How To Get Started In Real Estate Investing? Investing in real estate may be a good idea currently if you believe so. Nevertheless, here’s what you need to know before you get started.
It’s common for people to diversify their investments and obtain passive income through real estate investing. Learning how to invest in commercial and residential real estate is a two-tiered process that requires a different set of skills. When you’re just starting out in real estate investment, it’s easy to get overwhelmed by the sheer volume of information available.
Don’t let that discourage you; it is feasible for novices to go into real estate, become successful investors, and reach their financial objectives. Learn all you need to know to get started investing in real estate and create the best route for yourself with this comprehensive guide for beginners.
The advantages of investing in real estate
Many of the wealthiest families in the United States rely on real estate to make their fortunes. Home prices and rental income tend to climb with inflation, making renting out property a popular way to stay up. Because house values fluctuate considerably more slowly than stock prices, investing in real estate has a lower risk profile than investing in the stock market. It is possible that the value of real estate increases while the value of equities decreases.
Real estate investing is more appealing to certain investors because it allows them to see and feel the return on their investment immediately. With investing in the stock market, you’re more likely to be confronted with a monthly income and loss statement than with anything else. That interest in real estate helps some people become more engaged in the process of accumulating money.
People are drawn to real estate investment because it may be done either full-time or part-time. In addition to their regular 9-to-5 jobs, many businesses and families supplement their income by renting out rental homes. As a result, it is a very adaptable investment that you may use to meet your own financial and lifestyle objectives.
Finally, even though purchasing a piece of real estate might be expensive, it is feasible to begin investing in real estate with little or no money at all. Wholesaling, some forms of rental property opportunities, and REITs are all examples of small-money investments. For now, just know that real estate investment may be simple to enter into, which is one of the reasons it might be a smart decision. We’ll go into more detail about each of these alternatives later in the book.
Investing entails a certain amount of risk. You should conduct your own research before deciding to invest in a company mentioned in this guide.
The different types of real estate investing
Investing in real estate is a broad word that encompasses a wide range of options. There are advantages and disadvantages to any sort of real estate investing, including the time and money necessary to engage. Here are some of your alternatives to help you figure out which course to pursue in the real estate market.
Selling a home for more than it was originally purchased for is known as “flipping” a house. Most of the time, real estate speculators buy “distressed” properties, fix them up, and then resell them. It’s a property that has been neglected and has to be repaired in order to return to its potential worth. Distressed real estate There are a wide variety of repairs that may be done, ranging from carpet installation to roof replacement.
Flipping houses may be profitable if you know how much a property will be worth once all of the necessary repairs have been performed. After you’ve finished all of your renovations and enhancements, the new expected value is known as the after repair value or ARV.
It’s important to remember that your net profit is equal to the net sale price minus the amount you spent on selling, buying, fixing, and ensuring it. There is no substitute for doing the numbers before deciding to invest in a flip, as there is in any other sort of real estate investment.
Buy, Rehab, Rent, Refinance, Repeat (BRRRR)
Rental properties are the focus of the BRRRR real estate investment strategy. As a result, investors look for undervalued and distressed homes that can be restored or renovated in order to enhance their worth after they are finished. The term “under-market” refers to a property that is being offered at a lower price than comparable properties in the area. For example, the property you’re looking at is selling for $120,000 because of a divorce case that necessitates a rapid sale, whereas surrounding properties may be worth $150,000 to $200,000.
It’s advertised for rent once any necessary repairs have been made. Real estate investors refinance properties after tenants have moved in, taking into account changes in market value. As a result, they’ll be able to start the BRRRR procedure over with a new property.
There are three methods to make money with the BRRRR method:
- Capital appreciation occurs when the value of a property rises from its purchase price to its post-repair worth. Fixing up a house may enhance your equity, which is known as capital appreciation. If the property is worth more than you owe on your mortgage, you have equity.
- After subtracting your costs and mortgage payment from the rentals earned, the investor has a cash flow. The monthly rent you get from your rental property is your cash flow. Insurance, property taxes, a property manager, and others may be on the list of costs.
