If you want to earn extra income, it is important to learn how to invest in real estate. Real estate is land and anything erected on it. It also included the natural resources on or below the surface of the land. Before proceeding any further, we need to get a better understanding of the real estate industry.
What is Real Estate?
It is an asset; a type of real property. Real property is land and buildings on the land, including any other improvements on the land.
Real estate can also be used to refer to the proprietary rights enjoyed due to ownership of land, for example, the right to use and enjoy the land.
Lessees and renters may have the right to use land or buildings that are considered part of their estate, but these rights are not considered real estate.
The word ‘real’ is derived from the Latin word ‘res’ or things. Some people claim that it was derived from the Latin word ‘rex’ which means ‘royal’ since all the land within a kingdom used to be held by kings.
The US some time back restricted voting rights to real estate owners.
Now we will quickly review the main 3 types of Real Estate:
Commercial Real Estate
This includes shopping centers, malls, education centers, office spaces or buildings, and hotels. Most apartments are also categorized as commercial since they are used for residential purposes.This is because they are mainly used to generate income.
Residential Real Estate
Includes both homes for sale and newly constructed homes or those under construction. The single-family homes are the most common category here. There are also townhouses, duplexes, three-deckers, high-volume homes, vacation homes, and even quadplex.
Industrial Real Estate
Industrial property includes warehouses and buildings used for manufacturing purposes. Such properties are mainly used for production, storage, and research. Some of the distribution centers are considered commercial real estate.
How Real Estate Works?
The term real estate can also be used to refer to the production, purchase, and sale of real property. It critically affects the growth of the economy. In other words.
Real estate is real property that includes land and improvements on it, buildings erected on it, utility systems, fixtures on the land, and structures on the land.
The way it works is simple. You need to invest money and buy a property for a low price and then sell it for a higher amount. The key here is not how, but more like where.
Where you can find someone willing to sell a real estate for less when it can be sold for more. These conditions require immediate cash, for you to react fast and never miss an opportunity.
Everything else is mechanical such as obtaining market data, prospecting for potential buyers, etc. Since you now know you have to have money to make money from real property, let us take a look at how you can invest in real estate.
Investing In Real Estate
You are able to invest in real property right away by purchasing parcels of land or houses. You can also invest by buying shares in a Real Estate Investment Trust (REIT). You can also invest in Mortgage-Backed Securities (MBS).
Direct investment in real estate earns profits or results in losses in two major ways; revenues from renting or selling a property, and the appreciation of the property’s value.
Compared to other investments, geographically is the most affected by its immediate location and surroundings.
5 Ways to Invest In Real Estate
We will review the 5 most beneficial ways to invest in Real Estate right away!
1. Online Platform for Investing in Real Estate
Every investor needs to know such companies LendingClub and Prosper.
These companies connect borrowers and investors who can lend them money. With that money, the borrowers satisfy their needs, such as weddings or home renovations.
The main platform goal is to connect real estate developers and investors so that they may get financing for their investments or potential investment projects.
Investors receive money monthly or quarterly as their gain for the risk taken and the paid platform fees from their end.
You need money to make money. That is why most of these platforms only admit accredited investors as defined by the Securities and Exchange Commission.
In other words, a real estate online platform is a real estate system to which other software applications can connect.
2. Flipping Investment Properties
Basically, you invest in real estate by purchasing an underpriced home or property and renovate it with a little finance.
The whole point here is to sell it for a better price and earn a profit. You have probably watched TV shows for the same type of investing. The catch here is that it is a lot harder than it looks.
This method is called flipping investment because it hides a big element of risk. There is a lot of math that is hiding behind this operation, and you have to be extremely accurate in order to spin all the costs and earn a profit.
Here is an example so you can get a better understanding:
When browsing for Real Estate properties on the web, sometimes you can see extremely depreciated properties. You decide to go there and take a look.
What you see is that the property is very cheap but it needs renovation. It costs $200,000, you know that if it is in better condition you can sell it for $300,000, and you decide to buy it.
