Content of the material
- Investment Property Definition
- 3. House Flipping
- 6. How do you set the rental rate to cover bills and generate revenue?
- Ways to start investing in real estate
- Top 10 Traits of Successful Real Estate Investors
- Books For Beginning Real Estate Investors
- Why invest in real estate?
- Use leverage to invest in real estate
- Generate income
- Profit from long-term appreciation
- Save money on taxes
- Step #3 Pick a Target Market
- Tips On How To Invest In Real Estate
- Networking Is Key
- Draft A Real Estate Business Plan
- Read About Real Estate For Beginners
- Get Started
- Real estate investing education: Building block to success
- Is Real Estate Crowdfunding Risky?
- 4. What loan options are available to rental property owners and how should they be evaluated?
- Step #9 Schedule Your Time Prioritize Next Actions
- Schedule Your Time
- The Wyoming DAO LLC
- Related Resources
- Understanding The BRRRR Method Of Real Estate Investment
- Multifamily Investing 101: How To Buy Multifamily Homes
- Financing Multiple Rental Properties: A Beginner’s Guide
- Is Real Estate Investing for You?
Investment Property Definition
An investment property is real estate purchased to generate income (i.e., earn a return on the investment) through rental income or appreciation. Investment properties are typically purchased by a single investor or a pair or group of investors together.
3. House Flipping
House flipping is for people with significant experience in real estate valuation, marketing, and renovation. House flipping requires capital and the ability to do, or oversee, repairs as needed.
This is the proverbial “wild side” of real estate investing. Just as day trading is different from buy-and-hold investors, real estate flippers are distinct from buy-and-rent landlords. Case in point—real estate flippers often look to profitably sell the undervalued properties they buy in less than six months.
Pure property flippers often don’t invest in improving properties. Therefore, the investment must already have the intrinsic value needed to turn a profit without any alterations, or they’ll eliminate the property from contention.
Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to continued, snowballing losses.
There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment, wherein investors can only afford to take on one or two properties at a time.
Pros Ties up capital for a shorter time period Can offer quick returns Cons Requires a deeper market knowledge Hot markets cooling unexpectedly
6. How do you set the rental rate to cover bills and generate revenue?
“Both rents and home prices are changing quickly as spring seasonality meets optimism around vaccination rollout and reopening [during the coronavirus pandemic],” Popov said. “Do your due diligence with sources that track real estate trends, and keep up with new inventory to make sure [your property is] priced competitively and your investment doesn’t sit vacant.”
If you’re going the rental property route, Pinnegar said to make sure you look at your “potential expenses versus potential revenue on paper to help inform your investment” first.
“If the deal doesn’t look good on paper and you will not have positive cash flow from the very beginning, think about your risk tolerance and proceed with extreme caution,” Pinnegar flagged.
“The market plays a large role in rental rates [so] investors should first look at comparables in the specific real estate market and asset class. It’s important to look at other rents in the area and ask how your unit compares to others in the market, while also considering the age and condition of your property,” Pinnegar said. “Certain amenities – natural light, outdoor space, gyms and parking – are highly desired and could also bring greater value to your rental property, therefore increasing potential rent and revenue.”
Ways to start investing in real estate
The options for real estate investing can include traditional property ownership or making an investment without owning property.
Here are the best ways for young people to enter the real estate investment market and build wealth long term.
Top 10 Traits of Successful Real Estate Investors
As a first-time real estate investor, it can be easy to begin to doubt yourself and wonder if you really have what it takes to be successful. However, no success story begins with perfection. As the real estate mogul Warren Buffett says, “the most important quality for an investor is temperament, not intellect.” it is entirely possible to learn from experience and reinvent yourself time and again. The following describes some common traits of successful real estate investors that you can start to channel today:
Books For Beginning Real Estate Investors
If you are interested in adding a few books to your current reading list, there are numerous titles on real estate investing. These books can provide you with information on the basics of investing, industry terminology, key strategies, and more. Here are a few books to help you get started:
The Book on Investing in Real Estate with No (and Low) Money Down by Brandon Turner: The goal of this book is to start thinking like an investor. Turner’s insights help readers learn how to use other people’s money to make deals and how to make the most out of your finances.
Building Wealth One House at a Time by John Schaub: This book is all about methodology. If you are interested in learning how to buy properties, earn money, and replicate the results this is a great read. With over 30 years of experience in real estate investing, Schaub’s book is a great starting point for beginners.