- The property’s worth is expected to rise at the rate of inflation over time, however this might change depending on the economy and the local market. Inflation-adjusted home prices are the norm, but economic shifts like a recession can have an impact on property values. A factory closing or the opening of an important new company in your community might affect the value of your property.
Getting into wholesale real estate entails acting as a go-between for those looking to sell and purchase, and then profiting from the transaction. Wholesalers don’t need a license like real estate agents since they really own the items they’re selling, unlike real estate agents.
Raw land is sold in bulk through a process known as land wholesaling. A piece of land that has not been developed is known as raw land. You may buy and sell raw property fast and easily online from the convenience of your own home. Property taxes are low, and there are no structures to maintain, making it an attractive option for investors. The goal of land wholesalers is to swiftly recoup their investment by reselling the property they acquire.
Residential wholesalers specialize in selling everything from single-family houses to multi-family complexes (up to four units). The targeted properties are typically in disrepair or are undervalued in comparison to similar properties in the neighborhood. After signing a contract with the seller to buy the house, the wholesaler looks for another party willing to pay a fee to acquire the contract from them. The buyer will then take the contract and assume the role of the wholesaler in the transaction. Residential wholesalers, on the other hand, often do not own any of the properties they sell. Before losing their money, customers can back out of the transaction if they can’t find a buyer to take over their contract.
This includes commercial assets such as strip malls and apartment complexes with more than five units, as well as office buildings. In commercial real estate wholesaling, you’re seeking properties with low occupancy or below-market rentals, rather than finding an inexpensive dwelling. It’s likely that the firm to which you’re selling wholesale views these properties as a chance to generate value for which you’ll receive a fair return on your investment.
REITs and other investment opportunities
When a business invests in real estate with the goal of making money, the result is what’s known as a real estate investment trust (REIT). For example, healthcare institutions, business buildings, and apartments are all sorts of properties that REITs specialize in. Individual investors can begin with a small sum of money in a REIT and then gradually contribute more money as their budget permits.
Publicly listed real estate investment trusts (REITs), REIT mutual funds, and real estate crowdfunding platforms are all options for investors. Diversyfund, Crowdstreet, Fundrise, Roofstock, and Ground Floor are just some of the crowdfunding sites that have emerged in recent years. For each individual investor, there are different investing options. It’s possible to engage in Crowdstreet with just $10, but you must be an accredited investor with a particular net worth to join Fundrise. Some platforms allow you to withdraw your money more easily, while others are more difficult to access. By contrasting Fundrise with REITs, you can get a sense of how these crowdfunding platforms differ from more typical REITs. Researching each platform to find the best fit for your needs can pay dividends in the long run.
Finding funding for real estate investing
To begin investing in real estate, one of the first stages is to create a bank account with which to make purchases. In order to acquire real estate, you may need a bank loan if you don’t have an established firm or extensive real estate knowledge.
The sort of investment you’re looking to make and the properties you’re trying to acquire might lead to a variety of funding options. Different sorts of investment properties will necessitate different types of financing. Financing a real estate venture is most commonly done through:
- Personal savings
- Credit cards
- Family or friend loans
- Personal loans and lines of credit
- Seller/owner financing
- Home equity loan or line of credit
- Conventional loans and government programs
- Financing secured through a mortgage broker
- Hard money
The cheapest form of funding is your personal money, maintained in one of the finest savings accounts. There are no interest costs when you have the money to pay for a real estate purchase in advance. In order to put properties under contract, wholesalers may just require a minimal sum of money to cover deposits.
Repairs, utilities, insurance, and other bills may all be paid for using a credit card. A 0% APR promotional deal on a credit card might allow you additional time to pay off the amount, or you can receive points on certain purchases.
Family or friend loans
There are advantages and disadvantages to taking out a loan from family and friends. Even though they don’t charge interest, some people may feel entitled to get engaged in your business even if they don’t charge interest. If something goes wrong, you’ll owe them money and your relationship might be ruined.
Personal loans and lines of credit
If you’re looking for unsecured finance choices, personal loans and lines of credit are two of the best possibilities. It’s easier to buy a home with this money than a typical mortgage because it doesn’t require an assessment or underwriting clearance. Interest-bearing, fixed-term loans known as personal loans are the most common type of installment loan in the United States. Paying interest and making payments on a personal line of credit are required only when money is taken from the account.
