Real estate is a common subject, and chances are this won’t be the first or the last time you hear of it.
When people talk about real estate investing, however, there are different opinions. Some believe investing in real estate is one of the wisest investments you could ever make. Others feel differently and would rather take their investment elsewhere.
In this article, we will discuss real estate investing including, the good, the bad, and the ugly. Keep reading these lines as we talk all about it.
Is real estate the best way to invest?
It’s the big question, isn’t it? At some point, everyone whose interest is sparked by conversations on real estate wants to know if it is the best way to invest.
The short answer is – it depends entirely on you. And the long answer is – yes!
When it comes to investments, there are several ways you can go with your funds (big or small). Some top investment options include;
- The stock market
- Government bond funds
- Money market accounts
- Fixed deposit
- Commodities and gold
- Real estate market
There is hardly any such list that doesn’t include the mention of real estate investment. Andrew Carnegie once said that 90% of millionaires got their wealth by investing in real estate. So it’s starting to look like real estate can be the best way to invest, but we haven’t quite gotten to why yet.
Why real estate is considered a good investment?
The market offers cash flow
When you think about it, it makes sense that investing in properties can generate a consistent cash flow. People need houses or buildings to live in, do business, and have fun, and so on. Its shelter and shelter is one of the basic amenities in life. After the mortgage payments and operating expenses on your real estate investment, cash flow is the net income you get. Hence cash flow is the major benefit when you invest in this option because the market generates this consistently.
It only goes up in value
According to the National Association of Realtors, appreciation levels for real estate have been 6 percent per year, since 1968. This includes during recessions or the downturn in the economy.
In real estate investment, rental properties and the income they generate is the primary source of your profits. However, real estate values continue to appreciate over time, which proves that the longer you own your property, the more value it can have. In the long term, you can increase rental fees or sell the property for much more than you invested initially. This is in contrast to investments like stock, which can drop to zero or cars that depreciate with time.
You can leverage real estate
As an investor, it’s never strange to get to that point where you need leverage. Real estate can be leveraged and for most people, this is beneficial enough. Following building equity in an investment property, it can be leveraged for cash as either a second loan to refinance the original one or against increased equity.
Real estate is a tangible investment that can always serve as collateral. This helps you get financing easily.
You can improve real estate
As a tangible asset made of materials like brick and wood, it’s possible to keep your properties in great shape by making certain changes occasionally. Repairs, replacement and renovation projects help you increase the value of your property for sale, rent, or market value.
Lots of tax benefits
A real estate investment comes with many tax benefits such as cash flow from investment properties, property taxes, insurance, depreciation, tax deductions on mortgage interests, and so on. Tax codes allow you to make these deductions for your normal expense, and in turn, it reduces your total taxes.
Perfect for retirement
You might find it hard to enforce a savings program for your retirement, but investment in properties will do that for you. Once the mortgage is paid off after your real estate purchase, your cash flow steadily increases leaving you with an investment perfect for retirement.
This benefit of real estate investments is often the most underrated. When compared with several other investment options, real estate investors can enjoy the ease of purchasing properties, financing, maintenance, tax, and income. There are no tough financial barriers in real estate investment, and real estate investors can work with their various investment amounts. All you need to be a successful investor in real estate is easily accessible and most times affordable.
Why real estate might not be considered a good investment
We did state at the start that this talk on real estate investing will include the good, bad, and ugly. There are cons to this industry just as there are pros. While the pros and cons of investment are normal, it’s up to you to decide if these reasons why real estate investment might not be good, are deal-breaker material. Some of them are manageable issues that come with almost any investment.
It is not a get rich quick scheme
Many investors want their investment to yield profits as fast as possible, and that’s understandable considering a financial investment was involved. However, when you invest in property, you can’t expect to make money overnight. Real estate investing is a long-term business. It is possible to achieve steady cash flow within several months, but it takes years to gain financial freedom using real estate.
