Investing in real estate needs a lot of time, effort and money. The great way to start generating passive income is to buy a property with multiple units and then rent out some of them while living in the other one. This approach will help you to produce passive income. If you cannot afford to purchase a rental property, you may consider investing in real estate trusts.
The first step of investing in real estate is to create an emergency fund. You should save some money for the down payment and also, put some money aside if the property needs repair. Note that you have to add the extra expenses to your budget and calculate the amount of finance needed.
We will describe several tips that will help you to manage your costs in the most efficient manner possible.
Define your goals
You need to find out what exactly you are going to achieve in the first place. If your goal is to build wealth investing in real estate, then you should define what the word “wealth” means to you.
Decide, whether your aim is to make an investment portfolio that helps you to feel financial security and creates the source of income during retirement, or you want to generate positive monthly revenue. The good news is that investing in real estate may solve both of these two problems. Everything depends on your ability to face the risk, your persistence and commitment.
Define the type of real estate
After setting your goal, you will be able to find out the most suitable type of property that meets your requirements. Some types of investments provide the fast cash flow, but if you choose the other, you will have to wait until you will be able to gain the first income. Also, take into account your start-up fund, risk threshold and level of interest.
For instance, you may review the following types of real property investing:
- single-family rentals;
- holding a mortgage;
- flipping houses;
- commercial properties;
- real estate investment trusts (REITs);
- personal residence;
- tax lien investing.
Few Ways To Begin Investing In Real Estate
Take care of your budget
If you are willing to start investing in rental or commercial property, you need to get your finances in order. Prepare the emergency fund, automate your retirement savings and finally, pay off the debts.
Investing in real estate requires money that is why you need to have some savings for a down payment and these expenses should be separate from your daily emergency fund.
Consider investing in REITs
If you do not have enough means to invest in real property but you still want to become a part of this sphere, you may take into consideration investing in REITs. In this case, you do not need to buy any property.
REITs allow the investors to fund the development, management, and purchase of the real estate. Typically, the trust focuses on certain types of property – hotels, apartments, shopping centers or hospitals. Usually, investors receive dividends – about 90% of the yearly earnings.
Explore the local market
If you are going to buy the investment property, research the local market, the apartments and houses in your neighborhood. Talk to realtors and real estate agents, find out the prices, examine the information about tenants who live in the area.
Build the team of professionals
Real estate is the relationship-build business. That is why you need to focus on establishing relationships with people. You need to gather your own team of specialists who will consult you regarding different issues and help to conduct successful transactions. Your team may include a real estate agent, property manager, attorney, and reliable contractors.
Rent out a single-family house
If you invest in a single-family house and then rent it out, note that you will receive the positive income only in case when your overheads are low. You need to cover maintenance, mortgage, insurance and taxes with your tenants’ rental payments. In the best possible outcome, you need to pay a fixed mortgage while the price for rent rises. This will result in the growth of the amount of money you are saving.
House-hacking is the approach which we mentioned at the beginning of the article. According to this method, the owner of the property purchases a house, then he lives in one unit while renting out the rest three or four. This investing strategy helps to reduce the expenses for living and to bring enough income which covers:
- mortgage payments
- extra costs.
The rest of the money you may save for your emergency fund, for maintenance of the property and expenses on the renovation.
Tax lien investing
When an owner of the property does not pay taxes to the government, the city can make a lien against a piece of real estate. Then local municipalities may decide to sell the tax liens to those people who want to invest their money into real estate. Before considering this investment possibility, discover the potential risks.
One of the most effective methods to build wealth is to buy a property and then live in it. As time passes, the value of the house will grow and thus, after a while, you will be able to sell the property and receive revenue due to appreciation.
This type of investing requires making some extra savings. The main benefit of this method is the feeling of comfort and stability while you are owning the home. The disadvantage of this approach is the absence of cash flow. Due to this fact, you will be required to pay for living expenses and your property will function less than the item for investment.
Purchasing a multifamily building for sale
Along with the house-hacking approach, this method is very efficient in regards to saving money. The dealer purchases the multifamily house lives in one unit and then turns the other units into condos for sale. This method has a wide range of benefits. You receive short-term revenue and after some time due to appreciation, you will gain long-term returns in 15-20 years.
If the above-mentioned strategies are not suitable for you, you can make some upgrades in the property in your possession like painting the walls or replacing some items.
Expensive real estate does not always pay for itself
One common mistake of first-time real estate investors is purchasing expensive properties. These properties may seem to generate high returns due to their cost and the appearance of the building, though they would not provide the corresponding revenue from the rent. The solution to this problem is to choose average-priced real estate.
Concern the risks
Before investing in real property, you should mind the risks and prepare the plan to cope with them. Be patient and do not try to gain a fast profit because this may result in losing money. If you invest in multiple properties you may face the risk of overspending on the repairs or taxes. Also, the profitable properties may turn out to be generating the lower amount of income that you expected.
Take small steps
Do not try to invest in several properties at once. Start from one piece of real estate and when it starts to bring revenue, consider investing in the next property. Repeat this approach several times to receive a significant income.
The important thing is to remember and continue applying the working techniques and methods, and getting read of those procedures which do not work during the course of your investing.
Collaborate with a tax advisor
Hire the tax advisor who helps you to calculate the income and taxes in a proper way. The tax advisor also will provide you the information about tax benefits which include depreciation, local travel, repairs, and interest.
Find the most suitable niche in real property investing and become a professional in it. Visit local networking events and speak to the other investors, share your experience in certain fields.
You should keep in mind that the property in the cities is more expensive than in suburban areas. On the other hand, if you can not allow buying the house in expensive areas because of the marketing price formation, the suburban properties are also a good investment option. For instance, you may put higher prices for rent or sale and thus, you will receive higher income as a final result. Stick to your fixed budget and save some money for extra expenses like taxes and maintenance costs.
Discover different financial options
Some investors buy properties only if they have the full amount of cash needed for the purchase. Before the final decision, take into consideration various ways of finance. Sometimes making a down payment can be more profitable if you own the multiple properties which are partially financed by the bank.
Keep rental properties as long as you can
If you have a rental property in your possession, try not to sell it for a long time due to the fact that you will cut the source of passive income. If the property costs more than it is worth or it cannot be used for rent, then you have no other choice. In another case, when you pay off the mortgage, you will be able to gain 100% of the income that you can later reinvest in the other property and increase your wealth.
Real estate as an opportunity to build wealth
If you do the research, talk to local investors and define the threshold of the risk, then you will have the opportunity to gain a significant amount of income through investing in the property for sale, for rent or choosing any scheme we described above.
Investing in real estate is a great way to build your wealth due to the fact that after gaining the first profit, you can reinvest this money in purchasing the other property or upgrading the piece of real estate in your possession. Thus, your income will grow over time. After that, you will be able to make other types of investments and diversify your portfolio.
You may choose that financing option which correlates with the threshold of risk you are ready to cope with. Choose wisely and try to make the best decision according to your level of comfort and your financial capabilities.