When you buy a home and pay the owner instead of the bank, you’re referred to as “seller financing”. If you can’t secure bank funding, this is a great alternative. Even while the interest rate is greater and the needed down payment is smaller than with a regular bank loan, you won’t have to pay as many of the extra costs as you would with a traditional bank loan, either.
Home equity loan
Existing homeowners may also use a home equity loan or line of credit to finance the acquisition of investment properties. Instead of taking out a home equity loan, consider a home equity line of credit instead.
Conventional loans and government programs
Investors who are just getting started with rental properties may choose to reside in the property while they work on it or wait for it to appreciate in value before selling it. By renting out a spare room, they can afford their mortgages. Duplexes, three-, four-, and five-family houses with separate living quarters for the mother-in-law are common examples of these types of properties. In the event that you want to live in the house, traditional mortgages and government programs may be an option for you to consider.
You may be able to get a conventional mortgage through a credit union or a bank. It is common for credit unions to charge reduced interest rates and fees because they are charitable companies. Because credit unions are owned by their members and serve a specific geographic area, they may have more lenient underwriting standards, increasing your chances of getting your loan accepted.
Veterans Affairs and the U.S. Department of HUD loans are among the government programs that may be able to provide financing. Each will have its own set of requirements to meet in order to be considered. FHA loans, for example, need a 3.5 percent down payment and may be used to finance up to four units, whereas conventional loans require a larger down payment of 20 percent. In addition to the down payment, borrowers of FHA loans must pay an upfront premium of 1.75 percent and annual premiums ranging from 0.45 percent to 1.05 percent. In the event that you default on your mortgage, you’ll be paid an insurance fee to ensure that the bank doesn’t lose money. MIP stands for Mortgage Insurance Premium.
A mortgage broker can help you get a loan.
Alternatively, a mortgage broker might assist you in your endeavor. With the help of a broker, you may get the best possible price on your mortgage. This service can also be provided by online businesses like Rocket Mortgage.
Financial compensation is expected from the borrower or lender in exchange for the services of a mortgage broker. The cost, which is typically 1% to 2% of the loan amount, must be stated in your loan documentation and is customary. If you’re paying these costs, they can either be paid at the time of closing or added to the amount of your loan.
Even while hard money loans can be more expensive, you may have a better chance of getting approved if you go that route. To obtain a hard money loan, you will often be charged two to four points (each point equals one percent of the loan amount). You’ll pay higher interest rates than you would with other sources of finance when taking out a loan from them.
A year is not uncommon for hard money loans, which are not intended to be long-term sources of funding. Because of the high-interest rates and costs, hard money loans are normally only used as a last choice.
First-time homebuyer’s guide
The real estate adage “location, location, location” has been around for a long time. If you want to make money with your investments, location is crucial, but so are other aspects, such as the quality of the property itself. Investing in real estate may be done in a variety of ways. The most successful real estate investors search for bargains from a variety of sources at the same time.
Real estate agents
Working with a real estate agent gives you access to the multiple listing service and the agent’s intimate knowledge of the area. Only licensed real estate agents have access to the MLS, a database of homes for sale. MLS-like websites like Redfin, Zillow, and the like attempt to replicate the MLS’s wealth of information, but ultimately fall short.
Another way to uncover prospective offers is to look at auctions. It’s fairly uncommon for houses to be sold at auction since they’re not in the best shape to be sold through a traditional real estate agent. Different sorts of auctions are available, such as those for tax liens, trust assets, government properties, and foreclosed properties.
An auction often requires a deposit before bidding, and you must be able to pay for your winning offer quickly after the auction ends in order to avoid being disqualified. In other words, an auction may not be the best option if you need bank funding.
It is imperative that investors conduct further due diligence on an auction property in order to identify any possible liens. And in many circumstances, you won’t be able to see the property before bidding. You can’t walk away from a deal if you discover difficulties later on. Auction properties come with a high level of risk, but they also come with a great level of reward.
