UPDATED 10/28/20
Property investment is one of the oldest methods of generating income. People have always needed places to live and conduct business, and they always will. Not surprisingly, it is still a booming avenue for investors to generate income. In fact, 9.7 out of 10 real estate investors plan to allocate even more money to their investments over the next 18 months. The results are compelling enough to make existing investors double down and to pique the interest of new investors as well.
If your interest has recently been piqued at the thought of making money in real estate investment, you’re not alone. Many people have made considerable money, and there’s no reason you can’t as well. The key is to make sure you have set up a solid foundation of knowledge upon which to build your enterprise. Consider this article your first step. Keep reading to learn about how to start investing in property, why it’s smart to do so, ways to get the needed money for your venture, as well as a few different approaches you may want to consider.
Diversify Your Income
If you’re an entrepreneur, there exist a multitude of ways to generate a solid income. One of the best ways is to get involved in technology. For instance, cloud computing is an up and coming arena, and there is certainly money to be made. However, like many aspects of tech, the business models are still being tested. Many are not passing the test and people end up with less money than when they began. The same goes for several other types of business.
Getting involved in retail sales, the food and beverage industry, or the services industry comes with large risks—not the least of which is losing the money you initially invest, slowly, as the business fails to live up to its promise. Similarly, investing in stocks, bonds, foreign exchange, and other securities comes with the risk of losing most, if not all, of your money over a short period of time.
However, if you look into how to start investing in property, you will soon discover that there are benefits real estate investors have that many other investors do not. One of the primary advantages is, if you buy the right property, even if it doesn’t sell immediately, you can, in most cases, recoup your expenses. Often, you can still flip a profit if you sit on it and wait for it to appreciate. When you invest, say, $20,000 in a retail business venture, you can only recoup that money if you generate at least $20,000 in net sales. If the business fails to take off, that money is lost forever.
On the other hand, when looking into how to start investing in property, you will quickly notice that the majority of properties increase in value over time. Hence, what you purchase may end up recouping its value all on its own. For this reason, many folks interested in how to start investing in property see it as a lower-risk proposition.
How to Find the Best Real Estate Deals
Locating the best deals is going to be the biggest factor in your success as a real estate investor. Unlike many other business ventures, you can mitigate the amount of risk you shoulder by getting a good deal. Your “risk” shouldn’t be defined as your chances of overall success or failure. Rather, it should be determined on a deal-by-deal basis. If the deal you get when purchasing a property is a great one, your risk is automatically lower for that investment than it would be for one with tighter margins. As you check for real estate for sale, be sure to carefully compare prices of comparable properties.
”Comps,” as they’re known in real estate, give you quantifiable insight into the future of your investment. People are not going to pay a lot more for a home than others pay. While sellers can try to charge as much as they want, the supply and demand forces of the market will eventually tip the scales back toward a fair, reasonable price. The prices this process produces can be seen in the recent comps found for the area in which you plan to invest.
Doing comps is fairly easy. You can hire someone to do it for you, but to get started—both to save a little money and to learn about the process—it may be better to give it a shot yourself. You should look for properties that are similar to the one you are considering buying. They should have the same number of bedrooms and bathrooms, as well as about the same square footage. You should also take into consideration the size of the lot the home sits on. If one lot is significantly bigger than another, it will likely drive the price of the home up, at least somewhat.
Consider Location When Doing Comps Perhaps the biggest factor is going to be the area. The location is typically one of the most influential elements buyers take into consideration when planning a purchase. This is because the location helps determine some static factors. These include the school system their children will attend, the quality of the police and fire departments, the climate, and, often, the health of the job market. A good location is also going to have access to major areas of economic growth and potential. Typically these include metropolitan areas, but they can also include factories or centers of business investment such as technology parks. Other factors dependent on location include things that can, but most often do not change significantly: parks, recreation facilities, grocery stores, places to shop, and the demographic layout of the neighborhood. Due to these factors, you should heavily focus on location as you look into how to start investing in property, but particularly when it comes to comps. The comps you do should be within a 1-mile radius. Even if the comps are that close, double-check the neighborhoods and municipalities in which the comps lie. Often, there can be significant differences in value even due to a few blocks of distance between two homes that are otherwise essentially the same.
Distressed Properties
One easy way to find good deals is to look for properties that need considerable work in order to sell. These are referred to as “distressed properties” or “fixer-uppers.” The reason why distressed properties can be obtained at such good prices is due to the mentality of home buyers. When figuring out how to start investing in property, understanding how buyers think can be a powerful tool.
