Are you ready to take the plunge into real estate investing but don’t know where to start? Investing in real estate can be a highly profitable and rewarding venture, but it requires careful planning and a solid understanding of the market. As a beginner, it can be daunting to navigate the various investment options, financing strategies, and legal requirements.
However, with the right guidance and a willingness to learn, you can make smart investment decisions that will pay off in the long run. This article aims to provide a comprehensive introduction to real estate investing for beginners. We will cover the basics of real estate investing, including different types of properties, financing options, and investment strategies.
We will also explore the advantages and disadvantages of investing in real estate, as well as common mistakes to avoid. By the end of this article, you will have a clear understanding of how to invest in real estate and what steps you need to take to get started.
Whether you are looking to build wealth, generate passive income, or simply diversify your investment portfolio, real estate can be a valuable asset.
So, if you’re ready to take the first step towards achieving financial freedom through real estate investing, let’s dive in!
Table of Contents
The Basics of Real Estate Investing
At a basic level, real estate investing is a method of making money by renting, flipping, or owning residential, industrial, or commercial properties, or parcels of land. Some investors may find these properties on their own or through the use of an online real estates marketplace such as LoopNet, Zillow, and Redfin.
There are basically four types of real estate:
Residential real estate.
Residential property is real estate that has been developed or zoned for living, such as single-family houses, apartments, or mobile home parks. There are also condos, townhouses, duplexes, triple-deckers, quadplexes, high-value homes, multi-generational, and vacation homes.
Residential property is for non-business use, most frequently to provide a home for individuals and families to live in.
Commercial real estate.
Commercial real estate is business-focused, meaning that the owner of the property uses the property for specific business objectives. The owner expects to make a certain return on the investment.
You can buy an office building, an apartment building, or even a commercial storefront that houses a variety of retail shops.
Apartment buildings are often considered commercial, even though they’re used for residences. That’s because they’re owned to produce income. So, it’s a broad category that covers almost all kinds of real estate except homes.
The rule of thumb is anything that’s rented out to a business and any residential building with more than 4 units inside it, is classified as commercial.
Commercial real estate investing is complex and requires a lot of up-front capital, and you’ll need to have a reliable system in place to be able to manage it all (maintenance workers, accounting, property managers, etc.)
Industrial real estate.
Industrial real estate includes All land and buildings either utilized or suited for industrial activities.
It’s an umbrella term for manufacturing, production, Assembly, Warehousing, Research, Light Storage, Distribution, and some related Office requirements of tangible goods rather than service-related users.
Land investing (that’s right, buying and selling vacant land) is a massive opportunity that the majority of investors aren’t paying attention to.
This type of real estate is an extremely lucrative and low-risk way to build serious wealth from real estate, it includes vacant land, working farms, and ranches, minus buildings and equipment.
4 Ways Real Estate Investors Make Money
Regardless of the type of property you own, you can benefit monetarily profit from an investment property in four key ways: cash flow income, appreciation, tax benefits, and leverage.
1. Cash Flow Income.
The owner of a single-family home, condo, townhome, multifamily property, commercial building, crowdfunded real estate or industrial real estate may generate rental income by leasing out all or part of a building or unit to a tenant.
Many people investing in real estate choose to rent space to tenants because it provides a steady, predictable, and consistent revenue stream. This is particularly true if you are located in a stable real estate market. Be sure to check the local vacancy rates on the type of real estate property you want to invest in.
Some opt to pocket the money they make in rent and handle maintenance and upkeep of the property on their own, while others hire a property management company that receives part of the profits in exchange for property management services. On average, you can assume that a property manager will cost you 10% of your gross rent, for long-term renters. if operating short-term rentals, this number is much higher.
In certain real estate markets where property costs are on an upward trend, property owners can earn money simply by purchasing and holding the property.
The increase in a property’s value over time is called appreciation, and it will translate into a profit for the property owner when he or she decides to sell. This method of profit is ideal for people who are looking for a long-term investment in a market where property prices are steadily increasing.
A long-term buy-and-hold strategy is almost always a good choice, given that over the long-term real estate prices have almost always been appreciated.
3. Tax Benefits.
One of the most important considerations for real estate investors that most newbies don’t consider is the tax benefits. As a real estate investor, you are a business owner. As a business owner, you get tax deductions. This includes any upgrades to the property, your cost of traveling, having a home office, supplies you need for cleaning and maintenance, and the list goes on.
BUT! By far, the sexiest thing of all about investing in real estate is depreciation. Depreciation is a magical pot of gold at the end of a glistening rainbow that every investor can collect at the end of the tax year. Simply put, depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor.
Depreciation is actually a non-cash deduction that reduces the investor’s taxable income. Many investors refer to it as a “phantom” expense because they’re not actually writing a check. It is merely the IRS allowing them to take a tax deduction based on the perceived decrease in the value of the real estate.
Real estate depreciation assumes that the rental property is really declining over time as a result of wear and tear. But we all know this is not typically the case. Not many other sorts of investments offer comparable depreciation deductions. As a result of real estate depreciation, the investor may actually have income that flows in every month from the property but may show a tax loss.
When you leverage, you’re borrowing money to help finance a property investment. The most common means of leveraging in real estate is taking out a mortgage. where you’re using your own money to leverage the acquisition of the deal.
In most cases, a 20% down payment (and a good credit history) gets you 100% of the property and house you want. Some mortgage programs may even allow you to put down less.
How to invest in real estate?
Invest In Residential Real Estate.
Investing in residential properties involves buying a house with the intention of generating rental income. This approach has been a popular investment strategy for a long time, primarily due to the almost guaranteed monthly income it produces.
