Guidelines for Investing in Real Estate

Buying and owning real estate is a lucrative and satisfying investment strategy. Here are a few ways investors can make money from properties. 

Rental Properties

Owning rental properties is ideal for people with DIY skills who can manage tenets. It offers a regular source of income. Plus, many expenses associated with owning rentals are tax-deductible, while losses can offset any gains. Additionally, these properties tend to appreciate over time, leaving owners with more valuable property than initially purchased. It is especially pleasing once you get to the point where you no longer have to make mortgage payments. However, you need substantial capital upfront to cover the renovation costs and get you through vacancy periods. You may also have to charge less rent during times of economic downturn. On top of that, rental properties can cause constant headaches. Tenets can even damage properties.

House Flipping

House flipping is the wild side of real estate investment. People who do this are distinct from those who buy and rent properties. Flippers usually look to sell their properties for a profit soon after they buy them. There are two kinds of flippers. The first are those who look for properties that are ready to resell but are underpriced. These flippers want to sell properties as soon as possible and often need help to afford to pay the mortgage if they keep a house for too long. This can lead to continued financial losses. The other kind of flipper buys reasonably priced properties that need work and renovate them. This tends to be a longer-term investment, so these flippers may only have one or two properties at a time.

This is a great option for people with experience in real estate, marketing, and renovation. Getting started takes a lot of capital upfront, and you will want some DIY skills. Flipping is great if you want to hold properties for a short period. You can have significant returns in the time it takes to resell a house. However, this will require a deep understanding of the real estate market and luck. If the market suddenly tanks, you could be stuck with a significant loss or a rental property you didn't want.

Flipping is also an excellent idea for investing in commercial properties. For example, accomplished real estate investor Will Obeid has successfully turned properties with unique natural features into high-end wellness-focused resorts. In 2014, he even started his own company specifically to continue investing in these properties. Through this company, he has acquired many properties, including the Minnewaska Lodge in New York, and turned them into boutique-style adventure and wellness resorts. 

REIGs

Real estate investment groups are like mutual funds that invest in rental properties. Typically, a company buys or builds apartments or condos, then allows investors to purchase them through the company and join the group. An investor can buy one or many living units, but the company that started the group handles maintenance, advertising vacancies, and interviewing tenants. The company takes a percentage of the monthly rent in exchange for these tasks. The lease will generally be in an investor's name, but all units will pool a portion of their rent to guard against vacancies. Because of this, you can still receive income when your team is empty. However, if the vacancy in the group's units spikes too high, there could not be enough money to cover the costs. This is where a real estate syndication company can help you out where the price is divided and the financial risk is lower.

This is ideal for people who want to own rental properties without the hassle. You will need a financial cushion and access to more funds to get into this. These groups offer a much more hands-off approach to renting units but still provide a steady income. However, there tends to be a larger vacancy risk. Plus, these groups are vulnerable to the same fees in the mutual funds industry. On top of this, sometimes a management team for a group is corrupt and will cheat investors out of their money. Therefore, you must perform adequate research about a group before you decide to join it.

REITs

A real estate investment trust is created when a corporation uses money from investors to purchase and operate income properties. These are great for people who want to own rental properties but do not want to buy real estate. They are stocks that pay out to investors. However, joining a trust can take a lot of investment capital. This is because merging the trust is like buying stocks, so you cannot take out a mortgage. Similar to REITs, there are also e-REITs such as Fundrise and Diversyfund, which are good choices if you want to invest in a REIT but need a brokerage account or simply prefer the slightly higher returns they offer.

Whether your real estate investment strategy involves owning rental units or selling fixer-uppers as quickly as possible, this is an industry where you can make much money. Remember that there is always a risk whether you become a landlord, flip houses, or join an REIG or REIT.

Here are some general guidelines for investing in real estate:

1. Define Your Objectives:

Clearly outline your investment goals. Are you looking for long-term appreciation, rental income, or a combination? Understanding your objectives will guide your investment decisions.

2. Educate Yourself:

Gain a solid understanding of the real estate market, investment strategies, and local market conditions. Continuously educate yourself on current trends and changes in the real estate landscape.

3. Create a Budget:

Establish a budget that includes the purchase price and additional costs like property taxes, insurance, maintenance, and potential renovations. Ensure your budget is realistic and takes unexpected expenses into account.

4. Research Local Markets:

Thoroughly research the local real estate market. Understand property values, rental rates, vacancy rates, and economic indicators. Consider factors like job growth and development plans in the area.

5. Location is Key:

Focus on the location of the property. A good place can significantly impact the property's value and its potential for appreciation.

6. Risk Assessment:

Assess the risks associated with the investment. Consider market volatility, potential changes in interest rates, and local economic conditions. Diversify your real estate portfolio to mitigate risks.

7. Understand Financing Options:

Explore different financing options and mortgage rates. Understand the terms and conditions of loans and how they will impact your cash flow.

8. Due Diligence:

Conduct thorough due diligence before making any purchase. Inspect the property, review financial records, and be aware of any potential legal or title issues.

9. Consider Cash Flow:

If you're investing for rental income, analyze the potential cash flow. Ensure that rental income covers expenses and leaves room for a profit.

10. Long-Term Perspective:

- Real estate is often a long-term investment. Be prepared to hold onto your property for an extended period to benefit from potential appreciation.

11. Build a Professional Team:

- Work with professionals such as real estate agents, property managers, attorneys, and accountants. Building a reliable team can help you navigate the complexities of real estate investment.

12. Stay Liquid:

- Maintain liquidity for unforeseen expenses or opportunities. Only tie up some of your capital in real estate, as having some liquid assets provides financial flexibility.

13. Stay Informed About Tax Implications:

- Understand the tax implications of real estate investment. Consult with a tax professional to maximize deductions and minimize liabilities.

14. Monitor Your Investments:

- Regularly monitor the performance of your real estate investments. Stay informed about changes in the market and adjust your strategy as needed.

15. Have an Exit Strategy:

- Plan your exit strategy in advance. Whether it's selling the property, refinancing, or passing it on to heirs, a clear exit plan is essential.

Remember that real estate investment involves both opportunities and risks. Each property and market is unique, so it's crucial to tailor your approach based on your specific circumstances and goals. Always seek professional advice and be prepared to adapt your strategy as market conditions evolve.