Beginners Guide to Real Estate Investing
Investing in real estate provides many benefits. It can help you to diversify your investment portfolio, provide great returns, and offer you tax advantages. Young or old, real estate investing can prove to help fuel your investment strategy and create long term wealth.
What is real estate investing?
Investing in real estate can mean many different things. Maybe it’s buying your first home, or purchasing a rental property. Either way, real estate investing can provide a secondary (or primary) income stream to help you build long term wealth.
How much money do I need to invest in real estate?
It is a common misconception that you must have an excess amount of cash to invest in real estate. This is not true. While some people choose to invest this way, there are other options to invest with less money down. Many mortgages now let you put as little as 3% down. on a $150,000 that’s just a few thousand bucks.
Can you invest in real estate with no money?
This is a tough answer. Technically, yes. If you can find a private lender who is willing to lend with no money down, you could start investing in real estate. This can be riskier, however. Typically the terms on a private lender with no money down can be much more costly than a traditional mortgage, so be sure to calculate this when considering your investment.
How to Start Real Estate Investing
There are several paths of real estate investing as we mentioned before. You could purchase a home and wait for its value to appreciate. You could purchase a home to rent out and make an income that way. You can also invest in real estate development funds that will put your money to work for you. No matter which way you choose, they can all be great investments and help you diversify your portfolio.
“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
There’s no better way to secure an income than with a rental property. While it may not be as easy as it sounds, there’s no doubt that owning a rental property can help you take the next step to lifelong wealth. There are many things to consider before entertaining the idea of a rental property. How will you pay for it? Who will maintain it? How will the finances and taxes be handled? And many more. We’ll cover some of these questions below.
How will I pay for my rental property?
The first step to investing with rental properties is figuring out how you will obtain the real estate. Whether you decide to finance the purchase or use your own cash, you’ll need a way to pay for it. Like we mentioned before, it’s important to take into account the costs of financing your purchase to be sure it is a wise investment.
Who will maintain my property?
For many people's first rental property, they will choose to do the maintenance of the home themselves. Depending on your skills and availability, this can be a major money saver. If you have more than one rental property, it can be wise to hire a property management company to complete it for you. Typically they will cost around 10% of the rental price. No matter what you decide to do, be sure to incorporate the cost into your ROI.
How will you collect rent from tenants?
Similar to home maintenance, many property management companies will be able to solve this issue for you, or you can choose to collect rent yourself. Many property management companies will have online portals that tenants can pay their rent, making receiving your payment quick and easy. This feature is usually baked into the cost of the property management company.
Risks of Rental Properties
Owning a rental property can be a big step towards financial freedom however there are some risks you should be aware of. From tenants not paying on time to tenants destroying your property, it’s important to lessen these risks so you can maintain your income stream. We’ll cover some of these risks below.
Tenants not paying on time (or at all)
Whenever you rent out a property, both you and your tenant will sign an agreement that details everything about the relationship. This is called a lease agreement. In it, it should outline details of how much is owed, and late penalties, and how to pay. If a tenant is late paying, you should enforce the penalties in your lease agreement. If it is their first time being late on a payment, you might be tempted to let them off. If you own more than one rental property, this can cause legal trouble. By letting one tenant off of a late penalty and not letting another one off, you can set yourself up for a legal battle. Our advice? Always enforce late penalties to not only maximize your income but to also mitigate any potential legal trouble. One way many people enforce this is through their property management company. Because you will not be handling payments, they will enforce what is in the lease agreement for you. If a tenant is more than a month late, you should first talk with them to understand what the problem is, then you might be forced to vacate them from your property. This is the worst part of owning a rental property. Nobody wants to force a tenant to leave. Once again, having a property management company can help you with this property. Depending on your state, it can take anywhere from 2 weeks to 3+ months for an eviction. It’s a good idea to consult a local eviction lawyer before proceeding.
To protect yourself against a tenant that doesn’t pay on time, you need to make sure you can afford the mortgage payment (if you have one) without a tenant living there.
Tenant not maintaining the property
Whenever you rent a property, you hope that the tenant will maintain the interior so that you can rent it out after them. However, that is not always the case. When a rental relationship turns sour, it can be devastating for your investment. It’s always a good idea to regularly check in on the property. You’ll need to give your a tenant notice before your check-in. During your check-in, if you notice any damage to the interior, take pictures as evidence so that you can either deduct the damage from the tenant's security deposit or file a claim with your insurance. When the lease is up, walk through the home and take note of any damage that has occurred since the tenant started living at the property. You can deduct any damage from their security deposit.
Real Estate Investment Funds
Similar to how you can invest in stocks, you can invest in real estate the same way. Real estate investment trusts (REIT) invest directly in income-producing real estate and are traded like a stock. The great thing about real estate investment funds? You can invest with much smaller amounts of cash compared to a rental property. Some of the most popular real estate investment funds are:
- TIAA-CREF Real Estate Securities Fund
- Cohen & Steers Instl Realty Shares
- DFA Real Estate Securities Portfolio
Purchasing a home
Purchasing a home may not seem like real estate investing but in many ways it is. By seeking out a good deal in an ideal location, you can make money on your home through appreciation. Buying in the right areas can oftentimes see a 5% increase in your home's value per year. If you purchase a house that needs some TLC, you can even further the value of your home and when the time comes to sell, see returns that can fuel your next real estate investment. Looking for ways to increase the value of your home? We’ve listed some of the best ways below!
Remodel your kitchen
Remodeling your kitchen is one of the best ways to increase the value of your home. Americans flock to a large open kitchen with stainless steel appliances and granite countertops. Pair your countertops with a contrasting backsplash and you can increase the value of your home by 20%.
Add an extra bedroom
Bedrooms add value to homes. It’s as simple as that. If you have an open room that’s not being used to its full potential, just make sure it has a full egress window and a closet and you can add an extra bedroom to your home.
Revamp your bathrooms
Bathrooms can be a smaller but very beneficial home improvement. Maybe it’s time for a new vanity or bathtub. Refresh your bathroom with bright lighting and cool colors to create a more spacious feeling area.
No matter your method, investing in real estate is a no brainer. It can provide financial freedom and help you diversify your investment portfolio. What are your thoughts on real estate investing? Let us know below! Also, be sure to check out all things real estate investing here.