Real estate investing is a great way to build wealth. To be successful, you need to know how much time and work you’re willing to put in, what your goals are and where you want to invest.
Many people are hesitant because they’re afraid of making a bad investment. However, now might be a great time to take the leap since house prices increased 13%. To help you decide, check out the basics of real estate investing in this post.
1. Don’t rush; learn the market
First, you need to understand that real estate isn’t a get-rich-quick scheme. The biggest mistake an investor can make is sloughing money into an investment without learning the market dynamics.
Take your time to do your homework and find a good deal. This is especially important when choosing the right property type, such as apartment complexes, commercial buildings, single-family homes and institutional buildings.
Ask anyone at a top property investment event how to start a property investing business, and they will likely suggest the first step is finding the right property to invest in.
One hack to make your life easier is opening an account with a lender or broker specializing in real estate investment in your local area. You may use their services for several reasons, such as finding good deals on properties and other real estate-related services.
2. Owning rental property
The traditional method involved buying property and renting it, to make life easier, some property owners hire property management firms to take care of logistics, instantly transforming it into one of the best passive income investments to buy.
Alternatively, you could go down the house hack route. That involves purchasing a home or multi-family unit and renting out other parts of the property as you live in one of the rooms. However, these two methods require substantial upfront capital, even if you opt for a lender.
3. Buying REIT
According to a Forbes article, real estate investment trusts (REITs) are one of the most effective ways for investors to invest in real estate without requiring huge amounts of capital, all while avoiding some of the risks associated with real estate investing.
Like mutual funds, a REIT is a company that owns and operates its assets in real estate.
By pooling many investors’ funding to buy properties and then leasing them out to tenants, institutional investors can pool their resources and diversify risk while maximizing returns from rental income.
A REIT’s property holdings can range from residential housing to industrial buildings to shopping centers.
REITs often provide their investors with income via dividends—similar to a corporation’s profits—and these distributions are usually consistent and paid annually or quarterly.
Investing in REITs is pretty straightforward, as they trade on the stock exchange. You can purchase shares as you would normally do. They are cost-effective too, with some single shares trading for as low as £5.
Most importantly, they’re typically not subject to corporate taxes. Since the REIT is taxed as an entity separate from its investors, there’s no double taxation when it distributes these earnings.
An added benefit is that REITs are required to distribute at least 90% of their taxable income to shareholders via dividends. This means that even if the company earns very little in a particular year, they’ll still have to pay out something.
4. Real Estate Crowdfunding
What’s all the hype about crowdfunding? It allows investors to team up with other individuals and groups to pool their money to acquire a property.
This differs from traditional real estate investing, where an investor acquires properties individually or through a small group of partners.
Companies that run leading real estate crowdfunding websites like Simple Crowdfunding don’t typically deal with the everyday real estate investor. Instead, they work with larger institutions like regional banks.
Real estate crowdfunding functions in two basic ways: equity or debt investing. In debt investing, you invest in the mortgage loan and receive shares on the interest as it’s paid back. Equity investing is investing directly in the property, sharing in the income or profits.
The crowdfunding websites have a team of experts who will help you find an individual deal that meets your financial goals and requirements.
5. Real Estate Syndication
This form of investing allows investors to purchase property within a group and then share equally in any profits or losses that result from the investment.
Other investors are willing to take on a percentage of the risk in exchange for an equal share of the profit or loss, incentivizing future investment.
By partnering with other investors, an individual can access properties that would normally not be available to them.
Syndication differs from real estate crowdfunding since it refers to the funding relationship between the deal sponsor and investors. Real estate crowdfunding finds funders unknown or outside an investor’s network.
6. Flipping homes
It can be a wonderful means of acquiring wealth in the form of profit and equity, all without adding too much financial risk. This takes a different approach to real estate investing, as it swaps long-term investment in favour of short-term gains.
Home flippers buy properties, make improvements, and then sell them off for a higher price.
Flipping is different from traditional home buying or selling because you will be required to complete a rehabilitation project on the home before selling it.
Other things to look for when buying a property to flip are:
- Location – good neighbourhood, close to shopping malls, public transportation, schools;
- Comparisons – how much similar properties are selling for;
- Income – rent rolls or revenue from occupants of the building;
- Expenses – money needed to pay off renovation bills.
Real estate investing can seem daunting for beginners, but it does not need to be complex. Do your homework and take the time to learn about real estate investing.
If you have the funds, you could opt for the traditional real estate investing method–buying a property. For the rest, pooling your money with other investors in ventures such as real estate syndication and buying REITs can be the best option.
For the adventurous investor with a real eye for a good deal, flipping homes can prove to be a lucrative option, but don’t forget to take the time to learn the market dynamics first.