Trying to invest in real estate to generate a side income or retire early?
Perfect! Since, you’re reading this post you’re one step closer to investing in the the asset that would make you money for life.
Real estate is arguably the most stable investment anywhere in the world. And the wealthy have proven this for centuries by always having real estate in their investment portfolio.
Like with any investment, it’s neither plain-simple or foolproof.
But with knowledge of the different ways to invest and strategies for success, you can plan your investment properly. Without further ado, we’ll get into the basics of how to invest in real estate to build wealth.
- Invest in real estate with a SMART goal for guidance and motivation.
- It takes years to create wealth by investing in real estate — it’s not a get-rich scheme.
- Rental properties are most common form of real estate investment due to their steady income generation.
- There are dozens of ways to invest in real estate and make a profit.
- Getting familiar with real estate principles can make networking for lucrative deals easy.
What Is Real Estate Investment?
At its core, real estate investment is the purchase of a property with the hopes of collecting rent consistently and/or selling at a higher price in the future.
A wise investor carefully researches the market to find a gem — a property that’s relatively affordable but has a potential to generate more money.
Also, it also involves buying stocks in real estate investment trusts or digital tokens of properties.
Familiarizing With Important Real Estate Investment Terms
It’s not rocket science. Going into an investment without deep knowledge of the industry is a recipe for failure. And for a long-term investment like real estate, experience and know-how are traits that fuel your success.
So I made a list of common terms that could instantly put your brainwave on the workings of any real estate investment you choose along the line.
After-Repair Value ARV
This term is crucial if you’re planning to flip or rent out a building. It’s used to classify the value of a property after you make renovations.
The bane of real estate is its illiquidity — the ability to immediately sell your asset at a price close to fair market value. It could take 30-45 days to sell an investment property and you’ll pay 3-6 percent in agent fees.
Fortunately, other forms of real estate investment such as REITs and tokens. However, they give lower returns compared to trading or renting property. This is a factor you should consider before deciding on the real estate investment of your choosing.
Return on Investment ( ROI)
Return on investment is typically the estimated profit on your investment each year.
Cash flow is the amount you make monthly after deducting expenses for managing the property. It’s the passive income that makes real estate a surefire millionaire-maker.
A house with cash flow means you can pay off the mortgage, maintain the profit, and still make a profit.
The general rule of thumb to estimate if a property will yield cash flow is the 1 percent rule. It means you should be able to charge 1 percent of the purchase price as rent. So if a home is valued at $200,000, you’ll need to collect at least $2,000 on rent.
Dividend refers to the profit share that’s paid to a company’s shareholders. If you invest in REITs or real estate tokens, the dividend is the profit/income you’ll receive quarterly or the stipulated period.
Find A Mentor
Mentorship programs are available online that claim to teach you real estate investment and get your first client. While they aren’t a bad idea, these programs are a tad expensive — for most people.
However, if you know any successful real estate investor in your locale, you should make friends with them. I say friends because some folks don’t exactly believe in a mentor-mentee relationship. So, instead, they put you through the ropes, and in return, you offer your commitment and resourcefulness.
On the flip side, you can get your feet wet by joining a trusted online real estate forum, like Bigger Pockets. You’ll find experienced investors who’re willing to answer any questions as you start your investment journey.
The best thing about them is that they can prove you wrong or right for every step you take on your path to financial freedom.
Be Ready To Take A Risk
Fear is a good alarm to beware of danger but could also make you miss opportunities. If you’re too scared of the possibility that you might lose money while investing, you should have a rethink.
The greater the risk of an investment, the juicier the profit you stand to gain. Successful people do this all the time, sacrificing either money, time, or assets to amass even greater wealth.
Savvy real estate investors see opportunities where others fear failure. The good thing is, real estate is a relatively stable investment and you can actually build through your personal efforts or invest in passive real estate ventures.
Note: Going into an investment with the idea of getting rich quick is a recipe for disaster.
