- What is real estate investing?
- How do real estate investors make money?
- How to invest in real estate
- The pros and cons of real estate investing
- Challenges beginner real estate investors face
- How to succeed as a real estate investor
- Different types of real estate asset classes
- Options to finance your investment property purchase
- A step-by-step guide to buying your first investment property
- Common terms first-time real estate investors should know
Real Estate Investing 101: What Is It?
New to real estate investing? This guide is for you.
We're Realeflow - a real estate investing software that's designed to help investors build and scale their businesses.
But before you even think about software, you need a clear understanding of exactly what real estate investing is - and that's exactly what we're here to give you.
Real Estate Investing Defined
Real estate investing refers to the acquisition, ownership, management, rental, or sale of real estate property for profit.
How Investors Make Money With Real Estate Investing
Almost every real estate investing strategy falls into one of the below three ways investors make money on real estate;
1. Asset Appreciation
Property value typically increases over time, known as asset appreciation. It's the simplest way of making money in real estate. Purchase a property, hold onto it, and sell it later when its value has risen.
2. Building Equity & Creating Value
Another way to create value is through the build-up of equity. Equity refers to the difference between the market value of the property and any remaining mortgage payments. As you pay off the loan or the property value increases, your equity builds, creating net worth.
3. Providing Short & Long-Term Rental Services
Renting out properties, both in the short and long-term, is a popular strategy for generating steady income. It involves buying a property and leasing it to tenants for a specified period.
How To Invest In Real Estate
One of the best things about real estate investing is how many ways you, the investor, can leverage your creativity to make money. You can pick from the many different types of investing strategies, where you lean on your natural strengths and supplement your weaknesses with education, technology and a team.
Here are 7 of the most popular investing strategies in real estate;
Wholesaling real estate is an entry-level investment strategy where you sign a contract with a home seller, find an interested buyer, and then transfer the contract to that buyer. The profit is the difference between the contract price with the seller and the price paid by the buyer.
Short-term rentals are properties rented for a short period, like vacation homes on Airbnb. It's an attractive strategy because it can generate higher income than traditional, long-term rentals.
Long-term rentals involve leasing a property for an extended period, providing stable and consistent income over time. These properties are typically residential, but can also include commercial and industrial spaces.
Property flipping involves buying a property, improving it through renovations, and then selling it at a higher price. Successful flipping requires a good understanding of the real estate market and home improvement costs.
The BRRRR method—Buy, Rehab, Rent, Refinance, Repeat—is a more advanced strategy that combines other strategies. It involves purchasing a property, renovating it, renting it out to tenants, refinancing the mortgage, and repeating the process.
Real Estate Investment Groups (REIGs)
REIGs are a type of mutual fund for rental properties. For those who want to own a rental property but don't want the hassle of being a landlord, a REIG is a good option.
Real Estate Investment Trusts (REITs)
REITs are companies that own or finance income-producing real estate. They're a way for investors to own real estate without having to go out and buy commercial properties.
The Pros And Cons Of Real Estate Investing
Just like everything in life, there's the good, the bad, and the ugly. Real estate investing is know different. But by having a firm grasp on the risks your taking - along with the potential rewards of those risks - you'll be better prepared to make better, smarter decisions in your investing strategy.
The Pros Of Real Estate Investing
Hedge Against Inflation
Property values and rents tend to increase with inflation, making real estate a great hedge against it. As living costs go up, so too does the value of your investment.
The government provides several tax advantages to property owners, such as deductions on mortgage interest, property taxes, and depreciation.
Passive Income Generation
Rental properties can generate consistent passive income, offering financial stability, and even freedom from a 9-5 job.
Control Over Your Investment
Unlike stocks and bonds, real estate is a tangible asset that you can control. You have the power to add value through improvements, choose the tenants, and influence its profitability.
Adding real estate to your investment portfolio can improve its diversity, potentially reducing risk and providing a buffer against market volatility.
The Cons Of Real Estate Investing
Initial Capital Requirement
Real estate investing often requires significant upfront capital, making it a barrier for many beginners.
Real Estate Investing Is A Long-Term Commitment
Most real estate investments are long-term in nature, requiring patience and resilience to market swings.
It's Not Always Passive
Managing properties, dealing with tenants, and performing maintenance can require substantial effort and time; if you're manning and running the day-to-day operations, it's anything but passive.
Owning rental properties involves property management tasks, including tenant placement, maintenance, and legal responsibilities, which can be burdensome for some investors
Like any investment, real estate comes with market risk. Property values can decrease due to factors like economic downturns, increasing interest rates, or location-specific problems.
Real estate investments are not as easily sold as stocks and bonds, potentially causing issues if you need to access your capital quickly.
Roadblocks For First-Time Real Estate Investors
Capital And Financing
Acquiring capital and securing financing are common challenges for beginners in real estate investing. The large upfront costs can be daunting, and getting approved for loans can be complex.
Investor's Physical Location
Your geographical location can limit your investment options. Real estate is a local game, and understanding the nuances of your market is key to success.
Long ROI Time Horizon
Real estate investing often requires patience. It might take years to see substantial returns on your investment, which can be challenging for those needing immediate results.
Lack Of Industry Knowledge
Without proper education and experience, the real estate industry can be overwhelming. Missteps can be costly, so gaining a deep understanding of the industry is crucial
Taxes (Capital Gains Tax)
Understanding the tax implications, such as capital gains tax, is crucial in real estate investing. Not doing so could significantly impact your profits.
