When done right, real estate investing is a stable way to increase wealth over a period of time. It provides better returns than the stock market without as much volatility. Historically in real estate, your risk of loss is minimized by the length of time you hold on to your property.
When the market improves, so does the value of your home, and as a result, you build equity. With the stock market, the risk never changes and there are numerous factors beyond your control that can negatively impact your investment. Hence, The Great Depression – fueled by the stock market.
Table of contents
- Short term investment
- Long term investment
- Simple steps in real estate investing
- Types of real estate investment
- Vacant rentals and event venue rentals
- To flip…or not to flip
- Buy stock in real estate
- Grow up and go in
- The private benefactor
- Ways to invest in real estate without buying
- And finally
Short Term Investment
One thing that we can bet on for sure with real estate is that there will always be value in your land, and value in your home. Other forms of financial investments can leave you with little to no tangible asset value. Stocks can dip to zero,and new cars depreciate in value the moment you drive it off the lot.
GREAT NEWS though! Investing in real estate is not as cut and dry and traditional as it used to be. With the modernization of today, technology usage and our economy. There are a few out of the box ways you can still participate in real estate investment and receive benefits.
Renting out a room in your own home as short term real estate investment might cause your friends or family members to raise an eyebrow. However, it’s a commonplace practice, especially in high priced cities such as New York and Los Angeles. Where people become existing roommates even in apartments through subletting a room.
Also, many homeowners have embraced the thought of renting out a spare rooms on a short-term basis. Through popular home-sharing rental platforms and apps such as Airbnb and HomeAway.
Long Term Investment
Rentals are what we are used to when we think of real estate. It essentially requires a home purchase and long term rental. With traditional tenant agreements in which the tenant is essentially paying your mortgage for you while you get the tax benefits.
Traditional real estate investing via long term is known to pose less risk and give landlords more financial security and stability. Becoming a landlord is not a passive job though. And there is a lot of logistics involved in order to maintain the state of the property as well as to keep your tenants happy. And be prepared for vacancies.
Simple steps in real estate investing
Do your research
Conduct your research, in advance. Pick an area in which you want to buy a home and then look at the houses in that area until you are able to find one. That is under priced relative to the neighborhood because it is rundown and needs much work. Real estate agents refer to this kind of house a handyman’s special. And sometimes they do advertise it like that in the paper.
Often real estate agents will advertise an older house as a home that needs Tender Loving Care. For you, this kind of house is a sleeper. This means that it is much more valuable than it will appear to the average person.
Pay the lowest down payment possible
Once you are able to find a home that is under priced relative to the neighborhood and with the potential to be fixed up. You should buy the house with the lowest possible cash down payment. Very often, the seller can allow you to purchase the house with no money down. Especially when he is very eager to move somewhere else and get out from the mortgage payments. When this is not possible. You might often get the owner to carry back a second mortgage on the property for an amount that will represent most of his equity in the house.
Move in and get busy
You will take possession of the house, move in, and start working evenings and weekends. In order to renovate and refurbish your investment, doing all the necessary work yourself. If necessary, you might take courses in home construction and carpentry, purchase your own tools. Get advice from people who have experience in home renovations and learn how to do it yourself.
Take action to maximize your investment
When you have finished renovating and transforming both the house and yard, and it’s looking good, you might then do any of these three things.
First, you might sell the house for much more than you paid. You may then take the profit from the sale of the house and purchase another house to renovate and refurbish.
Second, you might rent out the house for a monthly payment that covers more than your mortgage payments. And still gives you extra cash flow in addition.
Third, you may rent out the renovated house and then go to a bank and still refinance the house. Often for as much as you have paid for it, this will be based on the new earning power of the property when it was rented out to a tenant. With a tenant paying you a particular amount each month, you will be getting a higher appraisal of the property’s value. The bank will be able to lend you money. Or you might take out a new mortgage on your investment, that will be based on this appraisal.
Repeat the process
You might decide to repeat this process with another, perhaps bigger house. Investing your sweat equity or human capital, in the renovations until you are able to fixed it up.
Move up to bigger properties
As you are increasing your investment and assets, you are generating passive income for yourself. You are gaining more cash flow and experience, you might repeat this process as you move up to bigger buildings and eventually apartment buildings.
In United States, many of the great real estate fortunes started off with an individual buying a single house. And then went to work to fix it up personally. Then they sold the house, purchased another and invested their time to renovate the house, and so on. Eventually they are able to build a real estate empire that included dozens and often hundreds or even thousands of residential units.
Types of real estate investment
Residential
Residential structures are properties like houses, apartment buildings, townhouses. As well as vacation houses where a person or family pays you to live in the property. The length of their stay is strictly based upon the rental or lease agreement. Many residential leases are on a twelve-month basis in U.S.
Commercial
Commercial properties consist many of office buildings and skyscrapers. If you were to take a little of your savings and build a small structure with individual offices. You might lease them out to companies and small business owners, who will pay you rent to use the property.