The value of a home is always subjective. However, that doesn’t mean that certain ground rules are not in place. The way a potential buyer views a home is something that stays relatively constant. The buyer is usually not going to do a basic calculation of dollars per square foot and compare that figure with the comps in the area. They are going to look at the property and consider how much work it’s going to take to make it pleasantly livable. The amount of work it takes affects how much they’re willing to pay for it, not just due to the cash cost but because peace of mind and an easy transition into a new home has an intrinsic monetary value as well.
When a buyer thinks a home is going to be too much work to make livable, they either walk away from the deal or offer a very low price. This significantly drops the value of the home on the market. However, for you, as you consider how to start investing in property, this could mean an excellent deal. Residential renovations may not cost you as much as it would cost a buyer, particularly if you take the time to find the right contractors, source the materials at a good cost, or do some of the work yourself. When it comes to how to start investing in property, you can often buy real estate for sale at a huge discount just because you’re willing to put in the elbow grease to get it ready for a buyer.
How to Finance Your Real Estate Investing
There are several ways you can get the money to start investing in real estate. One of the best ways is to scrape it together yourself using good ol’ fashioned cash. While you will be putting up your own hard-earned money, you will be avoiding what has plagued many investors: debt. This gives you financial freedom and flexibility.
To get the cash you need, you only have a couple of options. One is to save up over time. Another would be to sell an asset you currently own. Some folks may choose to get the initial cash by selling their current home and then downsizing to a smaller one or renting an apartment. You can find people and institutions offering cash for your home in most areas of the country. To make your home liquid before you look into how to start investing in property, you should check if it has any liens against it. Liens can come from various sources, but regardless of the type of lien, it will likely hold up the sale of your home considerably. If you owe back taxes, once you get tax lien released, you can then put your home on the market.
Another option for financing as you consider how to start investing in property is to get financing from an individual, company, or a financial institution like a bank. Banks offer standard mortgages, balloon mortgages, and loans with variable payments. You can also get a hard money loan or borrow from associations of people who invest in real estate using an investment group. When deciding which avenue to choose, carefully consider the loan terms and the rate. Take time to calculate the real cost of the loan and then add that to the cost of maintaining or improving a property between when you acquire it and sell it. Be honest and realistic with your numbers. This way, you can avoid some of the pitfalls that come with overextending yourself. This is a crucial step as you look into how to start investing in property.
Profiting from Real Estate Construction
Construction is another avenue that can return significant real estate investing profits. Many people, when they consider how to start investing in property, overlook the benefits of investing in construction. It looks like a lot of work, and the costs appear variable, at least from an outside perspective. But when you consider the real costs, you can often find strong opportunities.
Construction often comes with a smaller upfront investment in order to get started. You may not have to spend as much on materials as you may think. If you sit down with a lumber supplier, you can strike a deal to get materials in bulk. When a buyer commits to getting a whole lot of material, the lumber yard or DIY store gets to lock in the sale of more material, so both parties benefit.
You may also be able to save money on how much you spend for labor. The key is to shop around and not accept the first deal that comes your way. In order to save money on labor, however, you may have to make some sacrifices. Typically, cheap labor comes from crews that specialize in one thing in particular but are not so good at managing an entire building project. This means you may have to either manage each phase yourself or hire someone to do it. Keep in mind that this will take either time or money, and, in some ways, the two are the same.
When using construction as a real estate investment tool, also consider alternative types of buildings, such as office spaces. As businesses grow, they often need an affordable spot to which to expand. If you build small office spaces and outfit them with the right amount of connectivity resources, they may attract renters who wish to grow their small businesses.
Really, the possibilities are endless. It’s easy to see there are many ways to develop a strong real estate portfolio. Remember to do your research, pay careful attention to the comps in the area, and make sure they are accurate. Keep your mind open and consider different types of financing as well as the various construction options. If you take your time, develop a patient, pragmatic attitude, and wait for only the best deals, you will learn how to start investing in property and make some good money while you’re at it.
For those who are looking to get started in non accredited real estate investing, single-family houses or apt real estate can be an excellent choice. Two keys to being financially successful with this are to find a solid building in a good location that can rent at a good rate, and keep and setting aside the rental income for expenses like taxes, insurance, and repairs. Use the best rental home search app to find what rentals are on the market so you can make yours competitive. The best site for house shopping is Zillow. A 2 bedroom house Zillow listing is easy to find in most areas. Also, an all MLS listings home finder is another option. An available real estate company can help you with the entire process from searching to closing, and they can refer you to contractors and property managers if you prefer to be less hands-on. In terms of keeping cash aside for expenses, the best way to do this is to get a business checking account that lets you have sub-accounts where you can set aside money specifically for each line item. Decide upon a percentage, and transfer that amount of the rent income to the sub-account every month.
