What is Real Estate Investment and How to Start Investing

What is Real Estate Investment and How to Start Investing

The term real estate has been defined as land (or immovable property) and anything permanently affixed to the land such as buildings.

Investment, on the other hand, is the act of using money to purchase property for the sole purpose of holding it or leasing it out for income.

Combining the definitions of the individual terms, it is safe to say that real estate investment involves the act of acquiring real estate for the sole purposes of generating income and creating wealth.

Real estate, as an investment, is one of the oldest and most popular asset classes among investors. Over time, different types of real estate have come up. The real estate industry keeps providing diversification options day by day.

The different types of real estate are land, residential property, industrial property, commercial property, agricultural property, mixed-use property, and special-use property.

Before embarking on real estate investment, it is very important for you to know the types of real estate investment properties that exist, and how you can make them earn you a return on your investment. There are four main types of real estate investment properties.

Land

Land

The land itself is property. Other properties need to be erected on the land. Buying or owning land is a good investment strategy that one can earn from and produce returns.

Buying and holding vacant land, however, will not earn you any passive income. That can only happen if the land if farmland.

Holding the vacant land is quite risky. You will first of all deal with zoning issues and pay taxes on a piece of property that is not earning you any income.

You will also have to deal with issues to do with compliance with environmental regulations and accessing utilities.

Purchasing vacant land in a location that is ripe for future development can earn you great amounts of returns in the future when it becomes developed.

Some investors also purchase land and subdivide it according to zoning regulations and service it then sells them off buyers at a profit.

Some also benefit from the capital gains on the land by holding it for some time so that they can sell it at a profit on a later date.

During the holding period, the investor bears all the risks that come with ownership of the land.

1. Residential Real Estate Investment Properties

Residential real estate properties can be used to generate income in various ways. These properties include condominiums, apartments, single-family homes, multi-family homes townhouses, and cooperatives.

An investor can purchase and hold a single-family home for some time until its value increases then sell it at a later date at a profit. One can also buy a single-family home and improve it, hence increasing its value, then sell it off at a profit.

Some opt for renting the home out while they wait for its value to increase before selling it at a profit. Since most homes are purchased on a mortgage basis, investors may rent it out and use the income to service their mortgage.

You can invest in a multi-family home to generate income from multiple sources. These could be two or more unit homes or even apartments. Some investors start by purchasing a two-unit or four-unit home, live in one unit, and rent out the rest.

Townhouses and condominiums offer different investment strategies to real estate investors. An investor can purchase a condominium or townhouse and wait for their value to increase before selling them off at a profit, or earn passive income from them by renting them out.

Many skilled investors purchase more than one townhouse or condominium in the same complex so that they can efficiently manage these properties because they are found within the same location.

2. Industrial Real Estate Investment Properties

Industrial Real Estate Investment Properties

Industrial properties are manufacturing, research, storage, production, and distribution facilities used by companies for manufacturing, warehousing, and distribution of their products.

Due to the complex nature of industrial property investment, this sector requires skilled investors who have large investment portfolios to cushion them from the risks inherent.

Industrial properties are generally large, expensive, and complex to manage. Client needs are also diverse and can change drastically.
An investor in industrial real estate must understand how industrial properties generate returns.

Typically, they generate larger returns with longer leases. Tenants of industrial properties tend to take longer on a property, hence the investor is less likely to deal with high tenant turnover rates.

3. Commercial Real Estate Investment Properties

Commercial property is a property that is largely used for business activities. They are properties used for retail purposes and to provide office spaces.

Real estate investors keen on investing in commercial real estate develop or purchase these properties and rent them to business owners who are seeking space to carry out administrative duties relating to their businesses, or space where people can buy and sell their goods and services.

Investing in commercial real estate is not an easy undertaking. It is more complex and expensive to invest in commercial real estate properties, compared to residential real estate property for instance.

It requires one to carry out extensive research to find out if a commercial real property is a good investment option.