Ways To Invest In Real Estate to Grow Wealth
There are literally dozens of ways to invest in the real estate industry aside from trading property. But we’ll focus on the more conventional ways rather than side businesses like drone photography, staging, and cleaning services.
1. Owning A Rental Property
The go-to way to make money from real estate is through rental properties.
A rental property can be an apartment, multi-family unit, or office building. The first and most important step is researching the property and location you want to invest in. After acquiring the property, you charge an amount monthly or yearly as rent. All things equal, your rent should fund your monthly mortgage and running expenses with a remainder to build cash flow. After building sizeable equity on the property, you cash it out to buy another property and grow your portfolio.
But here’s the risk. Sometimes, unplanned factors like tenant vacancy or huge repairs can screw up investments even if you put aside an emergency fund.
For instance, you can start with a decent $80,000 apartment. Pay the downpayment and charge $800 per month
Say there are no vacancies or significant repairs, you can build up enough equity to buy another property within 3-5 years.
Investing in rental property is perfect for retirees or anyone looking for a steady cash flow to live.
2. Flipping Rundown Houses
Flipping presents a great opportunity for investors looking to work and grow wealth. The fix and flip market in America sees 100,000 to 200,000 homes flipped yearly and is a well over 600 billion dollar market.
That’s not to say anyone can also make money with this real estate investment method.
But with in-depth knowledge of the local market and commitment to renovate the house cost-effectively.
In the US TV series, Shameless, Fiona saved money on hiring a painting by doing it herself. If she had hired a contractor, she would have come short on her investment and she recognised the situation early on.
That’s why it’s also important to get fairly accurate projections on any real estate investment.
3. Leveraging Equity
An exceptional benefit of real estate investment is that you can build wealth with debt. Over time, the fair market value of your property will increase, so will your equity.
You can cash out up to eighty percent of the accrued value on your house using cash-out refinance or a home equity line of credit (HELOC). And then use the proceeds to buy another house while you’re paying the mortgage on the previous one.
Remember, you’ll have tenants paying the mortgage while you still generate cash flow. This way you’ll grow your own little empire that generates thousands of dollars in a few years.
Let me give you a hypothetical example.
Vladimir buys single-family property worth $150,000 in New Jersey and only made a 20% down payment of $10,000. 5 years later, the house is worth $250,000 and he’s still paying off mortgage on of 150k. Now armed with over 100,000 in equity, he cashes it to make a down payment on a 1-million dollar property.
Crowdfunding is one of the newer ways to invest in real estate without direct involvement. All you do is contribute a certain amount — alongside many other contributors — to an ongoing project and become a shareholder.
It offers portfolio diversification, by allowing you to stake on multiple investments at the same time and in different locations. What’s more, crowdfunding is no longer closed to elite accredited investors like banks, insurance companies, and the wealthy. Nowadays, you can invest with as little as $1,000 to $5,000.
Most crowdfunding companies reach out to potential investors through social media. The process looks like a GoFundMe, except it’s an investment to complete a growth-building project for fledging company, such as a new manufacturing plant or a multi-family complex. Crowd Street is a reputable site that offers a ton of crowdfunding opportunities.
However, crowdfunding like any investment comes with its risks. You’re likely to lose your investment if the relatively new company collapses.
5. Real estate investment trusts (REITs)
One way to invest in properties with a small capital and no maintenance responsibility is through real estate investment trusts (REITs, pronounced “reets”).
According to the Motley Fool,
“REITs are businesses that function as landlords; they acquire, manage, and rent properties to tenants, which are often other businesses.”
REITs are traded like stocks, so you can buy and sell them with the click of a button for as low as $100. The company usually pays a quarterly dividend which is a reliable source of passive income.
The downside to REITs is that tax on the dividend can be on the high side. Nonetheless, they can be a stable and more predictable addition to your investment portfolio.
