The world of real estate investing is vast. There are many types of real estate investments, possibilities for how to make money with them, and ways to use the money you earn. It may be a little overwhelming at first if you’re new to this field, but once you learn the basics, you’ll be well on your way.
The most important thing for you to know as a beginner is the simple truth that real estate investing is about YOU. If you invest in real estate, it needs to be something that helps you reach your personal goals. You also need to determine how hands-on you want to be. For instance, do you want to invest passively or actively?
Passive real estate investing is when an investor acquires a property but does not get involved in any way in the management of said property. Instead, he outsources this task to a manager. Conversely, when an investor gets involved in a real estate deal personally, and takes a participatory approach in managing it or its eventual sale for a profit, that is considered active real estate investing.
Active investments require more attention, as you’ll be managing tenants and the upkeep of the property. Passive investments don’t require a lot of work from you, but they also come with less potential for profit per investment dollar. There are also several other ways to earn money through real estate, and we’re going to talk about them here.
If you are ready to invest in real estate, here’s what you need to know.
1. Establish Your Investment Goals
Before you begin investing, establish the priorities for your investment. Are you concerned about up-front costs? Do you prefer active or passive income? Would you prefer to build a large portfolio of smaller investments or make one big “bet” on a single rental property?
There’s no one way to invest in real estate—it’s up to you to decide what makes sense for your own situation.
Write down your goals and think about what you want to achieve in real estate investing. Be realistic on how much you want to earn per month or per year, and make a plan on how you can achieve that.
2. Be Aware Of Your Financial Situation
Before you invest in a property, it’s important to know exactly how much money you have coming in and going out each month. This is good practice even for people who aren’t investing; if your income exceeds your expenses by a comfortable margin, then any investment is likely to pay off for you in the long run.
The trouble with investing is that it can be easy to over-commit to it. That is, you may find yourself allocating resources excessively, beyond your capacity to replenish them in the coming months.
Doing so can be difficult to manage, especially if you don’t have other means to support your investments financially.
You should complete a personal financial assessment and consider the following ways to stay on top of your financing before investing in real estate:
- Keep a budget: There are lots of tools out there to help you do this. From online software, like Mint, to applications for your phone or computer. Whether you use one of those programs or just keep track in a spreadsheet, it’s vital that you have a clear picture of your income and expenses before you invest.
- Look at your cash flow: If you can get a sense of what your monthly cash flow will be once the investment is in place, then you’ll know exactly how much you can afford to pay each month to keep up on the mortgage (and any other related payments).
This will help you make sure you have room in your budget to cover those costs.
3. Determine The State Of The Local Real Estate Market
There are several factors that can make or break a real estate investment. The most important factor—the state of the local market—is one that’s easy to learn about before investing.
What does this mean?
It means knowing everything you can about the market, from housing prices and rent rates to the level of competition in your area. You should also think about factors like crime rate, property taxes, unemployment statistics, and any other details that might be relevant.
Consider what has happened in recent years. Are there any factors that would benefit your investment?
For example, if you’re planning on buying a rental property, learn about whether prices have been trending up or down over the last 5-10 years, and whether income has risen or fallen. These statistics will all be available from the local government, usually in the form of a census report.
After making a thorough evaluation of the local real estate market, you’ll be better prepared to decide whether or not it’s a good time to invest.
Be Familiar With The Local Area
So, how do you know if a real estate investment in a particular area is going to be profitable? Here are some factors to consider:
- Attractiveness: The first thing you want to look for is an attractive investment opportunity—that is, one that seems likely to earn you money and/or to keep your expenses low. One way to do this is to look at a few comparable properties in the area.
If you’re buying a rental property, then find out the selling price for other similar properties in your target area.
- Competitiveness: You also want to consider how competitive investment opportunities are in your area. Is it easy to find and purchase a property at a good price, or are there lots of barriers to entry?
For example, if there’s an abundance of low-cost housing available in your area, then you’re not likely to make much money on the purchase itself. The same would be true with properties that need repairs.
- Look for trends: Also, look for trends in the local real estate market.
For example, are you in a growing city? If so, it’s likely you will find competition even when searching for rental properties.
Similarly, if there is a lot of construction in your area but not as much demand for housing, then many of those new properties will be sitting empty, which means you can get a property at a lower price.
4. Know The Ways You Can Earn Profits Off Real Estate Investing
The big one is the income you’ll receive as a result of your property’s rental income. But, if you’re really smart about things, you should set up a few other channels for earning extra cash from your property.
Here are just a few ideas:
- Partnering with local businesses: Do any local businesses have to pay monthly rent to operate in the area? Are there any community centers nearby that people need to pay to be able to use? If so, you could lease out your property to these organizations to gain a more reliable rental income stream and extend your profits.
