Beginner Guide to Real Estate Investing
Many millionaires often share one thing in common. Despite their backgrounds, industries of choice, or age they often all believe in the power of real estate. Billionaire Andrew Carnegie famously said that 90% of millionaires got their wealth by investing in real estate.
Many wealthy icons still credit real estate as a path to success. Real estate investing is a great way to build passive income and secure your financial future.
Real estate investing is a great way to not only build your passive income but your financial future. Thankfully there are many easy ways to start investing in real estate despite your background. From flips or note investments, it is easier than ever to start real estate investing.
If you want to become a real estate investor, knowledge is the key to success. From investment types to calculations we cover everything I beginner needs to know to start investing in real estate. Are you ready to start investing?
Must-Have Real Estate Knowledge
Real estate moves quickly, and the market is ever-changing. Because of the ever-changing nature of real estate, it is easy to get carried away with investment and lose a lot of money if you don’t know what you are doing.
Therefore, it is critical to have a clear understanding of the real estate investing basics, before you jump into real estate investing. You should have a baseline of your local market and some knowledge of what makes a good or bad investment.
Must-Have Real Estate Knowledge You Need to Have Before You Invest Are:
- Your Local Market
- ROI: Return on Investment
- ARV: After Repair Value
Before investing in real estate, you need to have a deep understanding of how your local market behaves, what it’s opportunities are, and what kind of investments are most profitable.
Depending on your style of real estate investing, you may find vacation rentals perform better than long-term rentals, or that flips are more sought after. In some area’s mobile homes, or even land may be a worthwhile investment depending on your area.
If you invest in your local market, having a baseline knowledge of your market is critical to understand what types of investing you should do. Other important market knowledge will be: days on the market, median sales price, median list price, and preferred style of home.
How To Calculate Your Returns
Return on investment or ROI is an important calculation as it can show you what kind of returns to expect and if an investment is worthwhile in the long-term. Return on investment calculations can show you how much you can expect on a property or any type of real estate investment. You can even use this calculation on note investments or other long-term investment styles, such as buy and hold. While note and buy and hold investments are profitable it requires an exit strategy and patience to execute.
The Cost Method for ROI is for properties bought in cash, like rentals. This formula is best for the return for cash flow and not equity.
The Cost Method Formula looks like this:
Out-Of-Pocket Method is used for investments that have additional costs, such as properties bought with loans. This formula is best for the return for cash flow and not equity.
The out of pocket formula:
ROI= Annual Cash Flow / Total investment cash
After repair value is an important calculator for those that flip properties. After repair value or (ARV) for short, simple states the value of a property once repairs have been made. This is calculated using comparable property sale prices, the local market, and the value of the repairs made.
Real estate investing is a risky business. The market can quickly change and home values can spike or drop depending on the market. Therefore, combining these calculations with your local and national real estate knowledge will help you find your way into real estate investing.
Different kinds of real estate
Real estate investing comes in many shapes and sizes but generally speaking there are roughly 4 types of real estate. There are many different types of real estate investments that you can invest in. While the situations and properties can be unique, Thankfully most investments fall into these categories.
The Different Types of Real Estate:
- Land Investments
- Single Family (Residential) Investments
- Multi-Family Investments
- Commercial Investments
- Industrial Investments
With many different types of real estate, there are endless ways to invest in real estate. Using your information on your local market is a great way to decide what type of real estate, and investment style works best for you.
What You Need to Know About The Different Kinds Of Real Estate
Who doesn’t love a blank slate? Surely land investments offer endless opportunities. Whether you want to implement a by and hold strategy, build your own apartments or homes, or maybe zone your land for commercial use, land investment is an easy investment for beginners. Land investments offer a lot of unique opportunities for an investor. Those investors with a long-term exit strategy can see large profits selling to individuals or companies if the value of the land increases.
Residential real estate is a great way to be involved in your local market. Whether you choose to rent or flip homes, investing in single-family homes will always be popular There are many ways to invest, from short term rentals (AIRBNB or vacation rentals), rehabs and flips, or even long-term rentals. With a few repairs, these real estate investors can make thousands of dollars!
