Investing is the best way to make you financially secure and increase your savings’ value exponentially. The goal of investing in real estate is plain and simple: to have more money than you had initially, taking into account taxes, payments for maintenance, utility bills, etc.
Along with Real Estate, you may consider alternative ways to multiply your money, like investing in bitcoin. The more diverse your investment portfolio is, the more your money is protected against the risk of certain market collapse, leading to the loss of all your investments.
The diversity of Real Estate investments niches is impressive: living buildings, apartments, garages, storages, commercial real estate, etc. Since property normally does not decrease in price over time, it could be considered a reasonable, safe long-term investment with average to high return.
Keep in mind that Real Estate is not for “I’ll get rich quickly” type of mindset. It is a work which takes patience, routine, and wise winning strategy.
Before you dive deeper into understanding the market, you must know your 6 most important figures:
- Cash flow (net income/debt financing payments).
- Net income (income/expenses).
- Return on investment (cash flow/investment).
- Cash-on-cash return (cash flow/investment).
- Cap rate (net income/property price).
- Total ROI (total return/investment).
Pros and Cons of investing in Real Estate
In spite of being considered a somewhat risky type of investment, Real Estate is a great tool for hedging inflation. As you know, inflation “eats away” a certain percentage of your money’s value year by year. Unlike cash, a property increases in price in long term. So, even if you will not earn much on selling your property you will at least compensate your money devaluation.
If you get a mortgage for buying, let’s say a house, and you will rent it out, the monthly income will cover your mortgage payments (ideally). After the mortgage is paid out, all the money you get from tenants paying for renting your house is your pure profit.
Real Estate market prices are relatively stable, except crisis periods. In long term, a property is one of the most reliable investments.
Investing in real estate could be risky in case you are paying your mortgage and rely on monthly payments from your tenants. If the market goes down, rent prices go down too, so you will have to decrease the rent price while your mortgage payments will remain the same. To reduce the risk of your investments – read about low-risk investments with modest, yet stable returns.
How to make money on Real Estate like a pro!
There are few ways how investors take benefits from putting the money into the real estate (or real estate related businesses). Depending on the type of investment you choose, the risks vary.
- Market’s value growth. You earn on a difference between an initial property’s cost (the money you’ve invested) and the price the market will offer over time. Your return is equal to the added value after tax. You may increase the value of your property by making good refurbishment and technical upgrades.
- Investment in Real Estate Company. You direct your investments into the real estate related company (or individual expert) who generates profit by buying and selling property. The difference they make and the commission they get is shared with the company and investors (or between a private expert and you as his investor).
- Income from a property for rental purposes. It is the most common purpose of investing money. Investments are purposed to generate regular cash flow income from renting the property out. Monthly payments from tenants must exceed (or at east be equal to) your maintenance expenses and (if any) mortgage payments.
- Ancillary revenue. It is an additional income within main real estate income. You let tenants use laundry equipment or other machines (for personal or business purposes) for the certain monthly payment. In a case of commercial property, you may lease out equipment within premises to get a bigger income. It could become a great source of income, turning your investments into the real business.
How to start
If you are serious about making considerable investments in property, find your local investors to join their community. They will show you their property and explain the reasons, pitfalls, and benefits of purchasing certain types of Real Estate in your area. Unlike Real Estate agencies and brokers who advertise everything which is beneficial for their business, real investors will give you a real picture.
- Take your investment as a business and make a good business plan. Make all calculations, including expected expenses for maintenance, utility bills, mortgage payments, etc. Make calculations of expected return, based on marketing data. Find and involve in writing your business plan someone who knows the market from inside.
- Since you’ve become an investor, bookkeeping must be on your daily radars. Learn how to do paperwork and make recordings regularly. If you invest in several Real Estate objects, hiring a professional accountant is recommended.
- Start with the smaller property, to understand all mechanisms of investing in Real Estate, and then go bigger. When you feel you get enough experience, don’t hesitate with buying a bigger property. Don’t be afraid to join the league of “big players” as larger assets normally rise in price faster so it brings returns sooner.
- Set individual retirement account. When you intend to invest in Real Estate using your own money (not borrowed), the best way to do it is using self-directed retirement account. There is a very important reason for that: using IRA allows you avoid your taxed money.
Secrets and tips of investing in Real Estate from professionals:
Investing in Real Estate can bring as high returns as stocks or other high-risk and high-yield investments. All you need is to get armed with tips, given by professional and experienced Real Estate investors.
- There is no “right time” or “perfect time” for investing in Real Estate. The market can go any direction at any time. Make a decision and don’t hesitate with making actions.
- Don’t get tempted by quick profit. Even if your property appreciates in good pace – don’t sell it sooner than you planned. Normally, there is a long-term uptrend for all types of Real Estate, but there are always ups and downs on the way. Don’t step off the course.
- Read a lot and attend your local property investors meetings. That is how you stay updated without spending days and nights following the market news on the Internet.
- Create a thorough financial plan with exact goals, like you would do it for investing in financial markets (stocks, commodities).Serious approach always pays off.
- Buy a property at a most motivated seller. When the seller really wants to sell it, he gives you a better price.
- It is always better to buy the worst building at the most popular location that the best house in the wrong area. For your future buyers or tenants, the reputation of the neighborhood is more important that other criteria. You can upgrade a bad house, but you can’t “upgrade” a bad location.
- Use universal 1% rule for Real Estate investments. It’s as simple as effective. If you are buying a property for $200K, your monthly income (rental) must be 200 000 x 1% = $2.000