Whether you're a novice or an experienced investor, understanding the different approaches to real estate investing can help you choose the one that best suits your resources, desired level of involvement, and risk tolerance. You might be surprised that there are actually ways to invest. Real estate that doesn't require a lot of money or time.
Consider these six ways to become an active or passive real estate investor.
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Own your own home.
If you own your own home, you are already a real estate investor. It provides shelter and the ability to build equity over time. For example, if he buys a house for $300,000 and the value appreciates 3% every year, he will have a $600,000 house after paying off his 30-year mortgage.
Another benefit of owning a home is that you can build equity by gradually reducing your mortgage balance through regular payments called depreciation. If you have a fixed-rate mortgage, your monthly payment includes both principal (the amount you borrow) and interest (the cost of borrowing), but the proportions change over time.
For example, at the beginning of an amortizing loan term, most of the payment is interest and some reduces the principal balance. However, with each monthly payment, you pay slightly less interest and more money towards your principal. As you pay down your original mortgage balance over time, your home equity increases over time, assuming the market value of your home remains stable or increases.
With potential price increases and lower mortgage balances, owning a home can help you build equity and increase your net worth. A Home Equity Line of Credit (HELOC), or Home Equity Loan, also allows you to put some of your home equity to work as you wish.
How does capital gains tax affect your ability to succeed as a real estate investor? Laura explains what you need to know about selling a home and the taxes you owe. Read on while listening in the player below.
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Become a landlord.
The second way to become a real estate investor is to buy properties that you rent out to generate positive cash flow, or at least break even. You may purchase single-family homes or apartment complexes on your own or with a partner as an active investor. This strategy requires a large amount of upfront capital for the down payment, ongoing maintenance, and tenant availability.
In addition to being capital intensive, managing a property and dealing with tenants is not for everyone. I started investing in real estate decades ago as a Sunday landlord. After dealing with tenants who were late on rent, damaging the property, and leaving behind junk, we decided to turn the heavy lifting to a professional property manager.
Turning my rental property over to a property management company was one of the best decisions I made as a landlord. That's because property management companies have raised rents and increased screening of potential tenants. A good manager usually charges his 10% of the total rent per property. If you have multiple properties, it may be cheaper. So unless you have the patience, skill, and legal knowledge to manage tenants, factor property management costs into your financial analysis.
If you can find undervalued properties that are likely to appreciate in value and provide net cash flow before expenses, they can be a good investment. Additionally, many expenses, such as repairs and maintenance, are tax deductible and can be offset against rental income.
When purchasing an investment property, lenders typically require a down payment of at least 20% to 25%. In addition, they typically have more stringent underwriting requirements for income and credit than those for purchasing a prospective home. You'll also need landlord insurance and healthy cash reserves to cover unexpected repairs and the possibility of months of vacancy.
If you know an experienced real estate investor, partnering with them can be a great way to share income and expenses, learn their business, and understand how to analyze potential deals. there is. Another tip: real estate agent or real estate agent Experienced in searching for, purchasing, and managing rental properties. There is no substitute for having a local expert who understands the market you want to invest in.
One investment strategy is to buy a multifamily property, such as a duplex, triplex, or small apartment complex, and become the landlord on the property. If you're willing to live in one unit and rent out others, you can actively manage your property while reducing your personal housing costs. Or maybe you live in a room in a house or condo and rent out the room to other people.
Another investment strategy is to purchase and rent out commercial real estate, such as retail buildings, warehouses, and office space. Commercial real estate is generally more expensive than residential, and leasing is more complicated. However, commercial investments can appreciate faster than residential properties depending on their location and characteristics.
I've owned residential and commercial real estate, and I can tell you from experience that neither is a surefire way to make money. A downturn in the market or neighborhood could mean you accept a lower rent than you want, operating costs are higher than expected, or it takes longer to find a suitable tenant.
When my husband and I moved to a larger home, we kept our first home instead of selling it and started investing in real estate. Becoming a real estate investor is relatively easy. All you have to do is move in and put up a “for rent” sign in your yard.
Not only is it easier to rent out your old home and buy another, it's also cheaper than financing a new investment property. As mentioned earlier, obtaining a mortgage on a property that is not occupied by the owner requires a large down payment and usually comes with a high interest rate.
