The basics of investing in real estate

Real estate can be a valuable addition to an investment portfolio. Not only is each piece of real estate completely unique, but they don’t care anymore. Real estate is a great way to enhance your investment, no matter what type of real estate investment you are pursuing.

There is a wide range of options for real estate investors, whether you want to be a very active investor or completely independent.

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What you need to know about investing in real estate

Investing in real estate is the pinnacle of investment achievement in the eyes of many new investors. Unlike stocks and bonds, real estate can be touched and used regardless of market conditions. When the market crashes, you still have a piece of the planet that’s going nowhere. For many investors, this is a kind of comfort that they cannot find in other types of investments which can seem more ethereal, even if they are guaranteed by very real companies.

Unfortunately, many people have the mistaken idea that real estate can only increase in value, which is totally wrong. If a property falls into disrepair or an area is no longer popular, you could see lower returns or even a crash in your property value. Unlike stocks, you have to maintain real estate – whether you do it yourself or hire someone – and you have to pay other expenses, such as taxes and insurance, even if you don’t. profit.

Although real estate tends to hold some value even in the worst of times, that’s not a sure thing. Like any type of investment, it is important to understand your real estate market, your competition, your potential customers and the income potential of your property. Most real estate investments aren’t very sexy, but they can serve as a counterbalance to riskier stocks and other investments such as cryptocurrencies.

7 ways to start investing in real estate

Although many people think of buying a small rental property when they think of investing in real estate, there are actually many different ways to enter the real estate market. Each has risks and rewards, and many are unique investment experiences.

Land speculation

Land speculation occurs when you buy land with the intention of reselling it, in whole or in part. In some parts of the country, you may own land but sell the water rights or mineral rights to other entities such as mining operations or oil and gas companies.

Although land speculation is often a form of short-term real estate investment, a savvy investor who understands the needs of the industry he is courting – oil and gas miners, farmers, home builders or commercial developers – can make a handsome profit by choosing the right plot of land at the right price at the right time.

Land speculation is quite simple but can be risky. You will need to understand exactly what the advantages of your land are for its particular market, its current value and its potential. You will also need to hire experts to document all of this.

Since land speculation usually involves being a middleman between land sellers and property developers, there are a number of risks, especially if interest in property in your area begins to wane. Remember that mall they kept saying 20 years ago that’s still just an empty patch of grass?

Ownership reversal

By now, everyone knows about property reversal. But what you see on TV isn’t the full picture of what is involved in successfully buying residential property, fixing it up, and selling it to someone who will love it. You will need significant capital to cover labor and supplies, as well as a construction crew or subcontractors you can trust. You will also likely be subject to several inspections, all of which you will need to pass before you are allowed to market your property.

Construction loans are possible, but are often difficult to obtain for the first time due to experience requirements and other conditions imposed by the bank. However, in today’s real estate market, a flip that is priced accordingly and will assess the asking price may not stick around very long at all. Be prepared to make additional repairs as the buyer’s inspector finds. No house is perfect, no matter how many people have worked there.

In the worst case, your flip house can be converted into a rental property. This is not ideal, of course, and it will take much longer to recover your investment, but it can be a solution if the property does not find a buyer. Sometimes the market turns after you start a project, and the only option you have is to keep moving forward. Always have an exit strategy when engaging in real estate flips.

Short term rental

Short-term rentals are a great way to earn some extra cash with spare homes or accessory dwelling units (ADUs) already on your property. When renting short-term rental units by the night or week, you can be very particular about who gets the keys. You can also potentially see greater returns than you would with a regular residential lease.

Make sure the neighborhood that houses your short-term rental allows this type of transaction, as many homeowners associations and cities are at war with short-term rental landlords, and many have banned them altogether. You also need to be on top of your customer service, as customer reviews can determine the popularity of your rental.

Small residential rental properties

Some people choose to invest in real estate by simply buying a few small residential properties. A few houses or a duplex might be a good starting point to give you an idea of ​​what it’s like to be an active homeowner. Most very small landlords choose their own tenants and manage their own maintenance (as well as their own evictions). As you build your property portfolio, it may be a good idea to hire a property manager. At first, however, the margins are probably too thin for a manager.

Landlord is a business many of us already understand since we’ve almost certainly rented something from someone at some point. That makes it a bit more comfortable than, say, land speculation. However, you will also need to enforce your leases and maintain the property, which could mean anything from collecting rent from stubborn tenants to calling the plumber and the backhoe when a sewer line decides to randomly crashing on a Saturday at 3am.

Large Scale Residential Rental Properties

Unlike small-scale residential rentals, larger-scale rental properties are generally rather hands-off operations. These are often larger apartment buildings or residential communities with a single owner or even a residential housing portfolio. Unless you have a large amount of cash, you will invest in these properties as part of an investment group. The group can be made up of a few friends who also have money to invest or a company that allows you to buy a share of a development.

Large-scale residential rental portfolios can be a great way to get started in real estate investing without any previous ownership or construction experience. Pay close attention to the company handling the investment, however. They should have little debt, a cash cushion for maintaining the property, and clearly defined goals for the future. Also find out how long you need to stay invested before you can divest. Some groups will lock you in longer than others no matter what the market does.

Commercial real estate

Putting your money into commercial real estate can mean many different things. You can build a small mini-warehouse or buy a series of empty warehouses in an industrial park, a mini-mall or even an office building. Renting each of these properties requires a different set of skills, but, ultimately, commercial properties tend to have higher values ​​than residential real estate and often fetch higher rents.

Commercial real estate can, however, involve risks. Some types of real estate are difficult to rent in down markets. For example, during the COVID-19 pandemic, office rentals have been very hit or miss as some companies are bringing their employees back to the office and others are still keeping workers at home. (Warehouses, on the other hand, cannot be rented out quickly enough.)

When entering direct ownership commercial real estate, it is very important to have a good property manager or real estate agent on your side. There are many ways to make a profit with commercial real estate.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) are funds whose shares you can buy on the open market. Unlike private real estate projects, REITs trade like stocks. Like stocks, REITs are essentially liquid – as long as you don’t mind losing money if you need to cash in quickly.

You won’t have to worry about property management or the day-to-day issues of investing in REITs, but you should be concerned about where any REIT is heading and how its money is being spent. As with other fractional real estate investments, you want to make sure they’re low on leverage, have a good amount of equity they can leverage in a downturn in the market, and have a long view. term for their properties.

REITs are very transparent and have to disclose a lot of information about their income and expenses, making them a great way for new real estate investors to add a little real estate exposure to their portfolios. The risk with REITs is the same as with any type of stock – the company could fold or you could lose huge sums due to someone else’s mismanagement. Be sure to thoroughly research the REIT before making a purchase.

Learn more about real estate investing

There is a type of real estate investment for every investor

Whatever type of investor you are, there is bound to be a type of real estate investment that will suit your needs perfectly. Looking for something practical? Try the owner or flip. Want something more in the sense of set it and forget it? REITs could be perfect for you.

However, as with any type of investment, make sure you understand the terms of real estate investing before you put any money on the table. Real estate is a long game, and it pays to make these decisions with great care and thought.

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