The E-Myth Real Estate Investor by Michael Gerber This is the backbone of real estate investing. The E-Myth teaches beginners to look at investing from a new perspective. The book providers an overview of strong business practices and investing frameworks to help you get started.
The Real Estate Rehab Investing Bible: A Proven-Profit System for Finding, Funding, Fixing, and Flipping Houses Without Lifting a Paintbrush by Paul Esajian: If flipping houses is the strategy that interests you the most, consider starting here. Esajian outlines the best systems for slipping houses for profits and provides advice on how to fund each deal. The book contains important formulas for analyzing deals that investors of all experience levels will find valuable.
The Real Estate Wholesaling Bible: The Fastest, Easiest way to Get Started in Real Estate Investing by Than Merrill: Wholesaling is often thought of as the best strategy for beginner real estate investors. This book outlines how you can turn this beginner-friendly side hustle into a full blown real estate business. Merrill’s advice includes advice on how to find funding for beginners and how to break into tough markets.
To learn more about the best books for beginner real estate investors, read our full run-down here.
Why invest in real estate?
People invest in real estate for several reasons, including generating rental income, profiting from the potential appreciation in property value over the long term, and reducing taxable net income.
One of the unique things about real estate as an investment asset class is that it may be possible to achieve all three of these things – income, long-term profit, and tax savings – at the same time while using other people’s money.
Use leverage to invest in real estate
People who invest in real estate directly by owning property such as a single-family rental (SFR) home often use leverage – also known as other people’s money – to finance the property purchase.
To illustrate how leverage works, assume an investor purchases a SFR for $120,000. One option is to pay cash for the property, while another option is to leverage the property purchase by making a 25% down payment of $30,000 and financing the rest.
Now assume that after 5 years, the home is worth $176,000. If an investor had paid all cash, the profit would be $56,000 and the cash on cash return would be 47% ($56,000 profit/$120,000 purchase price cash invested).
However, if an investor had used leverage to purchase the home, the profit would still be $56,000 but the cash on cash return would be 187% ($56,000 profit/$30,000 down payment cash invested). In other words, by wisely using leverage by making a conservative down payment, an investor nearly doubled the cash on cash return in this example.
Another reason people invest in real estate is to generate monthly cash flow.
Depending on the type of real estate owned, an investor may earn income from dividend distributions from a REIT or crowdfund, or an annual cash return by directly owning a property.
Profit from long-term appreciation
Housing prices historically increase in value when held for the long term, although there may also be times when home prices decline.
According to the Federal Reserve, the median sales price of houses sold in the U.S. has increased by more than 25% since the 2nd quarter of 2020, and by over 94% since the end of the Global Financial Crisis (GFC) of 2007-2009.
However, the median sales price of houses sold during the GFC declined by about 20%. During this 2-year period, millions of people lost their homes through foreclosure, allowing some buyers to purchase inexpensive homes and wait for the real estate market to rebound.
Save money on taxes
The IRS offers real estate investors numerous tax deductions to reduce taxable net income. For example, rental property owners can deduct ordinary expenses from rental income collected, including:
- Property management fees
- Leasing commissions
- Repairs and maintenance
- Mortgage interest
- Property taxes
- HOA fees
Depreciation is another way that real estate investors lower pre-tax income.
Residential real estate can be depreciated over a period of 27.5 years, excluding the land value. If an investor owns a home worth $120,000 net of the land value, the annual depreciation expense used to reduce a taxpayer’s taxable income would be $4,367.
Step #3 Pick a Target Market
With prices so high in many locations, people ask me often whether they should invest close to home or choose a new market. It’s a good question because the market you choose could make a big difference in your final results.
I prefer to invest close to home IF possible. Being local gives you the advantage of intimate knowledge of the market. And while managing real estate from a distance can be done, it’s still more efficient and effective to be local.
So, I would start evaluating markets close to home. If prices seem too high in your local neighborhoods, explore a few ideas locally first before looking at other locations. First, drive one hour away. Often the suburbs of major urban areas become much more affordable and reasonable for investments. Second, look for smaller niches within your overall market. Within high-priced markets, niches like condos, mobile homes, tax liens, and note investing can sometimes still be profitable.
But whether you stay close to home or invest somewhere else, you should always do a market analysis first. I wrote a comprehensive guide called How to Pick the Ideal Location For Investment Properties. Use that as your guide if you’re brand new to market analysis.
