It is generally a great investment option. Real estate, can generate ongoing passive income and can be a good long-term investment if the value increases over time. It is a great investment for many reasons including, enjoying an excellent rate of returns and amazing tax advantages. Real estate also provides better returns than the stock market without as much volatility.
In real estate, your risk of loss is minimized by the length of time you hold on to your property. When the market improves, so does the value of your home, and as a result, you build equity. Real estate gives you more control of your investment because your property is a tangible asset that you can leverage to capitalize on numerous revenue streams, while enjoying capital appreciation. In terms of tangible assets value, real estate has a high tangible asset value.
There will always be value in your land, and value in your home. Other investments can leave you with little to no tangible asset value such as a stock which can dip to zero, or a new car which decreases in value over time. Home owners insurance will protect your investment in real estate, so be sure to get the best policy available so your asset is protected in the worst-case scenario.
History continues to prove that the longer you hold onto your real estate, the more money you will make. The housing market has always recovered from past bubbles that caused home appreciation to slip, and for those who held on to their investments during those uncertain times, prices have returned to normal, and appreciation is back on track. Now, real estate investors in the top performing markets are enjoying a windfall. An investment in real estate can also diversify your portfolio.
Diversification is very important in financial planning . When you diversify your portfolio, you spread out the risk. Real estate will always serve as a safe tangible asset to mitigate the risk in your portfolio. Many have amassed wealth by solely investing in real estate. You can get tax deductions on mortgage interest, cash flow from investment properties, operating expenses and costs, property taxes, insurance and depreciation (even if the property gains value) and other benefits.
In real estate, your risk of loss is minimized by the length of time you hold on to your property. When the market improves, so does the value of your home, and as a result, you build equity. Real estate gives you more control of your investment because your property is a tangible asset that you can leverage to capitalize on numerous revenue streams, while enjoying capital appreciation. In terms of tangible assets value, real estate has a high tangible asset value.
There will always be value in your land, and value in your home. Other investments can leave you with little to no tangible asset value such as a stock which can dip to zero, or a new car which decreases in value over time. Home owners insurance will protect your investment in real estate, so be sure to get the best policy available so your asset is protected in the worst-case scenario.
History continues to prove that the longer you hold onto your real estate, the more money you will make. The housing market has always recovered from past bubbles that caused home appreciation to slip, and for those who held on to their investments during those uncertain times, prices have returned to normal, and appreciation is back on track. Now, real estate investors in the top performing markets are enjoying a windfall. An investment in real estate can also diversify your portfolio.
Diversification is very important in financial planning . When you diversify your portfolio, you spread out the risk. Real estate will always serve as a safe tangible asset to mitigate the risk in your portfolio. Many have amassed wealth by solely investing in real estate. You can get tax deductions on mortgage interest, cash flow from investment properties, operating expenses and costs, property taxes, insurance and depreciation (even if the property gains value) and other benefits.
How To Make Money In Real Estate
Generally, there are two primary ways to make money from real estate—Appreciation, which is an increase in property value over a period of time, and rental income collected by renting out the property to tenants. But there are other ways which includes ancillary real estate Investment Income.
Real Estate Appreciation: This is when the property increases in value. This may be due to a change in the real estate market that increases demand for property in your area. It could be due to upgrades you put into your real estate investment to make it more attractive to potential buyers or renters.
Cash Flow Income (Rent): This type of real estate investment focuses on buying a real estate property, such as an apartment building, and operating it, so you collect a stream of cash from rent. Cash flow income can be generated from apartment buildings, office buildings, rental houses, and more.
Ancillary Real Estate Investment Income: For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-captive collection of customers.
Real Estate Related Income: This is income generated by brokers and other industry specialists who make money through commissions from buying and selling property. It also includes real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. The purest, simplest form of real estate investing is all about cash flow from rents rather than appreciation.
Popular Ways To Start Investing In Real Estate
There is a myriad of different types of real estate investments a person might consider for his or her portfolio.
Real estate properties are ordinarily categorized into one of the following groups:
Residential real estate investing - These are properties that involve investing in real estate tied to houses or apartments in which individuals or families live. Sometimes, real estate investments of this type have a service business component, such as assisted living facilities for seniors or full-service buildings for tenants who want a luxury experience.
Leases usually run for 12 months, give or take six months on either side, leading to a much more rapid adjustment to market conditions than certain other types of real estate investments.
Commercial real estate investing - Commercial real estate investments largely consist of office buildings. These leases can be locked in for many years, resulting in a double-edged sword. When a commercial real estate investment is fully leased with long-term tenants who agreed to richly priced lease rates, the cash flow continues even if the lease rates on comparable properties fall (provided the tenant doesn't go bankrupt).
Commercial real estate investing - Commercial real estate investments largely consist of office buildings. These leases can be locked in for many years, resulting in a double-edged sword. When a commercial real estate investment is fully leased with long-term tenants who agreed to richly priced lease rates, the cash flow continues even if the lease rates on comparable properties fall (provided the tenant doesn't go bankrupt).