You need to understand how property investment works
It should be top of mind that just because you own a house doesn’t mean you know what it takes to invest in real estate. Owning or living in a house differs greatly from understanding an entire market for investment success. You will need to develop a strategy that suits you and your goals and select properties based on that. It’s similar to how one would enter other complex investments like the stock market.
You must have financial discipline
Being an investor or making a real estate investment comes with its set of challenges and having financial discipline is one of them. You can enter or succeed in real estate investment only if you’ve learned how to budget, spend less than you earn, manage debts, and leverage. If you have mastered none of these and might be unraveled by the slightest sign of financial troubles and debt, you will want to avoid the real estate market.
You shouldn’t get in if you don’t have money
While there are countless properties to invest in with different investment figures, real estate investment requires a level of financial stability. You should have a steady income from an established source to serve both as a financial buffer for rainy days and to encourage banks to give you loans. Do not invest into property in the market with low finance.
How much can you make as a real estate investor?
It’s understandable that before you hurry to make real estate investments, you would want to know the profit margins in store. After all, making money off your investment is what it all boils down to.
You can make a lot of money as a real estate investor or not a lot of money.
As of 2019, most real estate investors earned between $100,000 and $150, 000 per year. Yes, these numbers could go up or lower depending on several factors. We’ll break down the parts that determine how much you can make as a real estate investor.
What is a real estate investor?
They are people who invest in the buying and selling of properties to make money. The figures earned as a real estate investor differ based on factors like experience or time in the industry, state, type of property, and more.
How do real estate investors make money?
The best thing about investing in real estate is the diverse ways in which you can make money. Investors can make profits in any or all of these three major ways;
- Rental income
- High-valued resell of the acquired property
- Profits from business activities in real estate
- Rental Income
Leasing real estate property is likely the most popular way investors make money in real estate investing. It’s simple and capable of producing profits in the short term. Anyone can use this method. It involves acquiring a property, listing it as a rental, and because people would always need such amenities, they are fine with paying a rental fee as tenants to use the facility. You can lease a residential building, office, hotel, or parking space.
The most relevant downsides to leasing your property are dealing with maintenance, repairs, and even environmental investigations due to the actions of your tenants. You could end up going bankrupt or in trouble with the law because of the wrong tenant. But, to avoid these setbacks, background checks, tenancy agreements, and routine maintenance are necessary. As you know there is no shortage of landlords, real estate investors, or rental properties.
- High-valued resell of the acquired property
It’s important to understand that in real estate, not every property appreciates. The biggest threat to real estate investing is inflation and decades ago when inflation hit, the real estate industry came crashing down. During inflation selling properties will only make you small profits and with high spending power, you’ll be left with nothing.
Inflation in any economy occurs when the government has to print more currency notes to cover overspending.
Without the constraints and effects of inflation on an economy, your property can rise tremendously in value and be sold for a significant profit. Factors that influence this value include location, type of building, size of the building, condition of the property, market prices, and more. This also means you can increase the value of your property by employing certain methods.
- Profits from business activities in real estate
The possibilities with this method of making money in real estate investments are endless. It involves selling services within your property to guests, tenants, or visitors. For example, in a hotel building, you sell movies in a theatre to guests, install vending machines around the premises, and so on. This sort of investment may require some professional knowledge to make it successful, or you can hire an expert to run these business activities on your behalf.
Your location might matter
Your location/state plays a huge role in how much money you make as an investor, and this changes depending on the market in your location and the overall economy. Some investors can make as much as $200, 000 per year where others in different states make less than $150, 000.
How investors can make more money in real estate
The figures sound great, and it’s clear that you can make thousands of dollars yearly when you invest in real estate. But can you go even higher than whatever figure you end up with? Yes, and these are the tips that help.
- Diversify your methods and try other ways in real estate investing. If you already lease residential homes, you can try vacation homes and investing extra businesses on the property.
- Find a successful real estate investor for mentoring or coaching. Try to learn as much about the market and strategies as you can. Evolve with the times. Investors thrive on knowledge.
- Change your locations and always buy a property with high potential.
- Increase your rental fees or price, but ensure the increase is justified to stay in business and secure cash flow.
