Real estate investing can be an incredibly lucrative business. If you’re wondering how to get started into real estate investing, you need to decide which type of property you’d like to invest in, the time you’re willing to spend, and ultimately find the best strategies to make an income from it. Continue reading below for tips on the basic factors of the investment, economics, and weighing the potential risks.
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Types of Real Estate Properties
You need to first decide which type of property you’d like to invest in. There are five main types of real estate properties.
Residential
Residential properties are essentially any property that is used for housing. This could be a house, apartment, townhouses, vacation homes, etc. An individual or family will pay to live in the property based on a lease agreement or contract.
Commercial
Commercial real estate refers to a property that’s main purpose is for business operations or services. This includes office buildings, skyscrapers, retail shops, hotels, hospitals, etc. Depending on the commercial use, a property owner may receive a percentage of sales on top of the rental income. Many commercial properties involve multi-year leases, allowing greater stability when it comes to cash flow.
Industrial
Industrial real estate refers to properties with industrial-sized activities. This could be a property for production, warehousing, manufacturing, research, or distribution. There are a variety of factors that come into play when it comes to the return on investment for industrial real estate depending on the type of property, but there are typically significant fees or rental agreements from tenants or those who use the facilities.
Raw Land
Raw land refers to undeveloped or agricultural land such as farms, ranches, or timberlands. These are often considered great investments due to the open possibilities and resources that it may have. Purchasing raw land as opposed to a property can also be a significantly cheaper investment that doesn’t require the need for property insurance. However, raw land will not generate any income unless something is done with the land.
Mixed-Use
Mixed-use real estate consists of properties that combine any of these categories into one project. For example, it could be a residential complex with retail or office spaces. Mixed-use real estate investments allow the property owner diversity, which allows them more control over risk.
How to Make Money
Here are some of the top ways you can make money from real estate investing:
Rental Properties
Rental properties can provide a lucrative income for the property owner. The owner will receive monthly cash flow from the rent after deducting all related rental expenses. These expenses could include maintenance fees, home insurance, taxes, HOA dues, mortgage payments, and allowances for vacancies.
For those that want to get into rental properties, you can rent out your own home or a secondary residential property. AirBnb has become an increasingly popular platform for individuals to rent out their homes or properties for short term leases. If you’re considering rental properties as your gateway into real estate investment, it’s important to be aware that managing rental properties can be incredibly time consuming. Consider if you’d benefit from hiring a property manager, typically for about an 8-10% fee. Consult this Property Manager Hiring Guide with a dozen articles to help you make that decision.
Value Appreciation
One of the most common ways you can make money from real estate investing is through appreciation, which is when your property increases in value, which will give you more equity and you’ll ultimately make a profit when you decide to sell it. There are many factors that affect the value appreciation, depending on the type of property you own. For example, raw land will appreciate if you develop it or discover valuable resources or commodities on the land.
A residential property could appreciate based on location, if the revolving neighborhood grows and evolves. At the same time, a home’s value could also depreciate depending on the value of the neighborhood. If done correctly, home improvements can also increase the value of one’s home. If you’re considering doing home improvements to your home for value appreciation, it’s important to do some research or speak to a professional to see what would be valuable improvements to attract potential buyers.
Flipping Houses
Flipping houses has become a popular choice when it comes to real estate investing. The concept is pretty simple, you buy a house, fix it up, and then sell it for a higher price than what you bought it for, giving you a profit. When deciding to flip houses there are a few costs that you’ll need to consider like financing costs, repair costs, carrying costs (utilities, taxes, HOA dues), acquisition costs, and selling costs.
Real Estate Investment Trusts (REIT)
Real estate investment trusts, or REITs, are a low-risk way to get into real estate investing. REITs allow anyone to get involved by purchasing stocks. The shareholder then gets a share of the profits generated from the real investment without ever having to actually buy an entire property.
Real Estate Crowdfunding
In this digital age, crowdfunding, or peer-to-peer lending service, has become increasingly popular in the real estate space. These real estate investment platforms connect individuals to raise money and give them greater accessibility to real estate investment opportunities that were previously reserved for the wealthy. Think of it as an alternative to obtaining a loan from a bank or lender.