As a result, wholesalers are an excellent source for finding your next investment property. Describe the precise kinds of real estate properties you’re searching for when chatting with a wholesaler so they can offer prospects that suit your requirements. Another essential point in your real estate investing journey is the sort of property you’re looking for.
Investing in real estate may take several forms.
There are three basic categories of real estate: residential, commercial, and investment.
- A ready-to-rent property has already been refurbished and is ready to be rented to the next tenant. Because you’re paying more for the property than if you completed the rehab work yourself, these properties are less lucrative. Positively, you’ll have access to a solid market and a tenant already in place if you work with a respected turnkey seller. This can be a suitable investment if you’re searching for a low-risk venture that already has a steady stream of income.
- A fixer-upper is a property in need of repair. Renovating the property can increase its value while keeping expenditures under control for you or your contractors. (Equity is the difference between the home’s worth and its mortgage.) Because you’re in charge of the renovation, you can tailor the finishing to the sort of renter you’re looking for and your own budget.
- It’s common for value-adds to be fixers who have the chance to add additional value. Adding square footage or converting existing space can raise the resale value and monthly rentals by a significant amount. Add a shower to a half bath or transform a garage into an extra bedroom.
As a real estate investor, it is critical to constantly build relationships with other investors, contractors, and others in the industry. Deals come in many shapes and sizes, so you never know where your next one will come from.
The local REIA chapter is a fantastic area to start growing your network (real estate investors association). Do not be afraid to introduce yourself to the folks at the gatherings you attend. Develop a network of trusted allies among your other investors, as they aren’t necessarily your rivals. They may even share terrific offers that aren’t great for them if you develop a friendship with them.
The Wholesale Formula
Wholesalers are a common starting point for many real estate investors. In terms of obstacles to admission, it’s the easiest to get into. Finding deals that other investors are prepared to pay a price for is your duty as a wholesaler. When it comes to wholesaling, there is a lot of critical yet simple math to know.
As soon as you’ve identified a property that you think is perfect for wholesale, do some research to see how recently similar homes in the neighborhood have sold. Comps is a more popular name for these features. If you’re confident that you can find a buyer for a home quickly and cheaply, look for the lowest comparable sale and make a 30-percent offer below that amount to the owner. Having a 30 percent discount allows you wiggle space while negotiating, as well as a safety net for your costs.
Wholesalers are looking for properties with an all-in cost of $70,000 while the lowest comparable in the area is $100,000. It’s possible that your offer price will rise or fall based on the property’s condition and the cost of necessary repairs. A purchase price of $55,000 or less is the appropriate purchase price if the estimated $15,000 in repairs must be deducted from our $70,000 maximum budget limit.
Keeping your prices low might make your potential customers pleased and thrilled to do business with you since they may get a better bargain from you than they would from another company. The property can be sold for a profit or refinanced to free up capital for another investment, which is made possible by a decreased purchase price. Flipping properties is an excellent way to make money while keeping your expenditures low so that you can recoup your selling costs and even profit.
A word of caution about Zillow
In the world of real estate, Zillow is a household name. Similar to the MLS, Zillow allows you to filter your search by property type, number of bedrooms and bathrooms, square footage, lot size, and price. Zillow is a great tool for house hunters.
Zillow also gives a Zestimate of a home’s worth, however, this estimate may differ significantly from the real market value of that property. According to Zillow, a property in the region is worth $300,000, but it only sells for $250,000 because of market circumstances and the prices of other homes in the vicinity.
It’s possible that relying on Zestimates instead of your own investigation might cause major problems with the way you calculate a potential contract. As a result, you may end up with a loss rather than a profit. The lesson here is that you should always conduct your own research and calculations.
What to do when you’re ready to rent
Once the repair is complete, there are a few key measures to follow if you are intending to rent a home. In order to fill your rental property, you should do more than just put up a sign in the front yard.
Effectively marketing your rental property
Your property’s listing must be properly crafted before it can be posted online. If the home comes with a lot, write down the size of the lot as well as the number of bedrooms and bathrooms. A new carpet, fresh paint, and a remodeled kitchen are all worthy additions to your resume. Think about what sets your property unique from the rest and what makes it appealing to potential buyers. High-quality photos of the outside, as well as each room, can help you sell your home.