How do I start investing in real estate?
Getting started can be simpler than you think. We have put together the steps you need to start investing in real estate.
Know your finances
After learning all about the advantages of real estate investments, and how investing can be profitable, you might be excited about starting. But for investors, financing is the first huge step.
Thankfully, in real estate, you can start small or big. Your first investment depends on how much money you have available or the amount of funds accessible to you. For example, the down payment you might need to buy a property or house of $75, 000 is $15, 000. That is 20%. If this amount is beyond your financial ability, there are various properties with lower costs and down payments.
Hence, the first step in getting started requires you to know your finances. There’s no rush to start immediately, as real estate investing ultimately requires planning to be profitable. You can take your time to save, clear any existing debts, and move forward with the other steps.
Also, it’s important to remember that real estate is a not so liquid asset and will need time to gain value. So, asides from saving to gather the capital to invest, you should have a stable financial standing. Real estate is hardly a short-term investment strategy, so only invest if you can give it the room it needs to become profitable.
Identify your preferred real estate investing strategy
Before you dive into an elaborate plan, do this quick one and identify the strategy that best suits you at the moment. This strategy should include your preferred style of investing and method. Remember that you can always diversify.
Styles of investing include;
- A partnership. In this situation, you own a home with someone. This has its perks, such as less capital needed as it will be divided across both owners. Same with profits/cash flow.
- Sole proprietorship. Many investors prefer to be the sole owners of the properties they invest in. This might demand more capital from you at the start, but in the long term, you are in full control of your cash flow. It makes owning a rental property better.
- Crowdfunding. You’ve likely heard about crowdfunding for other business models, but it exists in the real estate industry too. Through crowdfunding, different types of investors can invest in various properties. It’s often done via online platforms. And you will be a passive investor, meaning you won’t be making the decisions.
- Real Estate Investment Trust (REITs). This involves purchasing shares sold on multiple properties to investors using mutual funds. It’s like a stock market form of real estate.
- Start as an Airbnb host. Airbnb business model allows most homeowners to make some extra cash from hosting guests in free rooms. It’s a simple way to start as an investor. The only downside may be having to clean up after your guests, even if you charge a housekeeping fee.
Build your team
This might sound surprising because all along you’ve likely thought real estate investing is a sole endeavor. It is. A team is important to invest in real estate because they perform specific roles. You will need;
- A real estate attorney
- Property manager
- Real estate agent
- Insurance agent
By now you probably get the picture. It’s wise to know and discuss with each of these professionals before starting real estate. While you may not need all of them at the start, they are always essential at some point. For example property management/manager would be relevant when you own a rental property.
You can build a team through referrals by asking others who have had reason to use any of these professionals. Check out a few options and settle for those that work well with you.
Reading our thorough and in-depth article is not all the knowledge you need. Investing is a serious business, and even though the practical experience is more valuable, it’s vital to improve your knowledge. Read on investing, real estates, successful mentors in the business, and so on. Find a mentor that shares knowledge with you.
Take the next step
The next step in starting real estate could be as simple as just buying your first house to live in. Stop paying rent and buy a house that can build equity for your future.
Buying a rental property is another step to get you started or move you further like most investors. Rental properties can be a multi-family unit or a single home you rent out to tenants. Not to forget that you can also rent out commercial buildings.
- Invest in REITs. REITs allow an investor to purchase company stock through mutual funds or exchange-traded fund (ETF). REITs are not an ideal long-term solution, but can be good for the short term. They are also similar to how the stock market works.
- House flipping, which is an investment gem right now, involves buying homes that are beyond market value and fixing them up to resell. Profits could be anywhere from 60% up to 95% in certain areas.
It’s safe to conclude that real estate investing is a good investment especially when compared with others like stock market. Billionaires have achieved their wealth status using this option and you can surely benefit from it too.
Getting started can be simple or hard depending on your approach and the help you can get. Invest in real estate with a stable finance source and a clear head. Always keep in mind that massive returns are not a short term goal for investors.