Managing a residential property is generally easier than managing a commercial building, making it an attractive option for investors. The rental income generated by residential properties can provide a stable and reliable source of passive income, making it an ideal option for those looking to supplement their income or build long-term wealth through real estate investing.
Fix & Flip.
Residential real estate investing isn’t just limited to rental properties. Another common strategy is known as “flipping,” which involves purchasing a property at a lower price, making improvements, and then selling it within a short period of time. Typically, the timeframe ranges from a few months to a year.
Unlike rental property investors, flippers don’t intend to hold onto the property for an extended period or generate rental income. The potential profits from flipping homes can be substantial, but it’s also a high-risk venture. Success hinges on whether the cost of improvements outweighs the resale value of the property.
Flipping properties requires expertise in both real estate and home improvement. Even a profitable flip can seem like a money loser for a long period of time. As such, patience is key to achieving success with this business model.
Invest in Commercial Real Estate.
If you’re interested in real estate investing beyond just residential property, commercial property can be a compelling option. Commercial properties include retail buildings, office buildings, and other structures that are designed for business purposes. However, this type of investment comes with a higher price tag, so you may need to consider partnering with others to finance the property.
As the owner or part-owner of a commercial property, you can rent it out to businesses in need of space. This can be a high-risk, high-reward investment. On the one hand, income from renting space to businesses is generally higher than that from residential properties. On the other hand, commercial property values can be more volatile and dependent on economic conditions.
Another key difference between commercial and residential properties is that commercial lease agreements typically have longer terms than residential ones. This provides more stability for the property owner, as it means that businesses are more likely to stay in the space for an extended period of time.
Invest in REITs.
Real estate investment trusts (REITs) offer a way to invest in real estate without the traditional responsibilities and risks that come with owning physical properties. Often compared to mutual funds, REITs are companies that own and manage commercial real estate properties such as office buildings, retail spaces, apartments, and hotels.
Investors can buy shares of the REIT and receive a passive income in the form of dividends based on the performance of the REIT’s investments. The ownership of the properties themselves belongs to the REIT, which splits the profits with investors in exchange for their investment.
This investment strategy is ideal for individuals who want to enter the real estate investing industry but don’t have significant capital to purchase investment properties or the time and resources to manage them. REITs provide an opportunity for investors to earn passive income from real estate without the hassle of dealing with tenants, property management, and other responsibilities that come with owning physical properties.
Another benefit of investing in REITs is that they typically own multiple investment properties, which means investors can have a diverse real estate portfolio with minimal effort. Overall, REITs offer a convenient and low-risk way to invest in real estate, making them a popular choice for both beginner and experienced investors alike.
Invest in real estate online.
Last but not least, don’t forget about all the new companies that are helping investors get involved in real estate without getting their hands dirty.
Websites like Fundrise and Realty Mogul allow you to invest in commercial or residential real estate investments and receive cash flow distributions in return. Investing in these Websites is similar to investing in REITs.
The cash you invest could also be used to purchase residential property, commercial real estate, apartment buildings, and more. Plus, you get the advantage of dividends and distributions and long-term appreciation of the properties you “own.”
While neither company has been around for too long, they’re both performing well so far. Fundraise returned an average of 11.4% on invested dollars in 2017 net of fees and 9.11% in 2018 after all, and you don’t need to be an accredited investor to open an account.
Rent out your spare space on Airbnb.
Renting out your spare space on Airbnb can be a great way to earn extra income, especially if you live in a popular tourist destination or a city with high demand for short-term rentals.
Airbnb is a platform that allows homeowners to list their property, such as a spare room, apartment, or even an entire house, for travelers to rent.
The process of listing your space on Airbnb is relatively simple and can be done through their website or mobile app. Once your listing is live, potential guests can browse and book your space, and you can communicate with them directly through the Airbnb platform.
One of the benefits of renting out your spare space on Airbnb is that you have the flexibility to set your own rates, availability, and house rules. You also have the option to screen guests and choose who stays in your space.
Keep in mind that there may be legal and tax implications for renting out your space, so it’s important to research and comply with any local regulations. Additionally, you may need to acquire insurance to protect yourself and your property.
Overall, renting out your spare space on Airbnb can be a great way to earn extra income, but it’s important to be aware of the potential risks and responsibilities involved.
Real Estate FAQs.
Why is an interest-only loan better for an investment property?
Interest-only investment loans are one-way real estate investors are keeping costs down. Without the need to repay the capital. This means that when the mortgage reaches maturity, you will still owe the amount of capital you originally borrowed.
The monthly payments when you are on Interest-only loans are lower than for principal-plus-interest loans. This helps investors to maximize cash flow while continuing to benefit from capital growth.
What is refinancing in real estate?
Refinancing is when the first loan is paid off and you get a new loan for your investment property based on the new NOI. This is a great way investors make money with their real estate because they will be able to get money out of the deal without paying taxes on it (A non-taxable event.)
What are the types of loans for real estate investing?
There are basically 6 common types of loans for investment properties in real estate:
- Conventional Mortgage Loans for Investment Properties
- Hard Money Loans for Investment Properties
- Private Money Loans for Investment Properties
- Fix-and-Flip Loans for Investment Properties
- Home Equity Loans for Investment Properties
- Commercial Investment Property Loans
Real estate investing can be a lucrative way to grow your wealth and reach financial independence. By taking the time to educate yourself on the different investment strategies and working with qualified professionals, you can minimize your risks and maximize your returns.
Remember to start with a clear plan, focus on properties or markets you understand well, and conduct thorough due diligence before making any investment decisions. With patience and persistence, you can achieve your financial goals through the power of real estate investing.