Is An Investment Property Right For You
Investing in real estate isnt for the faint of heart. Not only do you have to consider the mortgage and the operating costs, but you also have to think about the tenants, who can either make or break your investment. Theres usually more risk involved with owning a rental property than investing in the stock market. After all, if you managed to get stuck with bad tenants who dont pay rent on time, your returns arent just reduced theyre nonexistent. Sure, the stock market may only be pulling in 4% to 5% annually, but you can count on that with some level of confidence. Youre taking a bigger gamble with an investment property. But with a bigger gamble also comes the opportunity for a bigger reward, and this is especially true for investment properties.
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.
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 data and analytics 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.
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How Do You Invest In Real Estate
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 is a part of this land, including trees, buildings, or fences, is 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. The land is any natural surface and airspace anything 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 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, and 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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Here’s Howfrom Buying Rental Property To Reits And More
Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time.
Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate.
How Much Money Do You Need To Invest In Real Estate
There are many reasons to invest in real estate from rental income to portfolio diversification. During times of volatility in the stock and bond markets, some investors turn to hard assets such as real estate. In the past decade, investing in second homes to use for short-term rentals listed on home-sharing platforms has grown in popularity. There are several ways to get a start in real estate investing without an enormous outlay of cash.
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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.
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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.
Ability To Leverage Funds
When investing in real estate you probably cant afford to buy properties in full. After all, that single-family home you plan to rent might cost $200,000 or more. Thats where leverage comes in. Leverage in real estate means youre using other peoples money to purchase properties. In this case, youll take out loans from banks, mortgage lenders or credit unions and pay them back over time. This allows you to add to your real estate holdings without spending the full amount of money youd need to buy them on your own.
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Don’t Sell Appreciating Assets Just Yet
When we’re young, we tend to be quick to sell in hopes of making a return. This is the worst thing you can do in densely populated areas or up-and-coming cities. In these hot markets, the longer you wait to sell, the better. Across the country, in places like Seattle and Houston, many properties have doubled in value over the past three years.
Many of these properties will continue to appreciate, so determining when to sell is more complicated than simply seeing a slight return. Keeping track of market forecasts will help to determine when it’s time to sell. This is also something that will be learned with experience.
Invest In A Small Rental Property
If you learn better by being hands-on and if you have the capital on hand you can start small with a small rental property like a single home or a home with only a couple of units. You can also purchase a larger property in which you also live and rent out the rest.
This is a good option for someone who would rather hedge their bets on themselves rather than invest in a project they dont have a lot of control over. Starting small at first is a great way to gain knowledge and experience without overloading yourself. Through this process you will learn about what it takes to maintain a rental property and whether or not this is something you would like to do yourself or delegate to a property manager in the future.
Even with a smaller property this is no small undertaking and should be approached with that understanding. You wont just be dealing with a building, you will also be dealing with other people.
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How Much Rental Income Youll Need
To get a buy-to-let mortgage, lenders will want to know that the rental income of the property will cover your mortgage interest payments by 125% to 145%. So, if your mortgage payments would be £1,000 a month, youd need to get £1,250-£1,450 a month in rent depending on the lender.
To see whether you could realistically get that kind of income from the property youre planning to buy, speak to rental agents in the area to find out the going rate.
It’s hard to predict if a property will make a profit in the long term. Thats because the amount youll be able to sell it for in the future depends on many factors. These include the health of the property market and how desirable the area becomes. Thats why investing in property can be a risk.
However, you can at least work out if the property is likely to make you a profit once youve paid your mortgage each month. Don’t forget to take the cost of maintenance, repairs and agency fees into account.
Strategies For Wealth Stage #4 Growth
Strategy Goal: Grow your smaller net worth into a much bigger net worth
- Fix-and-Flip houses to generate big chunks of cash. Remember to save & reinvest your profits!
- Build & grow an income property portfolio using one of these plans:
- The All-Cash Plan no debt, pay 100% cash for each property
- The Debt Snowball Plan borrow on a small number of properties, then accelerate debt pay down one property at a time
- The Buy 3-Sell 2-Keep 1 Plan buy 3 rentals, hold, then sell 2 and pay off debt on the third
- The Trade-Up Plan use 1031 tax-free exchanges to build a portfolio with strong equity and income
- Self-Directed Retirement Account Plan use a self-directed IRA or 401k to invest tax-free in private loans , rentals, or flips
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Use Leverage To Invest In Real Estate
People who invest in real estate directly by owning property such as a single-family rental home often use leverage also known as other peoples money to finance the property purchase.
To illustrate how leverage works, assume an investor purchases a SFR for $120,000. One option is to pay cash for the property, while another option is to leverage the property purchase by making a 25% down payment of $30,000 and financing the rest.
Now assume that after 5 years, the home is worth $176,000. If an investor had paid all cash, the profit would be $56,000 and the cash on cash return would be 47% .
However, if an investor had used leverage to purchase the home, the profit would still be $56,000 but the cash on cash return would be 187% . In other words, by wisely using leverage by making a conservative down payment, an investor nearly doubled the cash on cash return in this example.
What To Expect From This Guide
Our beginners guide to real estate investing will help you:
- Determine which type of real estate investing is right for you
- Understand the types of funding available
- Know how to pick successful properties
- Understand the valuable role of credit cards
There are many nuances to real estate investing. It pays to do the learning up front to determine which type of real estate investing you want to get involved in. Will you focus on residential properties or commercial real estate? Are you looking to flip properties for a quick sum of cash? Or are you more focused on building an investment portfolio of rental properties that provide you a monthly income and diversification? Well discuss all these options.
Depending on the type of real estate you choose to invest in, the amount of funding youll need will vary. Well discuss how to get funding for your investments and the pros and cons of each of these sources of money.
When it comes time to invest, youll need to know how to pick your properties. Well share tips on what to look for and what to avoid.
Finally, well share how the right credit cards can help you amplify your earnings and save money on your expenses. Some credit cards can even provide short-term funding at an attractive interest rate.
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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 estate, 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.
The Blue Business Plus Credit Card From American Express
This Amex Blue Business Plus Credit Card is excellent for everyday purchases because you’ll earn 2X Membership Rewards points on business purchases up to $50,000 each year, and 1X points on purchases after that. It also offers a 0% APR introductory offer on purchases for 12 months after opening your credit card, then the APR increases to 14.74% to 22.74% . The flexibility this card offers can come in handy as you’re managing your cash flow on your projects.
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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.
Being Less Than Thorough
So youve found the right property and youre ready to make a move.
Have you really done every little bit of research into the investment?
Do you know why the vendor is selling?
Knowing the vendors motivation can make a big difference when it comes to negotiating a good price.
During the initial inspection look for clues as to the vendor’s personal situation are they going through a divorce for instance?
While it might sound a little callous, this gives you an opportunity to buy a bargain, as well as giving the seller a chance to move on with their lives.
Have you had the relevant inspections done to uncover any structural defects or signs of pest infestations, like termites?
The fees for these are tax-deductible and paying say $800 for this type of peace of mind can save you thousands in the long term.
Finally, is the property liveable from a tenants perspective?
Remember, while you wont be living here, someone else will, and theyll be paying you to do so.
Ask yourself, is the floor plan appealing, and will the property provide a comfortable, practical home?
Always do a second and third inspection at different times of the day.
Is it noisy during peak hours? How does light work at different times? Are the neighbours party animals or quiet?
Ticking all of the right boxes when you inspect a property will ensure you buy the best possible investment every time.
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