What is real estate?
Real Estate is the land, property, buildings, natural resources, including the air above it and the land below it. It is also referred to as real property.
While there may be many ways to invest your money, nothing can be as risky, or as lucrative, as real estate. And whether it’s for cash flow, appreciation, tax benefits or personal reasons, investing in real estate can be rewarding in more ways than one.
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” Franklin D. Roosevelt
Types of Properties
|Residential||Home is where the heart is… and where the investment portfolio begins. Most real estate investment newbies will simply start with owning their own home. More seasoned investors will focus on commercial, multi-family and other income producing properties.|
|Single and Multi Family Properties||These are generally known as the property types that deliver the most stable returns within a market that is the least volatile since people always need a place to live. Multi-family properties are popular options for investment beginners: living in one unit while renting out the other(s). Examples: (duplexes/triplexes).|
|Apartment Buildings||With larger-occupancy, most operating expenses are typically covered by the tenants.|
|Commercial Properties||Office buildings where companies and small businesses would pay rent to use the property.|
|Industrial Properties||Special purpose properties that generate profits from tenant rentals and sales from customers who use the facilities (storage units, car washes, etc.).|
|Retail||Storefronts, strip malls or shopping malls.|
|REITs (Real Estate Investment Trusts)||Publicly traded real estate operating companies. Similar to the stock exchange but for real estate; you purchase real estate like stocks, and they can be sold on short notice.|
While there are a few different approaches to real estate investment, the first step is to find a good deal. Short sales, foreclosures and tax auctions are a few ways to find a great deal on a property.
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- Fix and Flip: buying a discounted property, adding renovations/ improvements, and then selling it for a gain.
- Buy and Hold: buying a property and renting it out to collect cash flow, or holding on to it until it can be sold for a gain.
- Wholesale: finding great deals, writing a contract to acquire the deal, and then selling the contract to another buyer.
- Lease Option: leasing a property and then purchasing it at the end of the rental period.
What you need to begin
Basic real estate knowledge
While you may not need to be a full-time realtor to be an investor, you should still know the ins and outs of real estate and the market. Reading books and blogs can be great ways to understand the industry and related terms.
There are important short-term and long-term calculations necessary for real estate investing.
Following are some of the most useful formulas:
- ROI (Return on Investment)
- (Gain from Investment-Cost of Investment)/Total Cost of Investment
- Mortgage Calculators
- Future Value
- FV = PV(1+r)^n where:
- PV=present value/amount right now
- r=annual interest rate
- n=number of periods
For a more in-depth look, check out online investment calculators, like the one here: http://www.goodmortgage.com/Calculators/Investment_Property.html
Knowing the risks
Most experienced real estate investors will never buy investment real estate directly in their own name to avoid personal liability (define: a financial obligation for which an individual is responsible for). As a protective measure, it is recommended to only purchase property as a Limited Liability Company (LLC) or Limited Partnership (LP).
Answering the financial questions
How will you finance the investment? What are all the expenses involved in purchasing and managing the property?
A good rule of thumb to use when determining how much you should plan on spending for expenses is known as the “50% rule,” which states that, on average over time, expenses on a property will equal 50 percent of the income.
Having an exit strategy
If you’re planning to get in, you should always know how to get out.
Real estate benefits
- Long-term gain rate
- Deductible mortgage interest and property tax
- Tax-free profits
Real estate is one of the few things you can put your money into that you can actually see, touch and feel. You can inspect your property and take actions to make it better and worth more.
There are two basic ways to get returns from real estate investments:
- Tenant rent payments
- Capital returns: the increase or decrease in the value of the property due to changes in market demand and/or inflation.
Where to find properties
- The MLS (also known as the Multiple Listing Service): the most widely distributed listing of properties for sale.
- Real Estate Agencies: They’ll usually have printouts of their listings on the window, so you can see at-a-glance what some of the local options are.
- Websites/Apps: Craigslist, Realtor.com, Redfin, Zillow. There’s a wealth of information on what’s for sale and recently sold.
- Driving Around: It may be old-fashioned, but it certainly still works! Check out neighborhoods you like, and areas that you think would be marketable for properties that are available.
- Real Estate has created more millionaires and billionaires than any other investment type.
- The richest real estate mogul in the U.S. is Donald Bren, who is worth over $14 Billion.
- Warren Buffet is one of the richest men in the world, and he still lives in the home he bought in 1958 for $31,500.
- A great way to learn about real estate: playing Monopoly. Since 1934, the Parker Brothers board game has been teaching players the importance of location, patience, and cash flow.
- According to real estate website Zillow, the White House is valued at just under $400 million.
- In 2009, there were more foreclosures in the United States than there were marriages.