Here is a brief summary of the ideas I presented in that guide:
- Evaluate big picture location criteria
- Jobs and economics
- Population growth
- Rent/price ratio
- Evaluate small scale location criteria
- Safety and Crime Rates
- School Districts
- Public Transportation
- Neighborhood Covenants and HOAs
- Local Laws, Finances, Taxes, & Infrastructure
- Barriers to Supply
By combining all of these criteria, you can then choose a target investment market. Choosing your target market will probably begin with a metropolitan statistical area (MSA), which is a larger region. But I recommend narrowing it down even further to zip codes, school districts, or census blocks in order to make your property search easier.
If you need to take more time to evaluate and choose your market, that’s fine. But don’t get stuck too long. I recommend making a choice as soon as possible and then keep moving forward to Step #4. Much of entrepreneurship is trial and error. You’ll never be perfect. You can test your hypothesis and return to this step if it does not work.
Tips On How To Invest In Real Estate
For many aspiring investors, the closest they have come to a real estate deal is by watching reality TV. While television shows can be a good source of general information, they are often an unrealistic portrait of how to start a real estate business. Rather than watching HGTV in the hopes of picking up a new term or strategy, it is a good idea to form a concrete plan for learning the industry. The following list will outline some of the best real estate investing tips for beginners:
Networking Is Key
Aspiring investors should attend as many networking events and investment clubs as possible. This may sound uncomfortable at first, but anyone interested in breaking into the industry will need to form some connections. Try reading some networking tips online and attempt to identify a mentor after your first few meetings. By interacting with real estate professionals you can hear specific stories on how to land deals and overcome certain challenges. Networking events in your area can even expose you to information specific to your market.
Not only will networking events be a great place to learn, but they are also where you can start building a contacts list. In terms of real estate investing for beginners, your connections will ultimately impact how you approach investments and uncover your real estate niche. Having the right team to count on will be crucial once you start closing deals.
One final note about networking: always keep your best judgment in mind when talking to other investors. Take in as much information as you can, but remember to do your homework on everything you hear. Just because a certain niche or neighborhood did not work for someone does not necessarily mean it will not work for you.
Draft A Real Estate Business Plan
A great place to start investing as a beginner is to draft a business plan. This will allow you to identify your “why”. For example, maybe you want to save for retirement or help your family’s financial situation. The owner of Independent Property Group, Matthew Peden, gives this valuable advice: “If you are new to real estate investing, the best advice I can give you is to make sure you’re honest about your goals. As a new investor, you need to be honest about whether or not owning a home is just for living in or if it’s something that you see yourself being able to flip for profit. Make sure that even though you have better resources now than when you first started, the complexities of this type of investment are still manageable for you”. No matter what your reason is, visualizing your “why” before getting started will be a crucial source of motivation. The next step to creating a business plan is to write out your specific business goals. It may seem foreign at first, but the purpose of a real estate business plan is to produce a roadmap for investors. It will help you identify and outline your goals, while also strategizing actionable steps to accomplish them. With proper planning, a real estate business plan can serve as a critical learning tool for real estate investing beginners.
Read About Real Estate For Beginners
If you truly want to start a real estate business, it is crucial to learn as much about the industry as you can. There are countless investing books, blogs, and magazines that are a great place to start. While there are a ton of options out there, try not to overwhelm yourself at first. Instead, try grabbing a few investing books or subscribing to a real estate newsletter and designate just 15 minutes a day to reading something new. One thing all successful real estate investors have in common is that they never stop learning. This continual education mindset will serve you well throughout your career as an investor. Check out this list of real estate investing books for a few recommendations to get you started.
Finally, the single best way to learn the real estate business is by doing it. If you aren’t quite ready to go at it alone, try shadowing a real estate professional in your area on your next deal. You may need to assist on a few errands to make their time worthwhile, but after networking with other professionals you should have no problem finding a connection to shadow while you learn the ropes. Knowing how to make offers and negotiate with a real seller will be invaluable as you set up your own real estate business. Additionally, walking through properties with other professionals will give you an idea of what to look for when you are ready to start buying. First-hand experience, especially when it comes to real estate investing for beginners, will pay dividends in the long run.
Real estate investing education: Building block to success
Most new real estate investors fall into one of two camps: overconfident or overwhelmed.
“I’ve been around real estate my entire life! Supply, demand – I get it already – let’s cut to the chase and start looking at properties!”