It is not unusual for commercial real estate to involve various year leases. This might lead to greater stability in cash flow, and also protect the owner when rental rates decline. One major consideration is that markets do fluctuate, and rental rates could increase substantially over a short period of time. However, it might not be possible to raise rates if the commercial property is locked into older agreements.
Industrial
Industrial real estate consists of everything ranging from industrial warehouses, storage units, car washes. Together with other special purposes real estate that generate sales from customers who use the facility. Industrial real estate investments might often have significant fees and service revenue streams. Like adding coin-operated vacuum cleaners at a car wash, to be able to increase the return on investment for the owner.
Retail
Retail properties are those properties that consist of strip malls, shopping malls, and other retail storefronts. In some cases, the property owner equally receive a percentage of sales generated by the tenant store, in addition to a base rent.
Mixed-use
Mixed-use properties are those that will combine any of the above categories into a single project. As an instance, an investor in California took million dollars in savings and found a mid-size town in the Midwest. He then approached a bank for financing and ended up building a mixed-use three-story office building surrounded by retail shops. Mixed-use real estate investments are very popular for those with significant assets because they have a degree of built-in diversification, which is crucial for controlling risk.
Vacation Rentals and Event Venue Rentals
Where do people go to get married, or have a party, or stay at while on vacation? A major advantage of the vacation rental aspect of real estate is the expected income. When the property is rented— it should be drastically higher per day than that of a standard long term rental.
Let’s talk Viva Las Vegas. If you have a home not far from the strip in which to rent the home for the month would be at $1400 a month. But, if you rent that home as a vacation rental at an average rate of $129 per night you are now making $3870 almost triple! Plus, whenever you have a vacancy you can still use it for family and friends.
The reasons why the vacation rentals are much higher
1. the property is furnished;
2. the term is shorter, so the consumer gets no volume discount of a standard long term rental;
3. People splurge on vacations therefore your property income will follow the financial trends of hotel and vacation pricing in growth rather than the long-term housing pricing and growth. Event Venues also known as commercial real estate are similar.
To flip…or not to flip
Wholesaling and House flipping are two forms of real estate that have become much more prominent today with many TV shows. Like “Fixer Upper,” “Flip or Flop,” and “Flip this House.
When a property investor buys a house with the intention to fix it up and quickly resell it, he is “flipping it”. Typically, they’ll buy the home, make necessary repairs, upgrade the systems, style, and design of the property (thus adding value to it). And sell the house at a profit within a few months. House flipping can also refer to purchasing and reselling properties in a market where home valuations are on the rise.
Like any investment strategy, house flipping has its pros and cons. Because it requires such an investment, ask yourself the following questions before deciding to flip a house.
Things to consider
The price of the home. How affordable is the home you’re considering?
Local market conditions. What is local buying demand like? Is it likely you’ll be able to sell the home in a few months?
The condition and location of the home. How much repair work will the home need? Are there major issues, like foundation cracks or roof leaks to fix, or is it all minor and aesthetic?
Timeline. Given the repairs and upgrades needed, how long will it take to complete the project? Will you be able to get an ROI when expected?
Budget, credit or financing. Do you have enough money to cover the cost of the home, closing costs, and all the expenses associated with repairs, upgrades, marketing, and selling it?
Real estate wholesaling occurs when a party (the “wholeseller”) contracts with a home seller, markets the home to potential buyers, and then assigns the contract to one of them. The wholesaler makes a profit, which is the difference between the contracted price with the seller and the amount paid by the buyer. The goal in real estate wholesaling is to sell the home before the contract with the original homeowner closes.
Now, let’s talk about the money or should we say the various forms of optional funding and financing behind real estate investment.
Buy stock in real estate
Congress established real estate investment trusts in 1960 as an amendment to the Cigar Excise Tax Extension of 1960. The provision allows individual investors to buy shares in commercial real estate portfolios that receive income from a variety of properties.
Properties included in a REIT portfolio may include apartment complexes, data centers, health care facilities, hotels. As well as infrastructure—in the form of fiber cables, cell towers, and energy pipelines—office buildings, retail centers, self-storage, timberland, and warehouses.
Most REITs have a straightforward business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders. Equity REITs own and manage real estate properties while Mortgage REITs hold or trade mortgages and mortgage-backed securities. REITs are good for generating a steady income stream for investors but offer little in the way of capital appreciation. Most publicly traded like stocks, make them highly liquid.
Group up and go in
Real Estate Crowdfunding is a newer type of lending in which multiple investors contribute to a single loan and share in the profits when the loan is paid back. Crowdfunding has been around for quite some time, but in other industries. There are multiple types of crowdfunding all depending on what investors will receive in exchange for their contribution.
Generally, crowdfunding companies invite accredited investors to pool their money together to invest in a specific real estate project. Crowdfunding investments can be as little as $5,000. So a borrower many have a lot of crowd-funding investors, but not necessarily a single person to deal with. Some companies offer a projected specific rate of return on all projects, while others price the deal according to the risk involved.
