September 18th, 2018 By Chris Thompson in Blog
From 401(k)s to stocks, many of us have investments. While most invest in “standard assets,” the exploration of “alternative assets” has grown in recent years, with more people choosing to put money into items such as antiques, artwork or rare collectibles. A more common alternative investment is real estate.
What Is Real Estate Investing?
Real estate investing is the purchase, ownership, lease or sale of property and any structures on it to earn money. Real estate is broken down into three categories:
- Commercial – Property used for business purposes, such as office buildings, restaurants, farmland and apartment complexes larger than four units.
- Industrial – Real estate that serves an industrial purpose, including shipping or storage warehouses, factories and power plants.
- Residential – Land used as a living space, such as single-family homes, multi-family complexes, townhouses and condominiums.
There are four main ways to make money from real estate:
- Appreciation – A property’s increase in value over time represents the potential profit to an investor when that equity is sold.
- Flipping – Involves buying a home in poor condition, renovating it and reselling it for a profit.
- Interest from loans – An investor lends money to a real estate developer and earns money from interest payments.
- Rent – An investor can earn income on a property by leasing it.
Benefits of Real Estate Investing
Investing in real estate is one of the best ways to build wealth over time. Investment income is mostly passive, which gives you more time to focus on your full-time job or travel without worrying about cash flow. This makes it ideal for those looking to supplement their current earnings, or retirees who want more income than their retirement savings allow.
- Appreciation – The value of real estate tends to go up over time, so you will likely make a profit if you hold onto your investment for years and then sell when prices are high.
- Control of finances – Your financial future is not in the hands of your boss or Wall Street. With real estate investment, you are in control of your success or failure.
- Tax benefits – The government rewards rental property owners by offering benefits such as depreciation and low tax rates.
Real estate was once difficult to access and afford, but now there are many ways for people with little money or experience to begin investing in this lucrative asset. Here are four things to consider before investing.
Do Your Research
Thoroughly researching the type of property you want to invest in can go a long way toward ensuring it is the right choice for you. You should make sure the property is in a location that will attract the clients you hope to sell or rent to, appeal to the market and deliver the return on investment (ROI) you are expecting.
When you invest in real estate, experts suggest setting aside your emotions and focusing on analytics. You may have to ignore your personal preferences to find the property that will earn you the most money.
Make the numbers work for you. If you focus solely on the numbers, you can make some serious money. Figure out how long it will take you to make back your initial investment. Real estate investment is typically a long-term process – the sooner you can make the initial investment back, the sooner you can start making a profit!
Figure Out Your Finances
When buying a house to live in, you usually have to put down at least three percent of the home’s value. Investment real estate purchases typically require a 20 percent down payment because mortgage insurance does not apply to investment properties. They also have stricter approval requirements. Therefore, it is important to have your finances in order before deciding to invest in real estate.
It is recommended you pay off all your debts – car payments, student loans, medical bills – before starting out in real estate.
It is also a good idea to consider every financial detail of your purchase ahead of time. Start by calculating the money you already have and how much you can borrow. Then, add up how much it will cost to buy, renovate and maintain the property. Finally, estimate the price you plan to list your property for and subtract the expenses to get a rough idea of your potential profit.
There is an easy formula that all professional investors use – call us today to learn what it is!
Go Low to Start
Investing can be an exciting prospect, but you should avoid the temptation to get ahead of yourself or your finances. This holds especially true if you do not have much money to invest. It is a good idea to start with lower-priced properties – some investors say you should stay below the $150,000 threshold. Since it is your first property, keeping your investment low will help you avoid losing a lot of money if it does not go as planned.
Depending on the property you buy, you may need to spend thousands of dollars on renovation before you can sell or rent it to earn a profit, so you should set aside some money for those costs.
Consider Investment Loan Options
Financing an investment property is not easy, especially if you are tight on cash. You can make yourself a more attractive loan candidate by:
- Being a strong borrower – You will want to check your credit score before applying for a loan. If your score is below 740, you may have to accept a higher interest rate.
- Putting down more money – You may qualify for a lower interest rate if you can afford to put down more than the minimum.
- Choosing a smaller bank – Smaller, locally-owned banks are often more flexible than big banking institutions and may be more willing to extend a loan to you. Small banks may also have more interest in investing locally.
- Thinking outside the box – If you are considering a property that is likely to return a high profit, consider securing down payment or renovation money through a home equity line of credit (HELOC), credit cards or life insurance policies. You may be able to purchase the property through a personal loan from peer-to-peer lending sites, which connect investors to individual lenders.
It is recommended you hire an agent who does real estate investing to help you in the process. How can someone advise you best on an investment if they are not an expert at it?
Choose an Experienced Property Management Team for Your Investment
Investing in real estate can be a good source of supplemental income, especially if you have the time and money to put into researching and financing your purchase. However, it is a venture you should not go into alone. An experienced property management team can help you deal with the logistics of renting property to tenants.
The Rick & Chris Thompson Team of realtors has more than 20 years of experience selling homes throughout Maryland. Whether you are looking to sell an investment property or your own home, we can help you with your next move. Call 301-758-2679 or contact us online to get in touch with our team.