You are probably familiar with commercial properties such as retail stores, restaurants, and office spaces. Managing them is not as simple as you may think.

Before renting out your commercial property, you must, first of all, ascertain its value. You will not determine this by just comparing your property to similar commercial properties within the vicinity.

The process is more complex and more involving than just applying the market comparison approach.

The type of business and how much income it generates annually will have to be factored in. These also affect the value of commercial property.

When financing commercial real estate, you will be required to make a down payment of about 25%-50%. Due to the huge transaction, you would expect, you require a good credit score.

Some banks will require you to have a lease from a company or business entity that is already renting space in your property.

You read it right; you need a comprehensive lease agreement when renting out commercial property. It is not as easy as drawing up a simple rental contract as in the case of residential renting.

How to Start Investing in Real Estate

How to Start Investing in Real Estate

Real estate investment is not as easy as many people make it look. It is irrefutably one of the best ways to create wealth, but still challenging and complex at best.

It requires a lot of dedication, planning, research, and skill to become a successful investor in this industry and create a desirable stream of income.

The following are steps and strategies you can apply to become a master at the game.

1. Develop a Real Estate Investment Goal

Before you embark on investing in real estate, you must determine what you want to achieve, and by when you want to achieve it.

When considering real property investment, you will probably pull out some money to purchase an investment property.

You must be able to estimate the rate of return you expect to receive on that money you want to pump into the business given the risk.

There are several other investment options such as stocks and bonds where you can put your money, but why specifically real estate? What do you aspire to achieve in the next few months or years, say five years?

If you can answer this question right, you are on your way to becoming a successful real estate investor. Assess your current financial goals and decide which type of real estate investment property you can afford at your current financial state. You can work with a professional on this.

Real estate investment goals may include but are not limited to, tax benefits, property value appreciation, leverage, passive income, etc.

2. Build a Network

Build a Network

Real estate investment is complicated. You need to learn the basics and details of the business if you haven’t yet. You must have sufficient knowledge of the industry.

Given the complexity of the whole idea of investing in real estate, it is quite challenging for one to go it alone. That is why most savvy investors are those who have built a very strong real estate network over time.

Building a network provides you with great support in the business. Besides, it opens even greater opportunities.

Let an experienced professional help you solve the problems you are facing, or better yet, go around the problems you would have encountered instead of risking your money and wasting time trying to solve the problem on your own.

In your network, include such people as a real estate agent, an accountant, an attorney, and even a mentor if you want to.

3. Decide on Your Investment Strategy

As you might have realized as you were going through the types of real estate investment properties above, there are so many ways to make money in real estate.

The ones mentioned above are just the tip of the iceberg. An investor can buy and hold property, in which case they would rent it out.

Some decide to fix-and-flip real property. In modern-day investing, there are investment strategies that allow an investor to invest in real estate without even purchasing the investment property itself. These include real estate wholesaling and REITs.

Do your homework and pick one strategy if you are a beginner investor and focus on it. If you have been in the business for some time, you can skillfully combine more than one strategy.

4. Look for the Perfect Investment Property

Find properties in the real estate market that fit with the investment strategy you have formulated.

Once you have decided on what type of real estate investment property you would like to invest in, narrow down your search to the specific type of property you would like to invest your money on.

For instance, if you have decided to invest in residential real estate, you can narrow this down to whether you would like to purchase an apartment, a single-family home, or a condominium.

Maybe you want to own commercial space and rent it out to businesses and companies; consider purchasing an office space. Your investment strategy and your budget should help you decide on this.

Final Thoughts

Real estate as an investment property provides very many ways through which an investor can earn money.

Many aspiring investors spend so much time researching real estate investment, but very little action is evident in their investment lives.

Do your research and some due diligence, fine, but do not procrastinate too much and let your real estate dreams die having only sparked enthusiasm, and not earned you a single coin. Dreaming won’t earn you financial freedom; action will!