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Real estate investing is your path to profit through property ownership.
The goal of any investment is to put your money to work and produce a nice return. But if your hard-earned money is stuck in low-yield accounts or risky stocks, there might be a better way to build wealth: real estate investing.
The beauty of it? You can master the basics alongside your full-time job and create a powerful second income stream. With the right tools, like real estate investment software, and a well-defined plan, you can build a strong financial future, brick by brick.
What is real estate investing?
Real estate investing involves buying, selling, or renting real estate for profit. This includes residential properties like homes and apartments, commercial properties such as offices, warehouses, and retail spaces, and industrial properties.
Real estate investment is primarily directed at generating income rather than using the property as a primary residence.
While the initial investment may seem expensive, real estate investing is one of the most proven ways to build wealth. It requires careful research, market analysis, financial planning, and risk management. Read on to learn about six income-producing real estate investment strategies.
6 ways to invest in real estate
There are different ways to invest in real estate, each with its own requirements in terms of time, money, and involvement. The most suitable method for you depends on your financial goals, risk tolerance, and level of expertise. It is crucial to conduct proper research or seek advice from a financial advisor before selecting the best approach. Here are six common real estate investment methods:
1. Purchase appreciation
If you bought a home in Round Rock-Georgetown Austin, TX in 2013 for $100,000, that same home is likely worth at least $250,000 today. Purchase or price appreciation refers to the increase in the market value of a property over time. This is usually caused by high demand in a particular area, favorable economic conditions, and desirable property locations. When a property’s value increases, real estate investors can sell it at a higher price and make a profit.
Location
You’ve undoubtedly heard the cliché that the three most important facets of real estate investing are location, location, and location. Location is surely the key to success.
Savvy real estate investors also know that the neighborhood location can be more important than the actual property as the old advice that you should buy the cheapest home in the most expensive neighborhood is still solid real estate business truth. For example, a $500,000 home can produce rapid gains in an area where million-dollar properties dominate the landscape.
How software can help
Real estate software can be a powerful tool for investors looking to maximize returns. By offering comprehensive market analysis, predictive analytics, and historical pricing data, it empowers investors to make informed buying decisions with a strong understanding of potential property value appreciation.
2. Rental properties
While purchase appreciation is at the top of anyone’s real estate investing basics list, it’s great if you can make your property cash-flow positive. To do this, you obviously need to buy it correctly. Saddling yourself with an expensive property that comes with high property taxes and limited opportunities to attract renters at a nice price is a trap some wannabe landlords fall into. Check the cheapest apartments in your area, which will help you to look at local rent price scenarios.
Do the math
If your monthly mortgage payment, including taxes and insurance, is $1200, you need to rent your unit for more than that amount to break even. Sure, that’s business 101, but rental rates are not arbitrary.
You first need to understand what the median rents are for your area and then work the numbers to make sure that you can get the rent amount you need for positive cash flow. If the going rent rates for a one-bedroom apartment are only around $750, you’re going to have a tough time creating positive cash flow with that $200,000 property that you are planning to purchase with $20,000 down. Your $180,000 mortgage at 4 percent, for example, will cost you $859 per month before taxes and insurance, so that assures a negative cash flow. Consider renting out a property you already have. Also known as home sharing, you can rent out your entire house or just parts of your home on a short-term basis. Check your current homeowner’s policy to see if it already includes coverage for short-term rentals.
How software can help
The right software can help you pinpoint property values, prices, and loan scenarios. Real estate investment management software provides concise and easy-to-read reports created with real-time calculations. It lets you quickly analyze any property purchase and estimate your positive or negative cash flow.
3. House flipping
You have watched many DIY cable house flipping shows, and you undoubtedly know the drill. Find an undervalued property at a low price that needs work, carefully prepare demo and renovation plans, and start work quickly. Then, resell for a nice profit.
If you purchase your fixer-upper with hard money, your loan interest meter will be running at a high rate—sometimes even up to 15 percent. That is why it is critically important to get a plan, stick to it, and find the proper team to do the house-flipping work.
How software can help
A variety of software tools can help you here. You can use online reviews to begin vetting contractors. Never hire anyone to do any work until you can be as sure as possible that they will be able to meet or beat deadlines and come in under budget.
You can find contractors on many sites, including Craigslist. You can analyze deals, review accounting, and manage your entire project with software like a house-flipping spreadsheet.
