Investing in Real Estate
Investing in real estate can be a very lucrative business. Do you know what Donald Trump, David Walentas, Jeff Sutton, and Donald Bren have in common? They all made billions from investing in the real estate market.
The profit potential by investing in real estate is tremendous. With investment of just a few thousand dollars, you can build a large real estate empire within decades. All that is needed is the acumen for appraising future productivity of the real estate asset you are considering to purchase.
Real estate business is one of the few investment options where obtaining a bank’s loan is not that difficult. When investing in the real estate market, you put your money to work today and make it grow to earn money in the future. You have to earn enough profit to cover the costs and the risks you take on owning the real estate property.
The best thing about investing in the real estate market is that your investment grows tax-free. You do not have to pay any money to Uncle Sam unless and until you cash out your real estate property.
If you had the chance of meeting with a real estate investor, they would tell you about the thrill of chasing down a real estate deal or their last remodel. They pursue the addictive feeling and are always on the lookout for the next opportunity to win great deals.
How Can You Make Money from Real Estate?
You can make money in real estate in several ways.
- Rental Income: Rental income from real estate is a common way to earn from the real estate property. You buy the real estate property and rent it to the tenant. You will receive a stream of cash in the form of a rent that the tenant pays you for using the property for a specific period of time. The rental income can be generated from both residential and commercial properties such as car washes, office building, storage units, rental houses and more.
- Appreciation in Real Estate Value: This is another popular way to earn from the real estate property. Every real estate property consists of intrinsic value, which is the value of the land where the real estate property is located. The intrinsic value of the property appreciates and depreciates according to the demand. Greater is the demand, more would be the intrinsic value of the property. The contrary happens in case of low demand of the property. Some of the factors that affect real estate value include easy commute, amount of traffic, safe environment, close proximity to shopping centres, schools, parks etc. Moreover, price appreciation can also occur due to renovations and capital improvements.
- Real Estate Income Through Flipping: Flipping is a real estate appreciation strategy where the real estate investor purchase a “hot” property and quickly sells (flips) it for a profit. The profit earned from flipping real estate can come through different ways.
- Simple Flip: This is a simple flipping strategy and refers to buying properties at low prices and quickly selling them at higher prices. The strategy is usually used in a rapidly rising market.
- Fix and Flip: The flipping strategy refers to buying a house that needs repair, fixing it and then selling it for a profit.
Investors purchase the property at a discounted price that is much below the house’s market value. The discount may be due to deplorable condition of the house or urgency of the owner to get rid of the property. The former is known as fix and flip, while the latter is simple flipping. After purchasing the property, the investor then performs the necessary repairs if required and then sells it at or above the market value.
Types of Real Estate Investments
Now that you know how easy it is to generate income from real estate property, let us delve further and find out about the type of real estate properties that you can invest your money in to earn real estate income.
- Residential real estate investments: Residential properties include single-family housing, multi-family units (4 plex and less), condominiums, townhouses and mobile homes. Residential zones use smaller FAR (floor area ratio) than business, commercial, or industrial zones. These properties offer homes in a narrow range of prices and sizes, thus providing great investment opportunity for low-income investors.
Various factors affect the property value of residential properties. In many cases, the property value does not remain fixed. The factors that can cause a residential property to gain or lose value includes location, accessibility, neighbourhood, and adding aesthetic features to the properties such as fences, trees, or other hardscape elements.
- Commercial real estate investments: Commercial properties consist of building or land that is intended to generate profit through rental income or capital gain. Office buildings, farm lands, industrial properties, hotels, medical centers, malls, hotels, warehouses, garages, retail complexes, multifamily housing buildings are all different types of commercial properties.
In many states, a residential property that contains more than a certain number of units is classified as commercial property for loans and tax purposes. Normally, real estate properties containing five units and above are considered commercial properties.
Commercial real estate property is valued differently than residential real estate property. It costs a ton more than residential real estate properties, but also has a greater return prospective. In addition, investing in commercial real estate property allows you to diversify the risks. For instance, if you own an apartment complex and a tenant leaves the apartment, you lose only percentage of the income of that property. However, if you lose a tenant from a residential unit, you lose the entire rental income. Moreover, the cash flow generated from commercial property is often higher per square foot than it is in residential property.
- Real Estate Investment Trusts: Real estate investment trusts or REITs refers to a portfolio of real estate or real estate mortgages that are traded similar to stocks. REITs derive at least 75% of its gross income from mortgage, gains from sale of real estate property, and rental income. A typical REIT contains at least 100 shareholders and distributes around 90% of its annual taxable income (minus the capital gains) as dividends.
REITs allow investors to purchase a portfolio of real estate properties and manage them by a professional real estate team. Purchasing REITs can significantly limit personal risk. Owners of REITs do not have to worry about paying back mortgage loans or maintenance of the property. The REIT management company takes care of that for the owners.
- Mixed-use real estate investments: Mixed-use real estate investments is an investment strategy that combines two or more types of properties into a single project. The investment strategy consists of purchasing properties that are used for various purposes. For instance, an investor may took out a lease on a three story office building. The ground floor could be leased to a health insurance company. The remaining floors could be utilized for other businesses such as a membership gym, an upscale retail shop, hair salon or a virtual golf range. The benefit of mixed use real estate properties is that they have the ability of diversification and are effective in controlling risk.
Basic Real Estate Investment Advice and Tips
Before we delve further into the realm of real estate investment, let me take a moment to explain that you should never invest in real estate property in your own name. Most experienced Triangle real estate investors use a special legal structure such as LLC (Limited Liability Company) or LP (Limited Partnership). The reason is that you will be on the hook for anything above the insurance settlement if someone gets hurt on the real estate property and sues you for the injury. This may lead to financial bankruptcy or at the very least great financial suffering.
The legal real structure can be set up by paying only a few hundred dollars or a few thousand dollars if done through an attorney. The paper work required for forming a real estate company isn’t that difficult. You may also opt to set up different company for each real estate project. This is known as “asset separation” that would help you in case you get into trouble with one of the property as you can put it into bankruptcy without hurting the others.
Before you make a clear determination as to the type of legal entity you want to set up as Triangle Real Estate Investors, I strongly encourage you to speak with both a legal as well as tax professional. As I am neither, they can more accurately guide you through this process.
Having cleared this point let us find out what the best way is to invest in the real estate market.
- Buy Low, Sell High, and Rent Smart
- Do not Wait Too long to take Advantage of Low Prices
- Never invest in Buying a High Value Dream Home
- Utilize social media tools for real estate listings
- Remember the Rule: Fixed mortgage, Affordable payments and Long-term hold
On a final note, real estate investment is certainly not easy. In order to succeed in real estate investment you have to thoroughly understand the market and act opposite the herd. Consider getting in touch with a reliable real estate agency for successful real estate investment. A real estate broker is a person or firm that acts as an intermediary between the buyer and the seller of the real estate property.
Whether you want to buy or sell a real estate property, you should hire an experienced real estate broker that has the required experience, skills and tools necessary to make the process simple for you.
If you are a Triangle Real Estate Investor, contact me by calling (919) 322-3960 ext. 7 or email me at Rodney@MainStreet-Realty.net if you need any help buying or selling real estate investments.
You may also begin your own search for residential real estate investment properties by clicking on the link.