There is no doubt that real estate is a sound investment. Over the long term, real estate prices have increased, making it a very stable place to put your money. However, like any other type of investment, there are risks involved in real estate investing.
As such, it’s essential to understand what the possible benefits and risks are before diving headfirst into the world of real estate investing.
Types Of Real Estate Property Investments You Can Make Now
One of the reasons why real estate provides such a great investment opportunity is that there are many types of properties that you can invest in.
Some of these investments may be long-term, while others may be short-term. Some may involve a lot of risk, while others may be a bit safer. With this in mind, the following are the main types of real estate investments that you should know about:
Home Ownership
The most common type of real estate investment is homeownership. A lot of homeowners don’t see their property as an investment – but it is. When you buy a home, you are buying an asset that will likely increase in value over time.
If you live in your home for a long period of time, it means that your property has time to increase in value. By the time you’re ready to move, there’s a good chance that you’ll turn a profit when you sell your house.
Buy-And-Hold Property
If you buy a house that you plan to rent out instead of living in it, then you’re investing in what is called a “buy-and-hold” property. The idea is to rent out your property until its value increases to a point where you feel comfortable cashing in.
It’s worth noting that there are a lot of costs associated with holding a property. Besides paying the mortgage, you’ll also be in charge of maintenance, repairs, utilities, and more. Not to mention the advertising costs to find a tenant.
Long-Term Rentals
Long-term rentals refers to properties that are rented out for long periods of time. Typically, a long-term rental property will be rented out for one year at a time – although some owners will rent their properties out for six months at a time as well.
The advantage of a long-term rental is that you’ll earn a stable income from rent, which you can then use to pay off the mortgage. In some cases, you may even be able to turn a profit if the rental income exceeds the cost of your mortgage (and all the associated costs of owning a property).
Of course, it’s crucial to mention the possible drawbacks.
For example, if you get stuck with a bad tenant who doesn’t pay rent, damages your property, or breaks the lease, it could become costly. Not only can this be an enormous hassle to deal with, but you may also have to pay for repairs or go without rental income for some time.
Short-Term Rentals
Short-term rentals refers to properties that are rented out for a few days or weeks at a time. You can charge more on a per-day basis than you can for a long-term rental, which is why short-term rentals can be quite lucrative.
For instance, a two-bed house in a good location could be rented at$100 a day for a month, compared to $1300 a month if it were a long-term rental.
However, the drawback to investing in a short-term rental is that there’s no guarantee that you’ll attract enough renters every month to generate a profit. You may even go months without any renters. A big part of it depends on where the house is located.
For example, a house right on the beach is much more likely to attract short-term renters than a house in the suburbs.
Fix-And-Flips
Arguably the biggest risk-to-reward investment you can make in real estate is a fix-and-flip. A fix-and-flip investment refers to the process of finding properties that are in need of repair and renovations.
Such properties tend to be priced below the market value, which means that they’re cheaper to buy. The idea is to invest in these properties at a lower upfront cost, then repair and renovate the property to increase the value of the house.
After the house is renovated, you would put it back on the market and gain a profit by selling it at a price above what you bought it for.
Although you can make a significant amount of money on fix-and-flips, there’s a big risk involved as well. Not only do you need to invest in the property, but you also have to invest in the repairs.
If you don’t know what you’re doing, you could end up losing a substantial amount of money on your investment – especially if your newly renovated house takes a long time to sell or sells for below what you anticipated.
Why Invest In Real Estate?
Although there are a few risks involved when it comes to real estate investment, it’s worth noting that you’re always taking some sort of risk when it comes to an investment of any kind.