Or: “Internal rate of return? Navigating the permit process? Asset protection and legal entities? There’s so much to think about!”
The former is likely to lose their shirt because they could have failed to learn the fundamentals before laying out the down payment and dozens of other costs. The latter may suffer from analysis paralysis, which prevents them from investing at all.
The solution to both is simple: real estate investing education.
Real estate investing is not a “get rich quick scheme.” It comes with plenty of unique advantages and some unique risks, all of which you’ll need to understand in order to make informed decisions and calculated investments. Being a house flipping investor is also vastly different from rental properties to tenants, so it’s also important to be aware of how these processes in real estate investing can work.
Invest some time in your real estate investing education before investing money and risk burning bridges with any business partners. The more you learn, the more likely you’ll earn, and the less likely you are to make expensive mistakes.
Is Real Estate Crowdfunding Risky?
Compared to other forms of real estate investing, crowdfunding can be somewhat riskier. This is often because crowdfunding for real estate is relatively new. Moreover, some of the projects available may appear on crowdfunding sites because they were unable to source financing from more traditional means. Finally, many real estate crowdfunding platforms require investors' money to be locked up for a period of several years, making it somewhat illiquid. Still, the top platforms boast annualized returns of between 2% and 20%, according to Investopedia research.
4. What loan options are available to rental property owners and how should they be evaluated?
According to Pinnegar, there are a range of loan options available for rental properties. He mentioned three: loans backed by banks, loans from the government or even private money.
“For potential real estate investors, and even those already involved in the industry, it’s important to speak with a loan broker to find the best loan fit,” said Pinnegar. “Often, loan brokers can give potential investors the broadest range of options and evaluate the pros and cons specific to financial situations, market conditions and a host of other variables.”
Pinnegar also recommends speaking with an established real estate broker who is experienced with the type of rental properties you’re interested in. “This is because transactions differ widely based on property size and agents have different specialties – as an example, a transaction for a 1-4 unit property is more akin to a single-family home purchase and would require a different kind of agent than 5+ unit properties, which lean more towards a commercial loan,” Pinnegar explained.
“A knowledgeable agent can also connect you with a trusted loan broker, particularly for multi-family properties, as these transactions tend to be complicated and brokers rely on proven relationships with colleagues who can close deals and bring in commission.”
Step #9 Schedule Your Time Prioritize Next Actions
I’ve given you a LOT of information so far (over 4,000 words to be exact!). But the point of this real estate investing 101 article is to help you get started as quickly as possible.
So, the point of Step #9 is to help you transfer all of this information into organized, effective action right away. First, I’ll make recommendations for scheduling your time. Second, I’ll talk about prioritizing next actions.
Schedule Your Time
You know your life and your schedule better than I do. But I assume like most people you’re busy. So, here is an important question for you:
How much time can you and/or your spouse or business partner carve out each week to work on your real estate investing business?
Be realistic. But if getting started with real estate investing is important to you, also be ruthless with your priorities. This isn’t a forever project. You’ll spend more time for the next few months to a year, but later as you gain momentum, buy properties, and build systems it will consume much less time.
So, how much time can you carve out? Based on my prior experience helping other investors one-on-one, you need at least 10 hours per week in order to give yourself a minimal chance of success. But the more time you can commit, like 20-30 hours, the more you will increase your chances.
Now look at your calendar and block out specific times to work on real estate each week. For example, if you plan to do real estate before your job each day and on Saturday mornings, schedule it so that nothing else gets in the way. This is like a work or doctor appointment. It must be scheduled in order to be a priority.
Once you have the time blocked, you can focus on the actions you’ll take during that time.
The Wyoming DAO LLC
A DAO is an organization operated by a smart contract, which is a computer code running within the blockchain. The ‘A’ for Autonomous refers to the self-executing nature of it all.
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Is Real Estate Investing for You?
Real estate investing has its pros and cons, and it isn’t for everyone. If you’re wondering whether real estate investing has a place in your wealth-building plan, you need to get two key people on your team: an experienced real estate agent and a kick-butt investing pro.
The agent will help you learn about your local market and get great deals if you do decide to jump in. You can connect with a top-notch real estate agent through our Endorsed Local Providers (ELP) program. These RamseyTrusted pros are here to serve you—period.
And the investing pro? They’ll help you understand investing concepts and make a plan you feel good about. Need help finding quality pros? Try SmartVestor. It’s a free way to find qualified investing pros in your area.