How to Start Real Estate Investing

The ULTIMATE Beginner's Guide to Investing in Real Estate

What is Real Estate Investing?

There’s a bunch of different ways to start investing in real estate some including REITs, owning rental properties, flipping houses, etc. But basically you can consider real estate investing, any form of money of time commitment put into a form of real estate that generates you wealth via income or net worth.

Why Invest in Real Estate?

Real estate can enhance the risk-and-return profile of an investor’s portfolio, offering competitive risk-adjusted returns. In general, the real estate market is know for its low volatility, especially compared to the stock market.

Real estate is also attractive when compared with more-traditional sources of income return. This asset class typically trades at a yield premium to U.S. Treasuries and is especially attractive in an environment where Treasury rates are low.

Thanks to the power of leverage and the 4 ways to make money with real estate you can really put your money to work.

  1. Rental Cash Flow:
    This the income you make every single month after collecting rent and paying your expenses. This is one of the main reasons people start investing in real estate.
  2. Appreciation
    Homes tend to go up in value year after year, meaning that your net worth will increase based off a percentage of your homes new value.

    Example: Just by owning a home worth $100,000 your net worth on average would increase by $3,000! This is because average appreciation rate is around 3% annually.
  3. Mortgage Pay down
    As you continue to pay your mortgage your loan amount goes down and the equity in your home goes up.

    The best part is, if you have a tenant living in your property they are most likely paying down your mortgage for you.
  4. Depreciation
    “Most residential rental property is depreciated at a rate of 3.636% each year for 27.5 years. Only the value of the building can be depreciated; you can’t depreciate land because it will never be “used up.” (Source)

    This considered a “paper-loss” because you don’t actually pay someone 3.636% of your home each year. This depreciation is great for taxes especially if you have an expensive portfolio.

    Related: How much house can I afford?

How to Get Started With Real Estate Investing

Here are the 3 main ways you can begin to make money with real estate even as a beginner. If you’d like more help you can use this tool to help find local real estate investing groups.

1. Rental Properties

Owning a rental property makes you a landlord – meaning you’ll be responsible for paying property taxes, a mortgage, state laws and tenants. This is of course unless you hire a property manager to handle most of this for you.

The main way landlords make their money is by collecting rent from their tenants. How much they collect in rent is dependent on factors like location and size of the unit. This rent they collect goes towards covering expenses with anything left over afterwards being cash flow.

Another way to make money being a landlord is through appreciation. This can be forced appreciation from cosmetic improvements to the property or natural appreciation year after year.

2. Real Estate Investment Trust (REIT)

A Real Estate Investment Trust (REIT) is when a corporation is formed to pool individual investors’ money together to purchase, operate and later sell expensive commercial real estate.

“To qualify as a REIT, the entity must pay out 90% of its taxable profits in the form of dividends to shareholders. By doing this, REITs avoid paying corporate income tax, whereas a regular company would be taxed on its profits, thus eating into the returns it could distribute to its shareholders.” –Investopedia

REITs are beneficial for investors who want regular dividend paying income and want to partake in the real estate market without becoming a landlord themselves. REITs also have the benefit of you being able to invest in massive deals you otherwise couldn’t afford on your own.

Not to mention your investment in a REIT is incredibly liquid.

3. Flipping Houses

House flippers are as far across the spectrum as you can get from buy and hold investors. Flipping houses involves buying real estate with the intention of only owning for a few months and then reselling it for a profit.

The way they plan to profit from reselling the home is by repairing and updating the home as quickly and efficiently as possible.

The best repairs for ROI (Return on Investment) would include the following:

  • New flooring
  • Repainting walls, doors, cabinets, shutters, deck etc.
  • New hardware (door knobs, cabinet handles)
  • New light fixtures
  • Inexpensive landscaping work

The worst repairs for ROI include:

  • Foundation repair
  • Roof repair
  • Electrical work
  • Plumbing work
  • New HVAC system
  • Expensive kitchen upgrades (granite counter tops, all new cabinets, etc.)

Related: How to find tenants for your rental property

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