On the other hand, the opposite is true - you could find yourself earning significantly below-market lease rates on an office building because you signed long-term leases before lease rates increased.
Industrial real estate investing - Properties that fall under the industrial real estate umbrella can include warehouses and distribution centers, storage units, manufacturing facilities, and assembly plants.
Retail real estate investing - Some investors want to own properties such as shopping centers, strip malls, or traditional malls. Tenants can include retail shops, hair salons, restaurants, and similar enterprises. In some cases, rental rates include a percentage of a store's retail sales to create an incentive for the landlord.
For all the real estate investing options available to investors, the average person is going to get his or her first real estate ownership experience the traditional way: By purchasing a home.
To be more direct, a home isn't an investment in the same way an apartment building is. At its very best, and under the most ideal of circumstances, the safest strategy is to think of a home as a type of forced savings account that gives you a lot of personal use and joy while you reside in it.
On the other hand, if you take a holistic view of your personal wealth, outright ownership of a home (without any debt against it) is one of the best investments a person can make. Not only can the equity be tapped through the use of certain transactions, including reverse mortgages, but the cash flow saved from not having to rent generally results in net savings -- the profit component that would have gone to the landlord effectively stays in the homeowner's pocket.
Industrial real estate investing - Properties that fall under the industrial real estate umbrella can include warehouses and distribution centers, storage units, manufacturing facilities, and assembly plants.
Retail real estate investing - Some investors want to own properties such as shopping centers, strip malls, or traditional malls. Tenants can include retail shops, hair salons, restaurants, and similar enterprises. In some cases, rental rates include a percentage of a store's retail sales to create an incentive for the landlord.
For all the real estate investing options available to investors, the average person is going to get his or her first real estate ownership experience the traditional way: By purchasing a home.
To be more direct, a home isn't an investment in the same way an apartment building is. At its very best, and under the most ideal of circumstances, the safest strategy is to think of a home as a type of forced savings account that gives you a lot of personal use and joy while you reside in it.
On the other hand, if you take a holistic view of your personal wealth, outright ownership of a home (without any debt against it) is one of the best investments a person can make. Not only can the equity be tapped through the use of certain transactions, including reverse mortgages, but the cash flow saved from not having to rent generally results in net savings -- the profit component that would have gone to the landlord effectively stays in the homeowner's pocket.
This effect is so powerful that even back in the 1920s economists were trying to figure out a way for the Federal government to tax the cash savings over renting for debt-free homeowners, considering it a source of income.
This is a different type of investment, though -- something known as a "strategic investment." Were the economy to collapse, as long as you could pay the property taxes and basic upkeep, no one could evict you from your home. Even if you had to grow your own food in a garden, there's a level of personal safety there that matters.
This is a different type of investment, though -- something known as a "strategic investment." Were the economy to collapse, as long as you could pay the property taxes and basic upkeep, no one could evict you from your home. Even if you had to grow your own food in a garden, there's a level of personal safety there that matters.
There are times when financial returns are secondary to other, more practical considerations. If you are saving to acquire a home, one of the big mistakes is putting your money into the stock market, either through individual stocks or index funds. If you have any chance of needing to tap your money within five years or less, you have no business being anywhere near the stock market.
Instead, you should be following an investment mandate known as capital preservation. Here are the best places to invest money you're saving for a down payment.
Typical Sources Of Investment Properties Include:
- Market listings (through a Multiple Listing Service or Commercial Information Exchange)
- Real estate agents and Real estate brokers
- Banks (such as bank real estate owned departments for REO's and short sales)
- Government entities (such as Fannie Mae, Freddie Mac and other government agencies)
- Public auction (foreclosure sales, estate sales, etc.)
- Private sales (transactions for sale by owner For sale by owner)
- Real estate wholesalers and investors (flipping)
Once an investment property has been located, and preliminary due diligence (investigation and verification of the condition and status of the property) completed, the investor will have to negotiate a sale price and sale terms with the seller, then execute a contract for sale.
Most investors employ real estate agents and real estate attorneys to assist with the acquisition process, as it can be quite complex and improperly executed transactions can be very costly.
During the acquisition of a property, an investor will typically make a formal offer to buy including payment of "earnest money" to the seller at the start of negotiation to reserve the investor's rights to complete the transaction if price and terms can be satisfactorily negotiated.
This earnest money may or may not be refundable, and is considered to be a signal of the seriousness of the investor's intent to purchase. The terms of the offer will also usually include a number of contingencies which allow the investor time to complete due diligence, inspect the property and obtain financing among other requirements prior to final purchase.
Within the contingency period, the investor usually has the right to rescind the offer with no penalty and obtain a refund of earnest money deposits. Once contingencies have expired, rescinding the offer will usually require forfeiture of the earnest money deposits and may involve other penalties as well.
Real estate assets are typically very expensive in comparison to other widely available investment instruments (such as stocks or bonds). Only rarely will real estate investors pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself.
Real estate assets are typically very expensive in comparison to other widely available investment instruments (such as stocks or bonds). Only rarely will real estate investors pay the entire amount of the purchase price of a property in cash. Usually, a large portion of the purchase price will be financed using some sort of financial instrument or debt, such as a mortgage loan collateralized by the property itself.