- Advertising income: You could use your property to display advertisements for other businesses. This could be in the form of billboards, banners, wall space, and more. You can get creative on the ways you can use your property for advertising.
- Run an event business: Another big way you can earn cash from your real estate investment is by holding events on the property. For example, if you have property in a tourist area, you might be able to rent it out for special events such as festivals and fairs.
Try to find groups willing to rent out your property for their events. At the same time, you might want to rent extra rooms in your own home to event planners or festival workers who will stay on the property.
5. Understand The Costs Of Real Estate Investing
Real estate investments come with a variety of costs that may affect the overall result of your bottom line. The following are the common costs involved with real estate.
Closing costs are the expenses buyers and sellers usually incur when completing a real estate transaction. These can include appraisal fees, loan origination fees, title searches and insurance, surveys, taxes, deed recording fees, and credit report charges.
By calculating the total amount of fees involved in your property purchase, you will have an idea of how much money you need to come up with for the closing.
Buying a property to fix up and sell for a higher price is called rehabbing. Rehabbers purchase properties that they can renovate and resell without the hassle of it being their own home or office.
When buying a property to renovate, buyers must understand both the costs involved in the initial purchase of the property and the subsequent costs of the renovation. Some of those costs include settlement fees, building permits, contractors’ fees, renovation materials, and the time spent on the project.
Property tax is based on the value of your home or real estate. Property taxes can range from 0.5% to 2% of the value of a house.
In some areas, it may be more, and in others less, but the rate is usually standard for each county or state. Property taxes will vary depending on where you live and are a major financial factor when purchasing a home. To find out more about property taxes, check with the local county office or visit their website for details on your area.
Maintenance And Repair Costs
Maintenance costs can fluctuate substantially depending on the real estate you have in your portfolio. Routine and seasonal maintenance and any other repairs can all contribute to this cost. All of which you need to account for in order to accurately calculate your profits later.
You also have the choice to replace or repair. A seasoned renovator will not have any problems, but as a beginner you may not make the best choice the first time. It’s important to do research and learn from your experience.
The next choice you will have to make is whether you want to do it yourself, the maintenance and repair or outsource it. DIY may save you money if you know how to do it right, but again, it might not.
Real Estate Marketing Costs
In order to succeed in the real estate industry, you will have to market your services. There are several different avenues you can use to promote your business, but it will take money and time to get each method up and running.
The following is a list of several marketing expenses that will be necessary when trying to acquire new clients:
- Business Cards: When contacting clients, buyers, or other real estate agents, it is important to have a business card on hand. This will include basic information about who you are and what services you offer.
- Website Design: In order for people to find you online, it is a good idea to create a website. There are many design companies that will create a website for you, or you can try to do it yourself. It is important to promote your website wherever possible and be sure to include information about what you offer on the front page of your site.
- Advertising: This can be anything from a small postcard in mailboxes around town, newspaper ads or even buying time on the radio.
6. Learn To Calculate ROI And Cash-On-Cash Returns
You can determine a property’s return on investment (ROI) by dividing the annual return by how much you initially spent on this investment. Your annual return will include appreciation of the property which is not accounted for in a cash on cash calculation. It also accounts for the principal reduction in your loan payments which also is not part of the cash on cash formula.
For example, say the annual return for your property is $5000. Your investment included a down payment of $20,000, closing costs of $2,000, and you had some remodeling done for $8,000. Your ROI is therefore $5,000 / $30,000, which equals 0.167 or 16.7%.
To calculate cash-on-cash returns, you need to divide the annual pre-tax cash flow by the total cash invested.
For example, say you purchased a property for $500,000. You paid $20,000 in down payment, and you are required to take out a mortgage of $480,000 from the bank. Besides the down payment, you are required to pay $5,000 in various fees. You are going to offer this property to various renters.
After one year, the annual rental revenue from the property is $15,000. The mortgage payments, including principal repayments and interest payments, are $4,000. Your annual cash flow would be Annual Rent – Mortgage Payments, which is $15,000 – $4,000, equalling $11,000.
Your total cash invested includes the down payment plus fees, equalling $20,000 + $5,000, or $25,000.
Your cash-on-cash return would be Cash Flow / Cash Invested. Therefore, based on our example, that would be $11,000 / $25,000, which is 0.44 or 44%.
7. Understand The Time And Effort Required
Besides investing money in real estate, you have to take into account the time and effort required to run your venture. In doing so, you’ll realize if it is going to be worthwhile or not.
The following provides an overview of the common issues that arise in various real estate investments.
Fix-and-flips are an ideal business model for real estate investors because of their relatively low start-up costs and quick turnarounds.
