Investing in real estate can be a lucrative endeavor — if, you know what you’re doing, of course. The tangible aspect of real estate can be comforting, even if the investment itself is still quite risky. Just knowing that you’re investing your money into something you can actually see (and in some cases visit) makes the whole idea of investing in real estate somewhat more reassuring. That’s why so many people choose to invest in real estate in the first place. It’s also not surprising that you can make significant returns on real estate investments alone. However, the caveat with real estate investing is that one wrong move can also lead to devastating losses. And, while there are many ways to invest in real estate and still make good money along the way, it’s all about finding the best type of investment that works for your financial goals and timeline. Understanding that risk is always a factor to consider every time you invest is always the first step to investing responsibly and with diligence.
Here are some useful tips on how to invest in real estate:
Know your options.
Contrary to what most people assume, there are several ways to invest your money in real estate — it’s not all about buying and selling properties for profit. While some people prefer a more ‘hands on approach’ by purchasing and ‘flipping’ homes, others also find passive investments in real estate to be just the right fit for their needs. So what types of real estate investments are available for you to choose from?
Here are some options to consider:
Buying & Renting — If you’re more of a traditional real estate investor, you may prefer the option of purchasing one or more properties and renting them out for an additional source of income. This option may be a viable option if you’re looking to invest your cold hard cash in something you can literally see. However, it’s important to keep in mind the amount of maintenance and added costs that are required to keep these properties competitive and in rental condition. Not to mention the hassles that come along with being a landlord, such as property maintenance, addressing tenants, collecting rent and more. Many real estate investors will hire property managers to keep everything running smoothly, so they can focus on other things. If you take out a mortgage, you’ll still need a significant percentage of the property price for a down payment, not to mention you should be able to cover the mortgage in case you have some trouble finding suitable tenants. And you won’t start making a return on your investment until that loan is paid off, so finding good tenants is absolutely crucial.
Buying & Flipping — Flipping houses for profit is not for those looking to take on a ‘hobby’. It requires upfront cash, serious manual labor, construction experience, dedication to details, market knowledge and a lot of your precious time. It’s also quite common for the unexpected to happen with these projects — unexpected issues, construction delays, added costs — the list goes on. Not to mention there’s almost always a guarantee you’ll go over what you budgeted. Then, you’ll have to make sure you can sell it within a reasonable amount of time and for a large enough profit to cover all the expenses and time you spent on the ‘flip’ itself. It’s really not an easy task. Although buying and flipping will almost always require significantly large sums of money to purchase and renovate the properties, there’s still a possibility you can make a significant double-digit gain if you plan and budget accordingly. And most real estate investors will let you know they’ve made great returns on some flips but have also tanked on others. So, think twice before considering a flip, you may have to quit your day job to take on the project.
Passive Real Estate Investments — If you can agree there’s value in real estate assets, but don’t want the added hassles that come with purchasing homes for profit, you can always consider passive investments in real estate. You don’t have to do much but invest your money and forget about it until your investment matures. This is an excellent way to diversify your investments and create a reliable income stream. There are also many options available — REITs (Real Estate Investment Trusts), mortgage notes, crowdfunding projects, Limited Partnerships and more. Passive investments can really give you the best of both worlds — a sound investment in real estate without having to actually purchase or renovate the property. Just keep in mind that although passive investments may provide higher yields, each option may be structured differently — and some are riskier than others. It’s important to analyze all aspects of these types of real estate ventures in order to determine if it’s a right fit for you.
Do some homework.
For those looking to learn how to invest in real estate, it’s crucial to remember to do your due diligence as an investor. If you decide to purchase a home to flip it for profit, make sure you speak to others who’ve done the same. Gain some insight on what to expect, the process and any pitfalls. Don’t be afraid to ask about bad investments and why they flopped. It’s never a wise option to jump into any kind of real estate investment without experience, simply hoping you’ll have some luck along the way. If you decide to go with a passive real estate investment, research your options. See what’s the best fit for your timeline and end goals. Find a financial firm that offers a more personalized experience, so you can ask questions with ease. You’ll also want to look for fees. Many passive real estate investments come with hidden fees that could offset your expected gains. Regardless of what you choose, the best move you can make is to be well-informed when making your decision.
It’s never a wise option to jump into any kind of real estate investment without experience, simply hoping you’ll have some luck along the way.
Prepare your finances.
Once you’ve made a knowledgeable decision on how to invest in real estate, you’ll need to do the obvious — invest your money. But before you do, assess your finances. Determine where you’ll get the capital and how it will be used. Since the financial impact of each of these investment types may vary greatly, it’s critical to anticipate added capital and potential losses. It’s never a wise bet to invest money you can’t afford to lose. Too many people jump into real estate investments after attending seminars and watching popular real estate shows without truly understanding how a bad investment can impact their finances and overall life. You don’t want to end up filing for bankruptcy because you failed to calculate if you could really afford it. Carefully consider your options based on how much risk you’re comfortable with, how much it takes and how long it’ll be before you see a return. A good real estate investor is always informed and prepared.