The amount of the purchase price financed by debt is referred to as leverage. The amount financed by the investor's own capital, through cash or other asset transfers, is referred to as equity. The ratio of leverage to total appraised value (often referred to as "LTV", or loan to value for a conventional mortgage) is one mathematical measure of the risk an investor is taking by using leverage to finance the purchase of a property. Investors usually seek to decrease their equity requirements and increase their leverage, so that their return on investment (ROI) is maximized.
Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value. Investors seeking low equity requirements may explore alternate financing arrangements as part of the purchase of a property (for instance, seller financing, seller subordination, private equity sources, etc.)
Predating modern stock markets, real estate is one of the five basic asset classes that every investor should seriously consider adding to his or her portfolio for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers.
Rental income from real estate investments has a huge psychological advantage. You can drive by the property, see it, and touch it with your hands. You can paint it with your favorite color or hire an architect and construction company to modify it. You can also use your negotiation skills to determine the rental rate, allowing a good operator to generate higher capitalization rates, or "cap rates."
Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value. Investors seeking low equity requirements may explore alternate financing arrangements as part of the purchase of a property (for instance, seller financing, seller subordination, private equity sources, etc.)
Predating modern stock markets, real estate is one of the five basic asset classes that every investor should seriously consider adding to his or her portfolio for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers.
Rental income from real estate investments has a huge psychological advantage. You can drive by the property, see it, and touch it with your hands. You can paint it with your favorite color or hire an architect and construction company to modify it. You can also use your negotiation skills to determine the rental rate, allowing a good operator to generate higher capitalization rates, or "cap rates."
Here’s what you need to know about investing in real estate if it's the right choice for you:
Pay With Cash - Many financial experts warn against borrowing money to purchase investments. You should consider this before you purchase a piece of investment real estate. If you can’t afford to pay cash for the home, at the very least, you should be able to afford the mortgage payments, even without rental income.
Think About It: With renters, there can be high turnover. You may also experience a time where you have no renters at all for the property. If you can’t afford the mortgage payment without the rental income, it may end up being more of a financial burden, rather than a means of building wealth. Plus, if you can’t pay the mortgage, it could end up damaging your credit, which will cost you money in the long run.
Plan Out All Of Your Expenses - When purchasing real estate for investment purposes, you need to consider the cost of taxes, utilities, upkeep, and repairs. Often it is easier to go through a rental company and have them handle things like repairs and rent collection. While this will cost money, it will help ease the burden of owning a rental property.
Especially if you don’t have time to do everything that needs to be done at your property, using an agency is a good option. You need to price your rental property so that all of these fees and other expenses are fully covered. Additionally, you should take the first few months of surplus money and set it aside to cover the cost of repairs on the property.
It’s also important to have insurance on the property (and plan for the cost). You should also be prepared to deal with additional costs and other situations as they arise, perhaps with a sinking fund for the property.
Research The Property Carefully - If you are purchasing land that you plan to sell at a later date, you need to research the land deed thoroughly. Find out if any new roads are planned close to the land you purchase and consider how that will affect the property value. Also, be sure there isn’t a lien on the property.
Research The Property Carefully - If you are purchasing land that you plan to sell at a later date, you need to research the land deed thoroughly. Find out if any new roads are planned close to the land you purchase and consider how that will affect the property value. Also, be sure there isn’t a lien on the property.
You may also want to consider things like the comparables in the neighborhood, including whether the area is up-and-coming, and other external factors that could affect the property value.
Once you have done your research, you should be able to make the correct decision about purchasing it as an investment. Investing is always a risk, so keep that in mind. You may make money on your investment, but you could lose money as well. Things may change, and an area that you thought might increase in value might not actually go up, and vice versa.
Start Small - Some real estate investors begin by purchasing a duplex or a house with a basement apartment, then living in one unit and renting out the other. This is a good way to get your feet wet, but keep in mind that you will be living in the same building as your tenant. Additionally, when you set up your budget, you will want to make sure you can cover the entire mortgage and still live comfortably without the additional rent payments coming in.
As you become more comfortable with being a landlord and managing an investment property, you may consider buying a larger property with more income potential. Once you own several properties, it becomes easier to purchase and manage more properties—and earn a greater return on your investments.
Once you have done your research, you should be able to make the correct decision about purchasing it as an investment. Investing is always a risk, so keep that in mind. You may make money on your investment, but you could lose money as well. Things may change, and an area that you thought might increase in value might not actually go up, and vice versa.
Start Small - Some real estate investors begin by purchasing a duplex or a house with a basement apartment, then living in one unit and renting out the other. This is a good way to get your feet wet, but keep in mind that you will be living in the same building as your tenant. Additionally, when you set up your budget, you will want to make sure you can cover the entire mortgage and still live comfortably without the additional rent payments coming in.
As you become more comfortable with being a landlord and managing an investment property, you may consider buying a larger property with more income potential. Once you own several properties, it becomes easier to purchase and manage more properties—and earn a greater return on your investments.