Multi-family investments (such as apartment complexes are high earning real estate investment, while tenant management and upgrades are required these types of rentals (no matter the size) can be big earners for real estate investors Multi-family investments include: duplexes townhomes, apartment complexes, and many more.
Commercial investments can range from plazas, single buildings, or other commercial buildings. These investments have long term tenants with minimal hassle or upgrades. Commercial investments are expensive and require a lot of upkeep.
Industrial investments are your warehouses and factories. While requiring higher costs in upkeep these investments can make high profits and returns if managed and rented property.
How to Invest in real estate
Once you have a firm grasp on your local market you can decide on what type of investment is right for you. Combined with the type of real estate you may be presented with many opportunities for your first real estate investment.
Most Popular Ways to Invest in Real Estate.
- House Flipping
- Long-Term Rentals
- Short-Term or Vacation Rentals
- Buy and Hold
- Real Estate Notes
House flipping is all over magazines, t.v. shows, podcasts, and social media. House flipping is a great way to earn top-dollar on undervalued homes in need of repairs. To Flip a house, you purchase a home, make repairs, and sell for a profit to the next buyer. Many house flippers aim to make a home ‘move-in ready’ for first-time buyers. They often use the After-repair formula to determine if a flip will be profitable.
Long term rentals are tenants and properties that will lease tenants for at least a year. These rentals are amazing passive earners and if rented to the right tenant, require minimal upkeep or repairs.
Short-term rentals are vacation or Airbnb rentals; these can be high earnings in well-traveled areas and can require minimal maintenance.
Buy and hold investments are long-term investments that require patience and understanding of the real estate market. Investors who see long term gains in value can hold on to properties that will gain in value over time.
Some investors who are not interested in property management or may be inclined to invest in real estate notes. Banks or lenders looking to build their reserves may sell their real estate notes or deeds of trust at a discount to investors. These investors will receive payments for the interests and principles of the loan. This is a great way to earn passive income from real estate with minimal involvement.
Funding Your Real Estate investments
No matter what way you choose to invest, capital is key for investing in real estate. If you don’t have the cash to fund your investment, you will need to work with a lender who understands your real estate investments. There are many different types of lenders that can fund your real estate investments.
Three Ways to Fund Your Real Estate Investments:
- Traditional Lenders
- Hard Money Lenders
- Business Lenders
If you own a home, you most likely have a traditional loan or mortgage. Traditional lenders such as banks, often use mortgages and other home financings. A traditional home loan has low-interest rates, and a longer loan term, making for small monthly payments. These loans are valued for on the borrower’s credit, and so they require income statements, credit checks, and employment histories to value the loan and secure the rates. These loans can be used for purchasing properties.
Hard Money lenders are another source of funding for real estate investors. They offer asset-based loans (based on the property value) to secure the loan. They can be used to purchase, repair, and flip various properties. Hard money loans are often short-term loans (1-2 years) and have much higher rates because they are secure in the property value.
Alternatively, some real estate investors may use commercial or business loans to fund their real estate investments. These loans come directly from a bank and require business plans, profit points, and much more to approve.
Real estate investing is a great way to build your fortune and your future. No matter how you choose to invest in real estate, you will be among some great company of millionaires who choose real estate to build their wealth.
Here is What You Need To Know To Start Real Estate Investing:
- Must-Have Real Estate Knowledge: You need to know the basics before you start investing like your local market, how to calculate return on investment, profits, and more.
- The Different Types of Real estate: Knowing the pros and cons of each type of investment is critical for choosing your next property
- How To Invest In Real Estate: Whether you choose a hands-on or off approach to your investments can play a critical role in the success and profit of your investments,
- How To Fund Your Investment: If you don’t have cash upfront you will need to find a way to bankroll your investment. Depending on your investment and the style of investing you may have more or fewer options for how to fund your investment.
Are you ready to start investing in real estate?