Fixing up a home to sell usually takes a few months and can return big profits. Depending on the cost of the materials used, the profits can be extremely high. Some fix-and-flips have reported a profit of $100,000 or more in just two or three months.
Being The Landlord
Becoming a landlord is simple. The first thing you need to do is purchase the property and then find someone willing to rent it from you. If you hire a management company, they will take care of most of the responsibilities for you.
This includes collecting rent and dealing with maintenance problems or tenant issues that arise during an occupancy period.
However, the more properties you own, the more work you will have to do as a landlord. If you only own one or two properties and they are occupied by long-term tenants, there is little work required. This could be a very lucrative option if you are willing to take on several properties at once and manage them yourself.
8. Understand the Risks Of Investing As A Beginner
As someone new to real estate, here’s what you need to remember once you take the leap and invest your hard-earned cash:
Real Estate Is Not A Liquid Investment
The principal reason why real estate is not a liquid investment is that you can’t sell it to anyone at any time. Moreover, the market may dictate whether or not your property will sell for its full value.
When the market is strong and interest rates are low, properties tend to sell faster and for more money than when rates are high, unemployment is high, or when the overall economy is struggling.
It takes time to sell a property and you can’t necessarily get money out within weeks. Real estate prices change over periods of years and it can be difficult to cash in big profits within just a few months of investing.
Fix-and-Flips Can Cost More To Fix Than You Think
Initial outlay costs on a fix-and-flip can vary widely, depending on the extent of the repairs required for the property.
For example, a complete rehab of an entire home will cost significantly more than just making minor repairs to worn-out countertops and floors. You will have to factor in many things when determining the price tag of the flip, including materials, permits, contractors’ fees, and more.
When you add in holding costs, such as a mortgage, utilities, and property taxes over the course of completing renovations, this figure can easily surpass $50,000, even for a small home.
Once all of these costs are added together, it becomes clear why fix-and-flips cost so much. Investing in real estate can be risky and there are no guarantees that any money spent will result in a big payoff. Working with experienced contractors and focusing on ensuring the quality of work are both good ways to reduce risk.
Expanding Investments Can Result In Leverage Risk
Leverage risk can be a major problem in real estate investing. If you have invested your own money into the property and it does not sell, then you are on the hook for the entire loan.
This will leave you responsible for paying off the mortgage and any expenses associated with holding or maintaining the home while still being out whatever money was originally invested into the project.
Changes In Real Estate Market Can Affect Your Investments
If interest rates go down, the property is going to be worth more because you can now borrow money at a lower rate. This means that it will sell for more than what it would have previously. If interest rates go up, however, then the opposite is true and your investment loses value.
Diversify Your Investments to Lower Your Risk
While there is no denying that real estate investing can be an effective long-term strategy. Those who are new to this type of investing will often focus more on the potential for high returns rather than keeping their money safe.
Whenever possible, it is wise to diversify your risk by purchasing properties within different property classes and in different locations. This reduces your overall risk by spreading out the chance that an area or property class will drop in value and adversely affect your portfolio.
9: Establish A Team To Help You
It takes a team to make things work for your real estate business. It is advantageous to have a network of professionals whom you can count on when making decisions on projects.
Here are the types of people you need on your side as you venture out into real estate.
Lenders can help real estate investors in a number of ways. A good lender will be able to identify potential problems before they arise and give helpful suggestions on how to avoid them.
They can assist you with funding projects or financial matters when it comes to real estate investments. Find one that will help you make informed decisions without subjecting you to risky terms or practices.
- Certified Public Accountants (CPA)
A good CPA can help you avoid making mistakes on your tax returns.
A professional with experience in real estate investing will be able to provide valuable advice regarding which deductions are most likely to apply and which ones are not worth spending time and money on.
Local contractors can help you save time and money. Having a good local contractor on your team will allow you to eliminate wasted trips and lost time when repairs need to get done.
A skilled professional also has options available that are not necessarily known by most amateurs.
Agents can be a huge asset to those who are just getting started. Having an agent on your team is especially helpful when you are working in an area that you aren’t familiar with. Property values, interest rates, and other important details can vary widely from one area to another, so it helps to have someone who knows the lay of the land.
Lawyers can help you avoid mistakes and make sure you are acting within the bounds of the law. Good lawyers will also be able to identify situations that could turn into legal problems later on down the road.
IRS audits, for example, can become extensive, especially if they occur in a year where you have very little actual investment income. As such, it is a good idea to choose an experienced lawyer who can ensure you are up to date on all the latest tax laws and avoid any potential pitfalls.
The Importance of Financing For Your Real Estate Business
Your available funds can make or break your real estate venture. It’s important that you have the right amount of money to fund your projects and grow your portfolio. Pine Financial Group has various loan options with easy and quick approval processes for real estate investors. Apply now to finance your real estate investments.