Make sure your existing mortgage lender allows you to turn your residence into an investment property without paying penalties or refinancing to a more expensive non-owner loan. Keep in mind that when you switch your insurance from homeowners insurance to landlord or commercial insurance, the lender will know that you no longer live there. So read your mortgage or call your lender to find out what's allowed.
Related: 7 steps to protect your finances from recession
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Purchase vacation property.
There is a growing trend of people buying a second home before buying their first home as a vacation home or short-term rental. As mentioned earlier, purchasing a property that is not your primary residence means making at least a 20% down payment, paying a higher interest rate, and passing more stringent underwriting requirements than the home you plan to live in. means that there must be.
Therefore, whether you can buy a vacation home as a first or second home depends on your income, savings, financial goals, and income potential from the property. If you convert your property into a short-term rental, such as on Airbnb, be aware that many jurisdictions typically require you to collect and remit additional taxes, such as occupancy and sales taxes, to local or state governments. Also, managing short-term rentals yourself requires a significant investment of time.
Unless your finances are in good shape, buying a vacation home can stretch your budget. For example, do you have a healthy amount of cash for at least three months' worth of living expenses? Have you invested at least 10% of your pre-tax income for retirement? And have you eliminated any high-interest debt? ?
If you check off these economic fundamentals, buying a second home first can be a great investment. Consult a tax professional to determine tax liability on short-term and long-term rental income to factor into your decision.
Related: Advantages and disadvantages of buying investment property before buying your first home
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Fix the house and flip it.
If you love home rehab shows or are good at fixing things up, “flipping” investment properties may seem like a no-brainer. The idea is to find undervalued properties in great areas that are in need of a cosmetic update. I've remodeled my house several times, and knowing how much a remodel will cost is more of an art than a science.
I've been in the flooring business for many years, and you can't tell what's underneath the existing floor until you remove it. In other words, taking into account the many structural and financial unknowns, you should buy a home well below fixed market value to make a good profit.
You need to estimate renovation costs like a pro, and it helps if you can do some of the renovation work yourself. Therefore, home flipping is the most active form of real estate investment because you can become a full-time project manager and oversee multiple transactions at once.
If you decide to become a real estate agent, be sure to get a thorough home inspection to understand the hidden hidden costs. Be clear about the estimated costs, the property's potential market value, and how long it will take to sell after renovations. By working with an experienced partner, you can avoid missing the mark and get a return on your time and effort.
If you're looking to buy a home, one of the benefits homeowners have is being eligible for tax benefits for tax savings. Laura answers listeners' questions and explains the many ways that buying a home can improve your financial life compared to renting. Listen in the player below!
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Purchase a real estate investment fund.
If you want to become a real estate investor, but don't want to look for deals, become a landlord, or manage major renovations, consider passive options. One way is to buy a mutual fund or exchange-traded fund (ETF) that invests in stocks of companies in the real estate business, such as builders or material suppliers. This gives you exposure to real estate growth potential without directly owning the property.
Another option is to invest in real estate investment trusts or REITs. These companies invest in income-producing commercial real estate and pay regular dividends. For example, you may own vacation properties, hotels, medical facilities, retail centers, self-storage, warehouses, etc. You can earn real estate income without having to buy, manage, renovate, or finance your own property.
Some REITs are traded on exchanges like stocks, while others are not publicly traded, called non-traded REITs. You can also access a diversified real estate portfolio by purchasing a fund that owns a portion of several of his REITs.
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Invest in private real estate opportunities.
Another way to become a passive real estate investor is to personal real estate transactions, also called syndication. Private investing allows you to become a real estate investor without the hassle of tenants, renovations, or the risk of loss through trial and error.
Dennis Piazza, CPA and Managing Partner, said: One Street Capital, a private equity real estate company, the upfront investment can be as low as $25,000. she says: “Our firm specializes in finding commercial investments for institutional investors and providing them to investors who want to fund their projects with a team of experts. investor network, get educated about real estate and gain access to potential deals. ”
Dennis says the potential investment return on private real estate is determined by the amount invested and the skills and experience of the management team. Therefore, it is essential to do your homework. She recommends checking the project's financial projections, researching the investment firm's track record, and getting recommendations from other investors.
Whether your goal is to diversify your investments, generate passive income, or create a hedge against inflation, personal real estate investing is a great way to earn higher returns without the risk of becoming a hands-on, active investor. This will be an opportunity.
