How to Invest In Real Estate: The Clear and Complete Guide
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When most people think of investing in real estate, they think of the rich and famous who own a slew of properties. But what if anyone could invest in real estate; what if it were easy for even inexperienced investors to find, purchase, and successfully manage one or more single family rental properties?
Real estate investing is a great way to diversify your portfolio and to generate an additional source of revenue. Whether you have a lot of capital or just a little, there are ways to invest, let your money grow, and realize the benefits of investing in real estate.
What You Need to Get Started to Invest In Real Estate
Here’s all you need to begin investing in real estate:
- The drive to make money
- Support to help make decisions
- Time and patience to do research
- Decision-making skills to help choose the suitable investment
- An average risk tolerance
- Money to invest
- Decent credit and a low debt ratio to leverage an investment with financing
Who Qualifies to Invest In Real Estate?
You don’t have to be an accredited investor or even have experience investing in real estate. Anyone with the desire to make money can invest, but these people typically do the best with real estate investments:
- People who prefer a tangible investment, something you can see, hold, and even improve to make more money. Owning stocks is intangible - you don’t see them except for a piece of paper. When you own real estate, you own a physical property you must maintain.
- People who enjoy property renovations and improvements. If you spend your time watching HGTV or spend time dreaming of your next kitchen renovation or gardening project, real estate investment might be for you.
- Investors with a long-term mindset. Investing in real estate should be a long-term plan. Even if you fix and flip (more on this below), you’ll make the most profits if you have a long-term plan - a plan to grow your portfolio and multiply your earnings.
5 Ways to Invest In Real Estate
There is more than one way to invest in real estate. Here are the top ways you can diversify your portfolio.
1. House Hack
Many people start investing in real estate by house hacking. Since most mortgage programs give the best rate and terms to owner-occupied properties, homebuyers purchase a multi-unit property (1 - 4 units), live in one unit, and rent out the others.
This is technically an owner-occupied property since you live in one of the units. You can use the rent you collect from the other units to cover your mortgage payment and other maintenance costs.
Since you’re the landlord, you’re responsible for all real estate taxes, home insurance, and maintenance. Since you live in the property, you’ll likely manage it yourself and you should expect an occasional emergency phone call from tenants.
This is often a good way to dip your toe into real estate investing. Depending on your credit rating, you may be able to purchase a multifamily property with as little as 3.5% - 5% down.
As you build equity in the property, it’s yours to keep. You can keep the property or sell it, take the equity, and start a new real estate investment journey. If you leave the unit as a primary residence but keep the building, you may need to refinance to stay within the mortgage guidelines.
2. Fix and Flip
If you don’t see yourself acting as a landlord, the fix and flip strategy could be a good option.
It takes a little more work and a higher investment, but the profits are often high when you do it right. When you fix and flip, you buy an undervalued property, fix it up (investing more money) and sell it for a profit.
To make a fix and flip work, you must:
- Be able to find undervalued properties or work with someone who does. The idea is to buy a property for less than it’s worth, so there’s room to invest in fixing it up and then sell it for a profit.
- Have the cash to invest. Since fixer-uppers usually don’t pass mortgage appraisals, you may need a more considerable investment to buy the property in all cash unless you qualify for a rehab loan, such as the Fannie Mae HomeStyle loan or you borrow a hard money loan.
- Be able to recognize the work that the home needs. Whether you work with professionals who tell you what the home needs or you do it yourself, this is where you grow your investment. You make the home worth more money by repairing, renovating, and making it an attractive home that buyers want.
- Be able to fix up the home and sell it within a short period - usually six months. If you borrow a hard money loan, you’ll want to sell the house as quickly as possible, so you pay off the loan quickly and minimize the interest you pay.
3. Buy and Hold (Rent)
This is the most common way people invest in real estate. It takes some work, but there is plenty of support along the way.
When you buy and hold real estate, you buy a property in a desirable area that’s popular with renters. You purchase the property but don’t live in it - you rent it out to tenants. You collect the rent (cash flow) and earn appreciation in the property, using it as a long-term investment.
