The Beginner’s Guide to Real Estate Investing
Real estate investment is one of the best ways you can achieve financial freedom. A sound investment gives you a regular income. If you are looking forward to investing in real estate, then here is a beginner’s guide to help you contemplate.
Benefits of Investing in Property
• Property investment makes you your boss.
• You have the ability to influence performance by upgrading your property.
• A real estate investment gives you a hedge against inflation.
• The value of property keeps appreciating; hence your investment keeps growing.
• Property investment is a predictable investment.
Things That Make Good Investments
Despite the fact that real estate is a beguiling investment, you need an educated decision to get the best out of the investment. Below are tips that you need to consider when planning to make a good investment.
1. Strive to earn a fair cash-on-cash rate of return on your financial assets
Just like other investments are guided by a desire to secure an income flow, you need to choose a property that has a positive cash flow that will reward you for the time and resources invested. Therefore, you should ensure that the property you are purchasing pays for itself.
A property that does not pay for itself is equivalent to a loss since you will be required to get more money from your bank accounts to cover a negative cash flow. So before investing, conduct an in-depth research on rent, area vacancies and other expenses that can affect the returns of a rental property. Such information will help you make a sound decision.
2. Choose a low-risk real estate investment
Real estate investments like fixer uppers and development of properties are high-risk investments that place you at a high risk of losing your investment capital. As a beginner, you need to invest in already established property whose financial risk is low.
3. Invest in a property that you can comfortably manage
Properties like college rentals and vacation rentals require intense management to make a profit from the property. On the other hand, properties whose tenants are long-term residents need less management. As a result, you need to invest in properties that you can conveniently manage.
So, before you untie your purse strings, you need to conduct an in-depth research to help you find an already developed property that you can own fully.
Terms to Know
There are various terms whose use is common in the real estate sector. You may encounter the terms while renting, purchasing a property, or when looking for financing. A fundamental understanding of the terms will keep you at ease during any process of the investment.
Gross scheduled income
The gross scheduled income is the total annual income you will receive given that a property is 100% occupied.
Gross Operating Income
The gross operating income is the annual total of a property’s gross scheduled income plus other revenue generated from the property. Additional sources of revenue include income from other sources like storage units and garages.
Operating expenses are those expenses that a property owner will incur while managing the property. Examples of operating expenses include costs used in marketing, property taxes, insurance, utilities, trash collection, and maintenance.
Also known as capitalization rate is an estimate of the potential return you are likely to get from a property investment. The cap rate is a ratio of the annual net operating income to the property’s market value. For instance, if your annual net operating income is $200000 and a property’s value is $2,000,000, then the Cap rate is 200000/2000000 which is 0.10.
The break-even ratio is a calculation used by lenders when determining if or not to finance a real estate investment. The break-even ratio is calculated by adding debt services plus operating expenses, and the sum is dived by gross operating income.
Lenders may fail to finance you if your property’s break even ratio is more than 85%. A higher percentage indicates that your property is a high-risk investment.
Ways to Make Money
There are different ways you can make money from a real estate property management. Some of the ways include:
• Taking advantage of the property’s ever appreciating rate.
• Buying a property and then renting it out to generate a cash flow income.
• You can also opt for real estate related income whereby you become a specialist and get paid for work done.
• You can also make money through ancillary real estate investment. This investment entails the process of vending the equipment needed in offices or other buildings.
Ways to Get Started
There are different ways you can invest in real estate. Some of them include direct ownership of property, flipping houses, investing in real estate investment trusts and investing in property investment groups.
1. Direct Ownership
Direct ownership investment implies that you buy a stake in a particular real estate property. As such, you become the owner and manager of a particular property. A good example of a direct ownership property is a rental property.
Direct ownership comes with additional benefits like being the sole decision maker of your property. It also gives you the freedom to enhance your portfolio alongside giving your investment an inflation hedge.
Despite the fact that direct ownership adds value to your investment, it has some downsides that you have to consider before investing in the option. Compared to other indirect real estate investments, this type of investment requires huge initial capital requirements, requires experience and skill to manage and it requires sound financial skill to identify and maintain a steady income stream.
2. Flipping houses
Flipping houses is another investment option you can consider in the real estate industry. Flipping entails the process of buying property with the intention of selling them at a profit. One benefit of flipping is that it helps you make quick money.
How to Get Started
Since flipping is a risky investment that needs sound expertise to generate income, you need to conduct a thorough market research alongside learning all essentials required in flipping houses.
The research will help you calculate the starting capital you need to start flipping, best places to flip houses and the type of property that sells quickly.
Afterward, make a financial plan indicating the amount you want to invest and the amount you expect to get out after a particular time. You can consult your real estate provider or a financial expert to help you at this stage.
Consequently, seek financing if your cash is insufficient. Start flipping by purchasing low-priced houses, renovate them and sell them at a price that is adequate to compensate for the resources and time invested.
Tips to drive you towards a profitable house flipping future:
• Build a healthy relationship with contractors who will be helping you rehabilitate the homes. Some of the service providers you will need are architects, a handyman, landscapers, and other construction contractors.
• Legitimize your business by applying for necessary licenses and permits.
• Locate properties to flip from relevant websites and other sources.
3. Real Estate investment trusts
Unlike other estate investments whose scope of investments involves the buying and selling of property, Real Estate Investment Trusts buy property, develop them, and maintain them as their income-generating entities.
Most of the REIT are listed on the main stock exchanges, implying that you can buy their shares. Buying the shares is a long-term investment, and your profitability will continue rising so long as the property’s value continues to appreciate.
How to Buy Shares from Real Estate Investment Trusts
Here is a simple guide to help you when investing in a REIT.
• REITs are traded on most stock exchanges, and the procedure is just similar to that of buying stocks.
• Before you buy shares from a particular REIT, run a background check and identify companies that perform better.
• Choose companies who have stayed in the industry for long. You can also choose new enterprises that operate under an experienced management.
• Real estate experts recommend that you choose a REIT with a broad range of income-producing properties.
4. Property Investment Groups
A Real Estate Investment group purchases and develops real estate property and later sells them to investors. In return, the real estate investors pay a commission to the real estate investment group. The Real Estate Investment groups work with a group of buyers, fixers, flippers and other real estate experts.
However, you should invest in reputable real estate investment groups if you want to make a profit out of your investment. Factors that can help you identify a top service provider include:
• They have good ethical standards
• They specialize in a defined niche in the market
• They understand and communicate all risks associated with real estate development.
• Have an established network of related service providers.
• Have a passion for investing.
• They have sound money management skills.
• It works with an experienced team of experts.
As a beginner real estate investor, it is imperative that you join a local real estate club in your region. A real estate organization allows you to network with fellow investors and other real experts. Such a climate is good for learning as well as selling yourself to potential partners.