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Real Estate Investing – The Basics

Real Estate Investing – The Basics

Maybe you are worried about your retirement plan (or lack thereof), perhaps you just got a raise or somehow came into some money suddenly…no matter where your money comes from, you want to be sure you are investing it wisely.

There are so many options available that deciding how to invest your money can become overwhelming. According to Forbes, real estate investing is their #3 investment strategy on the list of the 4 best investments to make in 2018.

Now you might already be investing your money in stocks, bonds, mutual funds, etc., but there is something to be said for “diversifying your portfolio” and investing in real estate, might be the opportunity you are looking for to accomplish this.

Buying and owning real estate is a lot more complicated than most other forms of investing and there are some obvious inherent risks, but the main difference between many of the others and real estate is leverage. If you buy a stock, you must pay the full value of that stock at the time you purchase it. Whereas with a conventional mortgage, you are only paying a fraction of the total value and you have complete control over the property and the equity it holds.

Before you go getting ahead of yourself thinking you could be the next HGTV house flipping star, let’s take a moment to go through the basics of real estate investing.

  1. Home-Ownership: The most basic and traditional way people invest in real estate is through home-ownership. You buy your home, you take care of it or possibly even improve/update it over the years, and you hopefully build equity in this home you are also able to reside in. So, in that very basic sense it is an investment. You are saving the money that would typically go to a landlord. You can access this equity through other various transactions and this can create savings/cash flow. This would be a strategic investment. However, one could argue that owning a primary residence is more of a combination of financial valuation and personal utility. As opposed to owning say a duplex or an apartment building where you are making a profit off each of your tenants.
  2. Renting Out a Room: The next baby step to investing in real estate for beginners would be to rent out part of the space you already own. For example, you could rent a spare room or a guest house to someone. Sometimes renting out a room can be more favorable to leasing the entire property. Using this strategy is sometimes referred to as, “House Hacking.” Per David Meyer, VP of Growth and Marketing at BiggerPockets.com, “House Hacking lets investors buy a property with up to four units and still qualify for residential loans.” But let’s say that the idea of being a long-term landlord is just too much of a commitment for you, you might want to consider renting out part of your home or a vacation home on sites such as Airbnb. Airbnb will prescreen potential renters (to some extent) and the company’s host guarantee provides protection against damages.
  3. Invest in Rental Properties:
  • Buy & Hold/Rental Properties:

It’s simple, right? You buy a property and rent it out to a tenant. Not so fast…there are some risks and responsibilities that you must consider if this is how you plan to invest in real estate. As the landlord, you are responsible for the acquisition, the financing, and all the costs associated with the rehab, management and maintenance of the property. Ideally you charge enough rent to not only cover these costs, but to also make a profit each month. In some cases, landlords will charge more than the monthly expenses to create that monthly profit. However, the most common strategy is to only charge enough to cover your monthly expenses until you have paid off the mortgage. After that, most of the rent you will collect is shear profit. The risks of being a landlord are what scares many away from this real estate investment strategy. You are the one who is ultimately responsible if the AC stops working or the hot water heater leaks. You can end up with a bad tenant who damages your property, doesn’t pay rent or causes you to endure an expensive eviction! OR you can have no tenant at all which leaves you with no cash flow (rent) coming in and you are left having to pay those mortgage payments.

  • Fix & Flip/Real Estate Trading:

Flippers are very different from the buy-and-hold investor/landlord. Real estate traders buy properties with no desire to hold onto them longer than it takes to rehab them and get them back on the market. It’s all about the profit. For some flippers, their strategy is often buying low value or undervalued properties and possibly even several at a time in a booming or popular market. True property flippers know the local market they are buying into and there is a strategic technique that is utilized to calculate the return on their investment (ROI). In other words, this type of real estate investment should have an intrinsic value to turn a profit for the investor for it to be desirable. The goal here is for it to be a short-term cash investment. Some flippers choose to buy distressed properties or homes that just need a little updating. By adding value to these homes with renovations and updates, it can end up being a longer-term investment, but it can also be a bigger reward. However, the risk here can be large as well. If you end up with a property that you can’t sell for some reason, you are stuck with that mortgage payment on top of all the other costs. You can also run into a lot of unexpected issues with renovations that can change the entire ROI equation leaving the investor with a cash flow problem and a loss of the profit on the property.

  1. REIT’s: REIT’s (Real Estate Investment Trusts) are an opportunity for you to invest in real estate without having to buy, finance, or manage actual property. REIT’s are companies or trusts that own or finance income-producing properties. They use their investors’ money to purchase these income properties and they are mostly bought and sold on the major stock exchanges which can offer many benefits to their investors. REIT’s are a solid investment that provide all investors the chance to own valuable real estate while receiving regular income, much like regular dividend-paying stocks. Investors wo don’t want or need that regular income can reinvest those high paying-dividends to further grow their investment.  REIT’s also offer the opportunity for investors to invest in non-residential real estate such as office, retail, multi-purpose buildings/complexes and hotels. This is a highly liquid investment. However, not all REIT’s are publicly traded so the type of REIT you purchase can be a large factor in determining the amount of risk you taking with this type of real estate investing.
  2. Real Estate Investment Groups: A real estate investment group is an organization that builds or buys a group of properties and then sells them to various investors as rental properties. This type of real estate investing is most similar to mutual funds in that the investor gets the benefits of owning rental properties without the hassle. If you want to own a rental property but don’t want to deal with all the responsibilities of being a landlord, then a real estate investment group might be a good investment choice for you. The organization provides a service in exchange for a percentage of the investors’ monthly profit. They find the tenants, maintain and manage the property for the investor. Typically, there is a provision that investors pool a portion of their rent to cover the mortgage payments in the event of vacancies, since the standard is for the lease to be in the investor’s name.

Real estate Investing has changed drastically over the last 10-15 years. Much of this is due to major shifts in the real estate industry and the way that real estate transactions are being handled. These days, buyers are more informed than ever and the way that real estate professionals conduct business is fundamentally different.

Online real estate auctions are becoming a very popular and efficient way to locate and sell real estate. We are living in a digital era where we expect to be able to complete most tasks on our mobile devices and purchasing real estate is no exception.

What was once done on the computer is now done on the phone, what was handled with a voice call can now be handled through text, and transactions that we completed in person can now be accomplished through online platforms. These trends are evident in the ever-changing landscape of the real estate marketplace and they also have major implications for real estate investors. It’s important to keep this in mind when deciding how you want to invest in real estate.

Online auctions are a quick way for banks and property owners to sell real estate. Although buying properties with all cash would be nice, that’s not the typical purchase scenario…many online assets qualify for conventional financing, making this process even more accessible to the average consumer. Online auctions offer a variety of properties at great prices. Hudson and Marshall has been trusted in the auction game for more than 50 years.

 

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