Winning Strategies for New Real Estate Investors
Assemble Your Expert Team
A competent team is essential for success in real estate investing. Whether in-house or freelancers, consider working with realtors, property managers, accountants, and legal professionals.
Network With Other Real Estate Professionals
Networking with experienced real estate professionals can provide you with valuable insights, advice, and potentially, investment opportunities.
Equip Yourself With The Right Tools
Investing software and tools can streamline and simplify property analysis, financial calculations, and property management, making your investing journey more manageable.
Knowledge is power. Understand the principles of real estate investing, from basics like how to analyze properties to more complex topics like taxation and legal considerations.
Know Your Local Market
Developing a deep understanding of your local market is key to finding great deals. Understand the supply and demand dynamics, rental rates, neighborhood trends, and economic indicators.
The Different Types Of Real Estate Asset Classes
There are so many different types of real estate asset classes out there, but here we're going to run through some of the biggest ones;
Residential Real Estate
The most common type of property. It's a standalone house suitable for a single tenant or family. This includes short-term rentals as vacation properties.
These are properties that can house more than one family separately, such as duplexes and triplexes.
Apartment buildings can house multiple tenants and are typically managed by a property management company.
Condominiums are similar to apartments, but the units are individually owned.
Commercial Real Estate
Properties designed for businesses and workspaces.
These properties house multiple retail and service businesses.
Individual retail spaces can be standalone or part of a larger building, leased to businesses for operations.
These facilities offer rental storage space to individuals and businesses.
Industrial Real Estate
Industrial real estate includes warehouses, factories, and buildings used for manufacturing, storage, and distribution.
Land investing involves buying raw, undeveloped land with the intent to sell or develop it later.
Real Estate Investment Groups (REIGs)
These are groups that invest in a wide range of real estate assets, from residential to commercial and industrial properties.
Real Estate Investment Trusts (REITs)
REITs are companies that own and operate income-producing real estate, offering investors a way to invest in large-scale, income-producing real estate.
Funding Your Real Estate Dreams: Financing Options
Here's a rundown of 5 of the most common ways to fund investment properties below (or check out our more detailed blog on the 10 most common ways to fund investment properties);
Home Equity Line of Credit (HELOC)
A HELOC allows you to borrow against the equity in your home. It's a flexible financing option with relatively low interest rates.
Traditional mortgages are commonly used for purchasing properties. They usually require a down payment and have fixed payments over a set period.
Hard Money Loan
Hard money loans are short-term, high-interest loans typically used by investors who intend to resell or refinance the property quickly.
Private lenders can be individuals or companies that loan money for real estate investments. They're often more flexible and faster than traditional lenders.
Seller financing is when the seller provides a loan to the buyer to purchase the property. This can be beneficial when traditional financing is not an option.
Structuring Your Real Estate Empire: LLC
Using an LLC for real estate investing is a popular choice. It provides asset protection by separating your personal assets from your business assets. Forming an LLC can help protect your personal wealth from potential investment-related lawsuits.
A Step-By-Step Guide To Buying Your First Investment Property
Step 1: Choose Your Strategy
Decide which real estate investing strategy aligns with your goals, budget, skills, and risk tolerance.
Step 2: Evaluate Your Finances
Assess your financial situation and how much risk you're willing to take.
Step 3: Get Pre-Qualified For A Loan
Understanding how much you can borrow can guide your property search.
Step 4: Find a Mentor
A seasoned mentor can provide invaluable advice and guidance on your investing journey.
Step 5: Equip Yourself With The Right Tools
Use professional real estate software to aid in property analysis and management.
Step 6: Identify Potential Investment Properties
Hunt for properties that match your investment strategy and financial capabilities.
Step 7: Run Comps to Determine ARV
Real estate comps help you understand the after repair value (ARV), which give you the hard numbers you need in order to calculate potential profit.
Step 8: Estimate Repair Costs
You need to know how to calculate repair costs in order to avoid unexpected expenses that eat into your profits.
Step 9: Negotiate And Make An Offer
Once you've found a potential property, negotiate the terms and make an offer.
Step 10: Close The Deal
Work with a real estate attorney to ensure all legalities are correctly handled, and close the deal.
Decoding the Jargon: Real Estate Investing Glossary
As you start down the road of real estate investing, talking the talk is nearly as important as walking the walk. Here are some of the most common real estate investing terms you'll come across as you're just getting into the business - and for the rest of your career, for that matter (for a full list of terms, check out our comprehensive list of real estate investing terms here).
- Cash-On-Cash Return: This measures the annual return made on the property in relation to the down payment invested.
- Cash Reserves: This is a reserve of cash set aside to cover the costs of unexpected expenses.
- Equity: The difference between the market value of a property and the outstanding loan amount.
- Leads: Potential sellers or buyers interested in real estate transactions.
- 1031 Exchange: A tax-deferred exchange of like-kind real estate properties.
- Comparables: Properties with similar characteristics to the property being evaluated, used to determine its value.
- ARV (After Repair Value): The estimated value of a property after all repairs and renovations have been made.
- Capital Gains Tax: Tax paid on the profit made from selling a property.
- Debt-to-Equity Ratio: A financial ratio indicating the relative proportion of entity's equity and debt used to finance its assets.
- Debt-to-Income Ratio: The percentage of your income that goes towards paying your monthly debts.
- Leverage: Using borrowed money to increase potential return of an investment.
- Occupancy Rate: The percentage of rented or used space compared to the total amount of available space.
- ROI (Return on Investment): A measure of the profitability of an investment.
- Motivated Lead: A potential seller who is eager to sell due to circumstances like divorce, bankruptcy, or a job transfer.