As a landlord, you’re responsible for:
- Maintaining the property, including routine repairs and occasional improvements
- Paying the property taxes and homeowner’s insurance
- Covering all liabilities that occur on the property
- Finding, screening, and managing tenants
- Following all landlord/tenant laws in the area
You can buy and hold real estate in your area or anywhere around the country. If you invest in real estate long distance, you may want to hire a property management company to manage the property for you. This will minimize the time and effort you spend overseeing your investment.
Finding properties to buy and hold takes a little work, but when you work with a platform like Roofstock Marketplace, you’ll have an entire platform of investment properties to choose from with the research and number crunching did for you.
4. Buy a Turnkey Property
Buying a turnkey property is another way to buy and hold. This is a popular method for investors who want to invest outside their area (long-distance investing). Turnkey properties are properties that already have tenants in them. You buy the property and become an instant landlord with an active lease. You take over where the seller left off, managing the tenants and the house that’s now yours.
Roofstock Marketplace is well-known for its turnkey properties. Many of the properties they list are from investors who want to sell their property but don’t want to interrupt their tenants. Roofstock does all the due diligence on the properties so you can make an informed decision.
You can browse the marketplace for free and see the current rent, cap rate, gross yield, and neighborhood rating just by browsing the platform. If you find a listing that interests you, click on it, and you’ll get even more information, including:
- Annualized returns
- Lease start and end dates
- HOA information
- Lot size
- Net cash flow
- Cash on cash return
- Immediate costs
You can use the information provided by Roofstock to determine if buying a turnkey property will yield the cash flow and profits you hoped.
5. Invest In Crowdfunding
If investing in physical real estate doesn’t interest you (or scares you), consider investing in crowdfunding. With this method, you pool your funds with other investors to invest collectively in real estate.
You still earn cash flow if you invest in equity and interest if you invest in debt. But you don’t have to take possession or manage the physical property. You invest in a fund whose manager chooses the properties and developers they trust will give your fellow investors a good return on their investment.
Many platforms let you start investing in real estate with as little as $500. It’s an excellent way to get your feet wet, see what the returns are like, and decide if you want to take the next step and invest in physical real estate yourself.
Investing In Real Estate FAQs
How Much Money Should You Have Before Investing in Real Estate?
There isn’t a set amount of money you need to invest in real estate. It depends on where you’re investing and if you qualify for financing. Many investors leverage their investment, only contributing the minimum down payment and borrowing the rest to focus their money on fixing up a property and either selling it or renting it out for the cash flow.
In terms of how much money you need, a good ballpark is 20% - 30% of the purchase price, as that’s what most lenders want.
Is It Good to Invest In Real Estate Now?
With the economy bouncing back, and the real estate industry HOT, many people wonder if they should invest in real estate now or if they should wait and see if the market falls apart again.
Real estate, like the stock market, has its ups and downs. There’s no perfect time to invest. Instead, have a plan in mind. If you’re investing for the long-term, know that you’ll have peaks and valleys, but if you wait it out, you’ll generally come out with a decent return on your investment.
Is It Ever a Bad Idea to Invest In Real Estate?
The only time it’s a bad idea to invest in real estate is if you didn’t do your research and/or the property doesn’t have any cash flow. Don’t assume a rental property will make you money - do your research and know for sure. Of course, anything could happen, and your profits could change, but if you do your research, know the historical trends, and work with a reputable platform, your chances of making a sound investment are higher.
How much money should you spend on your first real estate investment?
There isn’t a right or wrong answer as to how much money you should spend on your first real estate investment. Instead, focus on the cash flow. The rent you can charge (average rent for the area) should be at least 1% of the purchase price. If you can’t get at least that much rent, the property may not be an ideal rental property—unless you can expect significant appreciation in the property value over time.
The amount that you spend to acquire an investment property depends on the area you invest in, what financial goals you have, and how long you’ll keep the property. If you’re buying a fix and flip, you should spend as little as possible on the home. If you’re investing in a buy-and-hold, you’ll spend more money, but the cash flow will make up for it.
The Bottom Line
Investing in real estate may be a great way to diversify your portfolio and provides the potential for cash flow and appreciation. It’s a great way to plan for the future, have monthly cash flow now and even leverage your investment to increase your real estate investment portfolio by buying more properties.
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