More people are beginning to realize that investing is the path to financial independence.
But where should you put your money?
Stocks, bonds, and more recently Bitcoin have all been touted as good ways to generate a quick buck.
But slow and steady usually wins the race. For this reason, every successful investor will have real estate included in their portfolio. The monthly passive income, direct control of assets, and the absence of the constant volatility of the stock markets only increase its appeal.
So, would you like to know how to invest in real estate? Our guide will break down all you need to know to guarantee your success in becoming a real estate investor.
Get Your House in Order
The goal of any investor is to reach a point of financial independence.
Your money should be viewed as your employee, working on your behalf to generate more cash. But to get to that point, it is imperative to have some form of financial stability, especially before investing in traditional real estate.
Firstly, real estate is an expensive investment, and additional costs can rear their head at any time. From the money needed for a downpayment to unexpected maintenance costs, being unprepared could lead you into a potentially sticky situation in the future.
To ensure long-term success, the wisest course for anyone who wants to start investing in real estate is to focus on improving your current finances.
Remember, you should only invest what you are willing to lose. Therefore, if you are going to be dependent on receiving rental payments just to make ends meet each month, you could find yourself one vacancy or boiler replacement away from being in a precarious position.
Aim to pay off any outstanding debts and try to build up an emergency fund over time. When supported by that kind of safety net, the chances of you being able to handle whatever your investing journey throws at you will skyrocket.
Flip or Hold: Decide on Your Strategy
No guide to real estate investing would be complete without dedicating a few words to the different ways in which you can decide to go about your business.
The first and most common is buying and holding.
This is when you buy a rental property, aiming to generate a steady passive income over the years through rent. This technique is the safest for first-time buyers and those who are interested in building up a portfolio of properties over time.
There is a skill to getting this right, however. While it can be tempting to raise rents to increase profits, if this is not in line with the market, you could be in jeopardy of struggling to find tenants who are willing to pay.
An additional benefit for those who buy and hold is that if property prices increase, they can eventually sell the property for a substantial profit.
The next strategy comes in the form of house flipping. This more risky approach involves first buying a bargain property in an area where prices are stable or where prices are known to be rising.
There are then two approaches that can be utilized. Either refurbish and upgrade the quality of the place and sell at a profit. Or you can hold onto the property for a few months without doing work to it, confident that you will be able to sell it at a higher price based on the market.
As you can imagine this is a high-risk, high-reward strategy, so it certainly is not for the faint-hearted.
So which strategy is best for you?
Well, it is important to bear in mind that house flipping can include substantial building work costs. Do you have expertise in this area and can you guarantee low labor costs? If not, for your first investment, it may be best to play it safe and consider buying and holding.
Become a Real Estate Student
For many of us who have left school, the idea of having to study again sounds about as unappealing as it can get. But the key to knowing how to invest in real estate and succeed is by being fully aware of the market and property laws.
For most of us, these will be new skills, but remember that this information is for your own benefit. Taking the time to get familiar with them can pay off even in a literal sense.
There are online courses, books, and even Youtube videos giving out great advice on the more nuanced sides of how to invest in real estate. The more you soak in information like a sponge, the better prepared you will be to make your dreams a reality.
So, with your finances in order and you increasing in knowledge by the day, your first step on the journey should be to lock down potential areas to invest in.
When deciding on a location, ask yourself questions like: What is the crime rate like? What about the employment figures in the area? Are there any well-rated schools? What about any local amenities?
All of these factors can have an impact on whether your home will appreciate in value or if renting if there will be much demand.
Once that is decided, the next step is crunching the numbers. Research how much money properties in the area are going for. While it may be tempting to find this out in the comfort of your own home online, there is much to be gained by speaking to real estate agents, other investors, and even locals if you can.
The insight gained by doing this can do much to provide peace of mind and help you to know a bargain when you see one.
Deal or No Deal?
So you have found an area and some good options. But how do you convert a rental property investment into a cash cow?
Again, the numbers provide the answer.
Becoming aware of all the expenses, even before your tenants move in, is an eye-opener for most beginners. But the quicker you get familiar with the areas of primary importance, the quicker you can start to make decisions on real estate.
Your goal should be the generation of positive cash flow. So what things will pull you into the red?
These can be obvious, like mortgage payments, insurance, repairs, or hidden costs like property taxes. Do you have the time to manage the properties? If not, it would be good to find a reputable property management company to look after it for you. But this comes at a cost that should be included, too.
Only move forward with an offer when all these costs are calculated and you know you can turn a profit.
A good rule of thumb for many investors has been the 1% rule.
The idea is that 1% of the total purchase price should be the amount you receive in monthly rent. For example, a property that costs $320,000 should have a rent that is $3,200 per month.
The 1% is great to use as a marker, but not as a defining factor on whether you stick or twist.
If you are investing in an apartment complex, you may need a higher margin as more can go wrong. Likewise, a property that provides you with less than 1% can still be a great investment, if the area is in such high demand you never will need to worry about vacancy costs or if there is little to no maintenance or refurbishments needed.
How to Invest in Real Estate Without Much Capital
Real estate investments have the potential to provide real financial freedom to those who take the plunge; however, for many, although they may have the desire to start investing in real estate, the demands of their day-to-day expenses make it seem like a fantasy.
Nonetheless, it is also possible to invest in real estate without having to own a property. Here are a few:
Real Estate Investment Trusts
Real Estate Investment Trusts (REITs) operate much like stocks and shares. These corporations use the pooled funds from investors to source, purchase, and manage properties and then share the profits with their investors.
The types of properties usually sourced are commercial, such as hotels, malls, and other office complexes. The benefit of a REIT is that they are under obligation to pay out 90% of their profits to shareholders to avoid paying corporate income tax.
Real Estate Mutual Funds
Real Estate Investment Funds operate much in the same way a traditional mutual fund operates, with the biggest difference being that they focus on purchasing REITs and shares in real estate companies.
They are managed by groups that have professional analysts who can take control of the whole operation and allow investors to have a more flexible portfolio.
Make a Start Today
Knowing how to invest in real estate comes down to a few simple steps. Whether you need to clear debt, save, make decisions on where and when you want to make a start, or if you are ready to sign on the dotted line, one thing is true.
It is possible to make progress on your journey right now.
One of the best resources to stay informed about the market and find the best properties in your area is right here on Hommati. Take advantage of our vast catalog of available properties and our professional agents to help you find the rental property investment of your dreams.