Real estate tends to be a stable investment – as long as you do your due diligence and you know what you’re doing. Just consider these benefits:
- Regular Cash Flow
Unlike stocks and other investments, real estate can provide a regular cash flow if you’re renting out your property. This cash flow can be used to pay off the mortgage, invest in other real estate properties, or live off of. - Tax Deductions and Exemptions
There are many tax benefits available for real estate investors. The government understands that investment in real estate can help encourage economic growth in underdeveloped areas. It’s why there are tax benefits for real estate investors that invest in opportunity zones. Additionally, landlords can deduct many of their expenses on their tax returns, making it easier for them to turn a profit. - Wide Variety Of Loans Available
Unlike other investments, real estate has a huge variety of loans that are available to help you finance your purchase. This means that you don’t need a lot of money to get started in real estate investing. You can use a loan to cover the cost of the property, the renovations, and even the closing costs. If you’re investing in a rental property, you can then use the rental income you generate to pay off your loan. - Renovations Can Force Appreciation
One of the biggest benefits of real estate investment is that you can often force appreciation on a property. This means that, through renovations and improvements, you can make the property worth more than when you first bought it. It’s why so many real estate investors invest in fix-and-flips. - Property Is Inheritable
When you own a property, you can leave it to your heirs and they will receive it with the same benefits as you did. This is not always the case with other investments, which can often be subject to probate. - Property Is Insurable
Not all investments are insurable. Real estate is insurable, which means that if something were to happen to your property, you wouldn’t lose all of the money you invested into it. As such, a real estate investment is often a much safer investment to make. - Property Is Transferable
Because real estate investments are transferable, you can easily sell your property to another investor if you no longer want it. You can also use real estate as collateral for a loan, which is not possible with many other investments. - A Way To Diversify Your Investment Portfolio
Real estate is often a good way to diversify your investment portfolio. Real estate is not as volatile as other investments, such as stocks. When you invest in real estate, you’re investing in something that is likely to maintain its value and appreciate over time.As such, if your portfolio has a lot of risky stock investments, adding real estate can help make your portfolio a little more secure.
What Makes A Property A Good Real Estate Investment?
Despite the fact that there are countless benefits to real estate investing, that doesn’t mean that you should invest in just any property. There are still risks involved in real estate investing, after all. With that in mind, you’ll want to know how to identify a good real estate investment opportunity.
The following are a few indicators of a good real estate investment:
- It’s In A Promising Location
The property should be in a desirable area that is likely to appreciate in the future. This could be an up-and-coming neighborhood or an area that is already developed. The more in-demand the neighborhood is, the better.It’s also important to consider the future of the neighborhood. For example, if a major road is being planned that will help connect the neighborhood to a big city, it can cause home values to skyrocket in the future. Be on the lookout for future plans that can affect a property’s value. - It Has Access To Useful Amenities
Another important factor to consider when investing in real estate is the access to amenities. The property should be close to desirable amenities, such as schools, parks, shopping, restaurants, and other amenities.People look for homes with access to these useful amenities, as they are valuable and can improve quality of life. - The Neighborhood Rankings Are Encouraging
You can also look into a neighborhood’s rankings to get an idea of whether or not it would be a good place to invest in real estate. A neighborhood that is deemed unsafe or has a high crime rate is not likely to be a good investment.However, a neighborhood with a high ranking for education and employment is likely to be a better investment. - Property Trends Are Increasing
When you’re looking to invest in real estate, you’ll want to make sure that the price of the property is comparable to other homes in the same market. You don’t want to invest in a property that is too expensive.Additionally, you’ll want to look at how the price of the property has been trending. If the price is increasing, that’s a good sign. However, if the price is decreasing, that’s a sign that you may want to look elsewhere.
Financing For Real Estate Investments
Real estate is no small investment. Expect to pay hundreds of thousands of dollars for a single property (depending on the size of the property and its location, of course).
Knowing your financing options is crucial to making the right investment decision. The following are a few things to consider when it comes to financing your real estate investment.
Conventional Wisdom: Paying In Cash
When it comes to real estate investments, a lot of people subscribe to the idea of paying in cash. This is the idea that you should have the entire purchase price of the property in hand before you make the purchase. Paying in cash is a good option if you have the money available to do so.
After all, if you pay in cash, it means that you’ll save money in interest over the long term. Because so few buyers pay in cash, the ability to make a cash offer can also provide you with more negotiating power.
