Contrary to popular belief, becoming a real estate investor doesn’t require you to have millions of dollars or a substantial amount of experience in the industry. Most real estate markets are highly accessible and offer a diverse array of opportunities for individuals hoping to make a profit.
However, though the real estate market has historically been quite lucrative, there are still many important details that need attention.
The two most important variables in the real estate industry are timing and location. For example, while the real estate industry has generally yielded a positive return on investment, if you were to have invested in real estate in 2006, you would likely not have been able to make a profitable resale for several years.
Additionally, while one neighborhood in the same city might increase in value over a short period of time, a zip code just across town may be experiencing the exact opposite.
Successfully investing in real estate requires a firm understanding of these trends and also involves an awareness of the specific type of real estate investment you are making.
“Flipping” Real Estate Properties
One of the most common forms of real estate investing is known as “flipping” properties. Generally, flipping a property involves finding undervalued properties in a highly demanded location, making significant improvements to the property, and then selling the property for a price that is greater than the initial investment plus the cost of making improvements.
Flipping properties typically requires a significant amount of work and is generally not considered a form of real estate investing for beginners. In order to enter the property flipping market, you will likely need to have a strong familiarity with the home improvement industry as well as a considerable amount of capital at your disposal.
Property flipping can often yield an above average return on investment if it is done in the right place and at the right time. Succeeding with this specific variety of investment requires a considerable amount of patience from the initial investor.
One of the most important components of flipping properties is having the ability to recognize the relationship between various home improvements and the actual price of the property. For example, if adding a pool, garage, or any other major addition costs $10,000, but this investment only increases the value of the property by $9,000, then your money may be spent better elsewhere.
Real Estate Investment Trusts (REITs)
Real Estate Investment Trusts (REITs) first became organized following an amendment to the Cigar Excise Tax Extension of 1960. These unique organizations are similar to a mutual fund in the sense that they leverage the capital of numerous different investors in order to take on large real estate projects.
Some REITs require very little initial investment in order to participate, but it is important to note that if you do not invest very much money, then you will likely not earn very much money either. However, due to the fact that REITs are generally accessible and do not require an active effort from investors, they are often considered to be a fairly good form of real estate investing for beginners.
When comparing different REITs, there are several different things that you should keep in mind. Things such as proposed projects, total amount of capital, and minimal investment required are all relevant variables for those who are wondering how to invest in real estate. Looking at the historical rates of return for a specific REIT can also be quite helpful, though having success in the past does not guarantee success in the future.
Rental Properties
If you can find the right neighborhood and sufficiently market the property, investing in a rental property can often be an incredibly lucrative form of real estate investing. Rental properties are often preferable to selling properties outright because cash flows occur at a predictable monthly rate instead of sporadically and all at once.
There are many different ways that a new real estate investor can get involved in the rental property market. Many individuals prefer to begin by buying a relatively small rental property (four units or fewer), living in one of the units rent-free, and renting out the remaining units to other people. This form of property investment helps the owner avoid the personal cost of rent (though they may need to be paying a loan) and also earn a profit for as long as they are living there.
The rental property market is fairly straightforward. With research on your areas market statistics and trends, it can be easy to identify which properties will be profitable and which of them will not be. These variables include the rent to purchase ratio in a specific neighborhood, the ratio between the cost per square foot and the rent per square foot, and the anticipated payback period for the specific property itself. When making these investments, it is also important to consider all relevant taxes and fees for keeping the home up.
Wholesale Real Estate Investing
Wholesale real estate serves a necessary function in the industry by connecting those who are looking to sell properties with those who are looking to buy. Technically, the wholesaler never actually owns the property, but instead, they are able to recognize mutually beneficial exchanges that can earn them a profit for facilitating.
For example, a common wholesale real estate exchange usually begins with an individual looking to sell a home “under contract.” If the individual is under contract for $150,000, that means that the wholesaler will earn a profit from any final exchange that is for a figure greater than $150,000. The wholesaler, who has a network of typical buyers, will look for individuals who are willing to pay $180,000 for the property. If there is a buyer who believes they will be able to flip the property for $250,000 after $20,000 in improvements are made, they will agree to buy from the wholesaler.
In this particular example, the wholesaler will earn $30,000 in profit ($180,000 minus $150,000), the original seller will get the property off of their hands at an agreed upon price, and the “flipper” will have the opportunity to earn $50,000 as well potentially. In this situation, every party involved ends up with a more financially desirable circumstance.
Conclusion
Entering the real estate investment market will not guarantee you are able to become wealthy overnight, but there are certainly a strong number of unique opportunities available.
If you are able to correctly time the market, identify locations in which properties are undervalued, and understand which form of real estate investing is right for your personal circumstances, then you will be better prepared to earn a return on your investment.