Your estimated renovation cost is around $40,000 to $50,000 and if you manage to sell it for $300,000 you have approximately $50,000 profit! This is why you need to have ready money and be ready to buy whenever you see an opportunity.
The risk is also there, but if you know an auditory that is ready to buy you can invest right away!
Unfortunately, flipping also has some level of risk because the property is likely to lose value if held for a relatively long period.
This is because you will be servicing a loan without getting any income from the property. Flipping investment is not recommended for beginners as you need to know the market and be ready at all times.
3. Buy Real Estate Investment Trusts (REITs)
REITs allow one to invest in real property without actually owning the property. They pay high dividends, making them a common investment in retirement.
If you desire a regular income, you can invest the dividends further. This type of investment is usually related to companies that have invested in commercial properties, for example, offices, retail spaces, hotels, and large apartments.
REITs can be a good investment but they can be complex and of wide varieties. Some of them operate just like stocks while others don’t, so the amount can be the biggest object of risk you will be taking.
They can be difficult to value, and they are not easily sold. So as a new investor, you may want to invest in publicly-traded REITs. These you can buy from brokerage firms.
A brokerage account is what you need to invest in real estate for this method! It takes only 15 minutes to register, if you don’t have an account and many platforms do not require an initial investment.
The brokerage account is a financial account that you open with an investment firm. It is different from the regular bank account because you can purchase investments and even stocks.
You can easily open a brokerage account with an investment company or brokerage firm.
Once you have the account, you will be able to invest money and sell the investments anytime. The brokerage account offers you access to a range of different investment opportunities.
Many brokers also offer mole-like forex & futures, management accounts safer investments and more.
4. Real Estate Investment Groups
If you want to own a rental real estate, without bothering to rent it, this method is just for you! It is a little bit hands-off approach to real estate but it provides you with passive income and appreciation.
With real estate investment groups, there is a risk of course regardless of the property owner. These groups are combining small mutual funds that invest in rental properties.
A company acquires a set of apartments and then sells them to a group of investors.
Just one single investor can own several real estates of living space, but the company manages all of them. The company handles all the management of course, such as maintenance, advertising vacancies, and interviewing tenants.
Monthly rent is provided to the company in return. This is the safest way to invest in real property. You will, however, be subjected to some fees.
5. Real Estate Syndications
These are similar to but not the same as crowdfunding. With syndications, a sponsor finds a huge real estate deal and invites external investors to raise the remaining capital.
As opposed to crowdfunding where investors bring in their money in order to invest in real estate without owning the property, investors, in this case, are offered just one huge deal.
The normal person does not have many opportunities to buy a multimillion-dollar property. But if you become a part of syndication, you’ll be able to buy apartments, whole hotels, and even commercial buildings.
There are disadvantages just as is the case with most endeavors. One of them is that these deals are mostly available to accredited investors. Besides, your money will be stuck with this deal and you will not be able to sell your interest or buy one.
It is upon you to carry out due diligence for the deal. You need to vet the numbers and the sponsors before putting in your money. This you have to do one way or another even if the deals are beyond your understanding.
How Much Money Do You Need To Start?
Everything depends on what form of investment you want to start with. Probably you already know that you will need a lot of money if you’re going to buy a house.
Basically, the more financial stability you have when starting, the more options of investment you have. Buying property is extremely expensive and you might consider renting it out, instead of purchasing.
Even if you are just planning to mortgage it and resell it, you will need to invest a large amount of money first, before having something in return.
As we reviewed, REITs are a very good option for you to invest in real property in case you are interested in real estate investing but you don’t have enough funds to purchase the property.
For the lowest investment REIT, you will be looking at $500. It is very affordable to start with and you have a potential for dividends on them as well.
So if you’re looking to start, you should have at least $800-$1700 saved up and ready for a possible investment.
Is It a Good Investment?
If you are familiar with the market, and you did research on more specific ways to invest, you might already know that Real Estate has the potential to be a solid investment with a lot of benefits.
It is the same as an ordinary investment. It will not work out for you if you make an investment you cannot afford.
So before you start to invest in real estate, do your research and get to know the limits of your financial situation.