4. Real estate investment trusts (REITs)
If you’re a beginner interested in generating a steady passive income, real estate investment trusts (REITs) might be a good option. REITs are companies that own real estate, and when you purchase shares in these companies, you receive regular dividends, and generally the returns are solid with relatively low risk. This is a great entry point to the real estate market for those who may not have the time or resources to invest in real estate directly. REITs are also a popular choice for investors looking to diversify their portfolios.
To begin investing, start by researching publicly traded options and assessing their performance, anticipated growth, current dividends, and funds from operations (FFO). Seeking advice from a financial advisor can also help you choose the right REIT.
How software can help
Specialized real estate software that provides in-depth financial data and metrics can help you analyze REITs and evaluate potential returns, dividend yields, and growth prospects. Portfolio management software can also allow you to track your REIT holdings along with other investments to maintain a balanced and diversified investment portfolio.
5. Online real estate platforms
Online real estate platforms, or real estate crowdfunding platforms, serve as a bridge between borrowers and investors seeking investment opportunities. These platforms enable developers to post their projects and deals, seeking financing through debt or equity. The setup benefits both parties, as investors can invest in real estate without worrying about ownership or management responsibilities, while developers can secure project financing.
However, it is worth noting that financing real estate deals through these platforms carries similar risks to direct real estate investment. It is crucial to conduct due diligence before committing to any deal.
Despite the advantages, using real estate platforms can have potential downsides. Investments can be illiquid, with lockup periods restricting access to funds, and investors may incur platform membership fees that impact their overall returns.
How software can help
Real estate software offers customized features that simplify the investment process. These features enable investors to perform due diligence, manage portfolios, and execute transactions efficiently and with informed decision-making.
6. Real Estate Investment Groups (REIG)
Real estate investment groups (REIGs) pool funds from various investors to purchase multi-unit housing and commercial properties. They function like small mutual funds, acquiring real estate and allowing investors to purchase units through the company and become part of the group.
Individual investors may own one or multiple units. The management company oversees all units, handling maintenance, tenant selection, and rent collection tasks. In return for these management services, the company receives a percentage of the monthly rent.
REIGs differ from REITs because they have more flexibility in their business structure and investment strategies. It offers an attractive opportunity for individuals who seek returns from real estate without the complexities of property management. However, participation typically requires a capital investment and access to financing.
How software can help
Real estate software helps manage REIG investments, properties, members, and communication. It evaluates investment opportunities, tracks property performance, and fosters transparent communication.
Pros and cons of real estate investing
Investing in real estate can be rewarding, but it comes with its own set of risks and challenges. That’s why conducting thorough research and possibly consulting a financial advisor before investing in real estate is crucial. Below are some of the pros and cons associated with real estate investments.
Advantages of investing in real estate
- Income stream: Real estate investments, particularly rental properties, can become a steady secondary income source. This income can then be used to cover expenses or reinvest for further property acquisitions.
- Appreciation: Real estate properties have the potential to increase in value over time, allowing investors to benefit from capital growth upon sale.
- Tax benefits: Real estate ownership offers various tax incentives and deductions, including deductions for mortgage interest, property taxes, and maintenance expenses. Additionally, long-term investors may qualify for capital gains tax exemptions.
- Portfolio diversification: Real estate investments can diversify an investment portfolio, reducing overall risk. They often have a low correlation with other financial markets, providing a hedge against market volatility.
Disadvantages of investing in real estate
- Illiquidity: Real estate is not a liquid asset, meaning it can take time to sell properties and access capital, particularly in a down market.
- Market risk: Property values can fluctuate due to economic conditions or changes in neighborhood dynamics, impacting potential investment returns.
- Maintenance: Real estate investments require active management, maintenance, and dealing with tenants, which can be time-consuming and stressful. Unexpected maintenance issues can lead to additional expenses.
- Upfront capital: Real estate investments typically require a significant initial investment, such as down payments, closing costs, and potential renovation expenses, which can be a barrier for some investors.
Rent your way to riches
Any investment requires diligence and homework on your part. Before you make any real estate investment decisions, first make sure you understand the terms and definitions of the real estate space. Research local real estate market trends and locate the best vendors for financing, remodeling, and marketing your property.
Read as many real estate investment books as you can, talk to as many pro investors as you are able to meet, and carefully weigh the pros and cons of each investment. By paying attention to details, you can become a successful real estate investor.
If you’re ready to start making real estate investments in 2024, check out how escrow can help you make secure transactions.
This article was originally published in 2019. It has been updated with new information.
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