowed to be estimated and charged to tenants if two units share a meter. The total for the connected meters for water and heat per month is $350 which comes straight out of your profits.
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Consider Flipping Investment Properties
This is HGTV come to life: You invest in an underpriced home in need of a little love, renovate it as inexpensively as possible and then resell it for a profit. Called house flipping, the strategy is a wee bit harder than it looks on TV.
There is a bigger element of risk, because so much of the math behind flipping requires a very accurate estimate of how much repairs are going to cost, which is not an easy thing to do, says Meyer.
His suggestion: Find an experienced partner. Maybe you have capital or time to contribute, but you find a contractor who is good at estimating expenses or managing the project, he says.
The other risk of flipping is that the longer you hold the property, the less money you make because youre paying a mortgage without bringing in any income. You can lower that risk by living in the house as you fix it up. This works as long as most of the updates are cosmetic and you dont mind a little dust.
» Which is better?Real estate vs. stocks
Rental Property Return Investment Tips
Erika Rasure, is the Founder of Crypto Goddess, the first learning community curated for women to learn how to invest their moneyand themselvesin crypto, blockchain, and the future of finance and digital assets. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator.
More and more people are getting started in real estate investing and are looking to rental properties as a way to diversify their investments and securing cash flow for the future.
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Why It’s Important To Know A Property’s Roi Before Buying Real Estate
One of the main reasons people invest is to increase their wealth. Although the motivations may differ between investorssome may want money for retirement, others may choose to sock away money for other life events like having a baby or for a weddingmaking money is usually the basis of all investments. And it doesn’t matter where you put your money, whether it goes into the stock market, the bond market, or real estate.
Real estate is tangible property that’s made up of land, and generally includes any structures or resources found on that land. Investment properties are one example of a real estate investment. People usually purchase investment properties with the intent of making money through rental income. Some people buy investment properties with the intent of selling them after a short time.
Regardless of the intention, for investors who diversify their investment portfolio with real estate, it’s important to measure return on investment to determine a property’s profitability. Here’s a quick look at ROI, how to calculate it for your rental property, and why it’s important that you know a property’s ROI before you make a real estate purchase.
Issue A Private Mortgage
Instead of buying property or investing money in a REIT, you could take another approach to real estate investing. You could become a private mortgage lender. As a private mortgage lender, you play the role of the bank. You lend money to homebuyers, charge an interest rate on what they borrow, then slowly take back in what you lent out.
Why would homebuyers come to you for money? Well, they may have no choice. They could have poor credit, or their income threshold or job status may disqualify them from getting a traditional mortgage. Either way a demand for private mortgages does exist. And if you have a lump sum growing by a meagre interest rate, lending it out as a private mortgage could help you earn more.
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Think About Investing In Rental Properties
Tiffany Alexy didnt intend to become a real estate investor when she bought her first rental property at age 21. Then a college senior in Raleigh, North Carolina, she planned to attend grad school locally and figured buying would be better than renting.
House hacking allows you to live in your investment property while renting out rooms or units.
I went on Craigslist and found a four-bedroom, four-bathroom condo that was set up student-housing style. I bought it, lived in one bedroom and rented out the other three, Alexy says.
The setup covered all of her expenses and brought in an extra $100 per month in cash far from chump change for a grad student, and enough that Alexy caught the real estate bug. Now age 27, she has five rentals and is a broker and owner of Alexy Realty Group in Raleigh.
Alexy entered the market using a strategy sometimes called house hacking, a term coined by BiggerPockets, an online resource for real estate investors. It essentially means youre occupying your investment property, either by renting out rooms, as Alexy did, or by renting out units in a multi-unit building. David Meyer, vice president of growth and marketing at the site, says house hacking lets investors buy a property with up to four units and still qualify for a residential loan.
If you manage it yourself, youll learn a lot about the industry, and if you buy future properties youll go into it with more experience, says Meyer.
Should You Invest In Real Estate
Adding real estate to your portfolio could be a smart choice. You can diversify your investments, take advantage of certain tax breaks, and create a solid stream of income that could carry over into retirement.
But, as with any investment, you want to know what youre doing. The gains on real estate investing can be immense. But so can the losses. And while you may feel motivated in the beginning to flip homes and manage rental property, the maintenance and upkeep, especially in storm prone areas, can get old fast.
If youre new to investing, you could learn the ropes with a more passive approach, such as a real estate ETF or a REIF. Both of these can expose you to the real estate market without requiring you to buy property. That might be more suitable for Canadian investors, especially as buying residential and commercial property has never felt more out of reach.
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