Real estate investment is a complicated field, with a lot of money moving around. If you'd like to expand your investment portfolio, real estate is a very popular way to do it. This guide will help get your money invested properly.
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Understand the Market
- Learn about real estate. In order to successfully invest in real estate, you should be well-versed in what it is and how the market functions. There are multiple ways to invest in real estate, and you will need to evaluate your goals and finances to decide which is best for you.
- Real estate is "an interest in land." This means that the real estate market is essentially about buying and selling property and buildings. There are two types of "interest" at work in real estate: ownership and leasehold. "Ownership interest" is taking full control and responsibility of the land, and "leasehold interest" is passing on of certain rights to a tenant in exchange for rent payment.
- The most common form of real estate investing is purchasing ownership interest in a property and then earning money from rent paid by giving leasehold interest to tenants.
- Decide your level of risk. There are two main markets when dealing in real estate. These are the private and public markets. Any investing is risky to some extent, but each market has it's own level of risk.
- Private real estate is when you as an investor purchase direct ownership interest in a property or properties. You, or a property manager, would then operate that property and you would earn money on rent paid by tenants. This is a very direct way of investing in real estate because you, as the owner, are responsible for the property.
- Public real estate involves purchasing shares of a publicly traded real estate company. Often these take the form of investment trusts. You buy shares on the market, and are paid dividends as the trust collects rent and value from the multiple properties it owns. Because you only own shares in the company, you are not responsible for the land. As such, this is a less direct approach to investing.
- Decide between equity and debt. Both the public and private markets operate on equity and debt. As an investor you pick which of those you would like to invest in.
- If you are investing in debt, then you lend money to someone so that they can buy interest in a property. You earn money in the form of interest payments on a mortgage.
- If you are investing in equity, then you are investing in ownership of the property. This means you are assuming all responsibilities for the operation of the land.
- Choose an investment in your sector. The two pairs of terms above combine to form the four main real estate invests: public equity, public debt, private equity, and private debt.
- If you chose public equity, then you will want to look at investment trusts. If you chose public debt, you should investigate mortgage securities, which are the debt equivalent of investment trusts.
- If you selected private equity, then you will most likely be purchasing residential or commercial property to act as a landlord. If you chose private debt, you would invest in private mortgages.
- Learn about real estate trading. This is a variation of private equity investing also known as flipping. The goal is to purchase a property and then turn around and resell it at a higher price.
- Typically investors try to hold on to a piece of property for no more than a few months before they sell it. This is because the costs of ownership begin to add up without income to pay them.
- Most flippers will do no improvement on the property as it can be too time-consuming. Instead, they bank on the market being favorable to them so that they can resell it at a profit.
- A longer-term flip will see the investor improving the property in an effort to increase its value on the market. This form of investment is very time-intensive, and many investors can only do one property at a time.
Analyze Your Finances
- Examine your portfolio. Investing in real estate is typically viewed as a portfolio enhancer, an investment that complements stocks and bonds. When invested in as part of a larger investment plan, it can add stability to your income.
- Evaluate your assets. Real estate investment can require a significant amount of capital, even beyond the price of the purchase. Ask yourself if you can afford to keep your investment if the market turns bad.
- Since real estate is a tangible property, it will require maintenance and upkeep. While this is normally covered by rent paid by tenants, there may be times when there are no tenants to occupy the property and the costs fall to the owner.
- Know that flipping a house can get expensive. If you decide to go into real estate trading, you have to be prepared for the worst. In the year that it might take you to renovate and sell, the market could have taken a dive and you'd be stuck making mortgage payments while you wait for it to sell.
- Make sure that you have the capital to invest into a potentially long-term project.
- Research the ins and outs of house flipping before committing so that you minimize unforeseen expenses.
Assemble a Team
- Make a plan. Decide where and how you want to invest. Take your plan to an accountant or investment broker. Go over the plan with a financial planner. Make sure that everything that can be accounted for is accounted for.
- Learn to rely on other people. A good real estate investor will not hesitate to enlist the aid of other professionals in order to ensure that the entire process goes smoothly. The type of team you will need will vary depending on your investment.
- You may need a mortgage broker, an accountant, a property manager, a real estate lawyer, a home inspector, and an insurance broker
- Work with a good real estate agent. If you want to invest in real estate, you must work with a realtor with expertise in the field of investment properties.
- Find a Realtor who can help you shop for ideal investment properties by interviewing several different agents. Discuss your goals and your investment plans. A good agent can show you properties that fit your investment strategy.
- Talk to mortgage brokers. Your real estate agent should be able to recommend lenders. Talk to your local banks and credit unions about mortgage financing.
- Find out what the brokers, lenders, and banks can offer in terms of interest rates, closing costs and payment terms. Ask about your financing options and choose the mortgage that fits your budget and investment strategy the best.
Edit Tips
- When starting, you need to look at what the real estate market is like in your area.
- As with any form of investing, there are always financial risks investing in real estate. Be sure to speak with a financial planner or investment broker before beginning any investing.