How Hard Is It To Get Financing?
Just because you don’t have the cash to purchase property doesn’t mean that you can’t invest in real estate. In fact, there are a number of different ways to finance a real estate investment. The most common way to finance a real estate investment is by getting a mortgage.
A mortgage is a loan that is given to you by a bank or other lending institution. The mortgage will be for the purchase price of the property, plus interest.
Although there are lots of different home loans available (including home loans backed by the federal government), you’ll generally need to have a good credit score and a steady income to qualify.
When Taking Out A Loan Is A Good Idea
Even if you have enough cash to pay for a property out of pocket, it may still be a better idea to take out a loan. Taking out a loan ensures that you don’t put all of your eggs in one basket.
If all of your money is trapped in one real estate investment, you’re taking on a big risk – especially if you suddenly have an unforeseen emergency expense in the future.
As such, it tends to be financially safer to take out a loan even though you will be paying interest on it. You should only pay for a real estate investment in cash if you can comfortably afford to do so.
Tips On How To Succeed In Real Estate Investing
When it comes to real estate investing, the goal should be to maximize your profit while minimizing your expenses. For first-time investors, this can be quite challenging. As such, the following are a few essential tips to keep in mind that will increase your odds of success:
- Plan All Your Expenses
When you’re investing in real estate, there are a lot of different expenses that you need to take into account. These include the down payment, closing costs, property taxes, and homeowners insurance.You need to understand what the short-term and long-term expenses of buying property are so that you can budget for them. After all, if you buy a property and it turns out you underestimated the costs, you could find yourself in a very difficult financial situation.
- Research Your Options Carefully
Before investing in real estate, it’s important to do your research. This means learning about the different types of real estate investments that are available to you, as well as the associated risks and rewards.It’s also important to research the market in which you’re investing. By understanding what the current real estate market looks like, you’ll be able to make more informed investment decisions. - Start Small
It’s a good idea to start small when you’re first getting into real estate investing. This means investing in properties that are within your budget and that you have a good understanding of.Don’t go all-in on a property until you have some experience in the real estate world. This will help you to minimize your risk and increase your chances of success. - Invest YourTime Wisely
When you’re investing in real estate, it’s important to make the most of your time. This means being organized and having a plan. If you’re not organized, you’ll waste a lot of time gathering information and making decisions.By having a plan, you’ll be able to stay focused on your goals and make the most of your time.
Addressing The Downsides Of Investing In Real Estate
Despite the many benefits of real estate investing, there are some downsides to be aware of. Real estate investing involves a lot of money, which means that there’s always going to be risks.
However, if you understand what the potential risks are, then they can be avoided or mitigated using the right strategies. With that in mind, the following are a few of the potential downsides to investing in real estate:
- No Guarantee Of Success
When you’re investing in real estate, there’s no guarantee that you’ll be successful. The market can be unpredictable, and even the best-laid plans can go awry.As such, it’s important to be prepared for the possibility that things can go wrong and have a backup plan in place. It’s also why you should never exceed your budget when investing in a property. - No Guarantee Of Cash Flow
Another downside of real estate investing is that there’s no guarantee of a positive cash flow. For example, you may have done everything right – but a simple downturn in the economy could mean that there are fewer renters, making it more difficult to find a tenant for your rental property. - Managing Properties Is Time Consuming
Managing properties can be a lot of work. This includes everything from finding and screening tenants to dealing with repairs and maintenance. You could outsource these tasks to a management company, but doing so will add to your expenses.If doing so isn’t financially logical, then expect to spend a lot of time managing your property.
Should You Invest In Real Estate?
Real estate investing can be a great way to build wealth over the long term. It also happens to be one of the most stable and rewarding investments you can make. However, there are some risks that come with real estate investing.
By doing your research and starting small, you can minimize these risks and increase your chances of success. If you are in need of financing for your real estate investments, then be sure to reach out to us at Pine Financial Group today.