Accordingly, not all borrowers are entitled to the lowest interest rate offered by the crowdfunder. Potential borrowers can go to a crowdfunder and submit their analytics on the deal, and also for some crowdfunders, their financials. Once a crowdfunder approves the deal, they list it on their website to solicit investments. Crowdfunding is quick. Once a deal is listed on the internet as available, funding can take place in a matter of days.
And don’t forget that you can cut the middle man out and gather together your most financial saavy friends and family as co-owners and co-borrowers as well.
The Private Benefactor
Private lenders operate quite differently. Private money lending is when individuals lend their own money to other investors or professionally managed real estate funds. All while securing the loan with a mortgage. Essentially, private money lending serves as an alternative to traditional lending institutions, like big banks. Leaving your hard-earned money in a savings account is no way to protect and grow your assets.
At the end of the day, private money lending allows you to secure a loan with real estate that is worth much more than the loan. Private money lending enables investors to create their own loan terms. Investors who utilize private money lending are typically able to obtain funding quicker than if they borrowed from a traditional banking institution.
Ways to invest in real estate without buying
Invest in real estate ETFs
ETFs, also known as an exchange-traded fund, is the collection of stocks or bonds in a single fund. ETFs are very similar to index funds and mutual funds in the fact they come with the same big diversification and low costs over all.
If you’re angling to invest in real estate but also need to diversify, investing in a real-estate themed ETF may be a smart move. There are a lot of other ETFs that offer exposure to real estate, too, so make sure to carry out your research and consider the possibilities.
Invest in real estate mutual funds
Just like you may invest in real estate ETFs, you may also invest in real estate mutual funds.
Invest in REITs
Consumers invest in REITs for the same reason they invest in real estate ETFs and mutual funds; they really want to invest in real estate without holding any physical property. REITs allow you do exactly that while also diversifying your holdings based on the kind of real estate class each REIT invests in. It also gives you exposure to real estate without having to be a landlord.
Invest in a real estate focused company
There are a lot of companies that own and manage real estate without operating as a REIT. The difference is, you’ll need to dig to find them and they might pay a lower dividend than a REIT.
Companies that are real estate-focused can include the following:
- Hotels
- Resort operators
- Timeshare companies
- Commercial real estate developers
Make sure to conduct your research before you buy stock in individual companies, but this option may be a good one if you need exposure to a particular type of real estate investment.
Invest in home construction
When you look at real estate market growth over the last decade or even longer. It’s very easy to see that much of it is the result of limited housing inventory. For this very reason, many predict that construction of new homes will continue to increase over the next few decades or more.
In that sense, it’s very easy to see why investing in the construction side of the industry could also be a smart move. The whole industry of homebuilders will want to develop new neighborhoods and rehabilitate old ones, after all, so now might be a good time to buy in.
Hire a property manager
While you don’t have to purchase physical property to invest in real estate, there’s at least one method that may help you have your cake and eat it, too. Many investors who need exposure to rental real estate they may see and touch go ahead and buy rentals. But then hire a property manager to do all the heavy work.
The key to making sure this method works is to ensure, you only invest in properties with enough cash flow to pay for a property manager, and still score a reasonable rate of return.
Invest in real estate notes
Real estate notes are a kind of investment you may buy if you’re interested in investing in real estate. But don’t necessarily need to deal with a brick and mortar structure. When you invest in real estate notes through a bank, you’re basically buying debt at prices that are below what a retail investor would pay.
Hard money loans
Basically, hard money loans are a direct loan to a real estate investor. You need to understand that is better to offer real estate loans to an investor you know in person, and can trust too.
Either way, hard money loans directly to real estate investors are another method to consider. If you need to invest in real estate but don’t really want to deal with a property and the headaches that do come with it.
Invest in real estate online
Don’t forget about all the new companies that have cropped up to assist investors get involved in real estate without getting their hands dirty. Websites like Fundrise and Realty Mogul allow you invest into commercial or even residential real estate investments and receive cash flow distributions in return.
Investing with either company is very similar to investing in REITs in that your money is pooled with cash from other investors who also take advantage of the platform. The cash you invest can be used to buy residential property, commercial real estate, apartment buildings, and more. Ultimately, you will get the benefit of dividends and distributions and long-term appreciation of the properties you “own.”
And Finally
All in all, there are so many ways that real estate investing can add to your overall wealth. One of the most pleasing aspects of real estate investment is the value it has for your own family. The capability of passing properties down to your children. Enabling them to enjoy the benefits of your investment long after you’re gone, leaving a Legacy of Wealth.
Real estate creates lasting wealth that carries far into the future. Do your research and know what is best for you. Remember, building wealth does not happen overnight, well that is unless you win the lottery or score big at the casino. So otherwise, patience is still a virtue and important when investing in real estate. But good things are always worth the wait.
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