6. Real Estate Tokens
A real estate token is another way to invest in real estate to earn passive income. In simple form, it’s a digital token that represents a share of the property, just like Bitcoin or Ethereum.
Similar to REITs, it represents a fraction of a bigger investment, but in the form of a token. A token could represent aa a residential or commercial property.
An example of tokenised commercial property is the Anna Villa in Paris. The hotel was divided into 1 million pieces, making the entry capital only 6.5 pounds per token.
Here in the United States, RealT is putting up investments in multi-family units for as low as 50 bucks a pop. This apartment in Greenfield has a token price of $50.85 bucks and is expected to yield %5.11 yearly.
Right now, real estate tokens are yet to be mainstream so liquidity may be slow. Unlike most cryptocurrencies, you won’t always have a buyer on the end for your token. And some platforms only offer select tokens to accredited investors.
Strategies For Investing in Real Estate
The real estate niches mentioned above are lucrative ways to invest and profit in real estate. However, they all require one or more proven strategies for success.
Buy And Hold
If you’ve invested in stocks or crypto, you’ll be familiar with buying and holding. Crypto and NFT “gurus”, call it HODLing — Holding On for Dear Life.
And that’s exactly what it means in real estate. Investors buy and hold to milk as much rental income and sell (or not) after some years.
Let’s say you buy a property in 2010 for $250,000. Going by the 1% percent rule, you’ll have earned $2,500 monthly income for 12 years, and going with a 3% appreciation rate would be worth $340,000 in the current market. And that’s not accounting for the potential rent increase, and of course, mortgage, maintenance, and other expenses.
One key factor that sets this strategy apart is that the property is usually in tip-top shape, or needs only little repairs.
Flipping is arguably the most profitable strategy in real estate investment. And it also demands hard work from the outset.
The strategy usually involves buying a distressed property considerably below the fair market value and then making cost-effective repairs.
A popular flipping niche in real estate is BRRRR (Buy. Rehab. Rent. Refinance. Repeat). It’s with this strategy many giant of industry grew their portfolio, build wealth and become giants of industry.
Aside from sourcing funds for the down payment, closing costs, and emergency reserves, you’ll need some expertise. Success in flipping requires knowledge of the area to make repairs that add value.
Wholesaling and flipping are similar in many ways, but especially because they both target properties that are in need of repair. However, the key difference is that a wholesaler never does the renovation — or buy the house for that matter.
It’s the strategy most fund-strapped beginners use for a breakthrough in real estate investing. But also requires the most effort and determination.
So, here’s how it works. The investor scouts for a seller to get the contract to market the house at an agreed price. Then, he goes ahead to market it at a higher price to potential buyers and keeps the profit.
How To Finance Your Real Estate Investment
The hard truth is that all real estate transactions require a considerable about of funds, even if you’re borrowing. Not to mention you have to be employed and have a healthy financial record to qualify for loans.
However, it’s possible to invest in real estate without capital using other people’s money.
“If you lack money, there are other things you can bring to the table in a (real estate) transaction—if structured correctly—including education, time, connections, confidence, intelligence, and creativity.” — Bigger Pockets.
Meanwhile, you can work as a service provider in the real estate industry to earn money and knowledge before becoming an investor yourself. Or even start as a wholesaler.
If you think you’re ready, here are ways to finance your first investment property.
Financing property investment with cash is the go-to for wholesalers and investment companies. It *beautifies offers and cuts down time spent applying for loans and closing considerably.
However, individuals just starting will find it difficult to shell out tens or hundreds of thousands on a property. And with interest rates currently at an all-time, borrowing is a good idea.
If you can afford to pay in cash, research to know your investment is fool-proof. You’ll sleep better at night knowing you’re debt-free.
The conventional way to secure funding for an investment property. Most banks and mortgage lenders will provide the loan with t
Request quotes from two or three financial institutions to see which offers the best interest rates. Experts say small lenders offer the best rates, so you can get quotes from two of them, and one from a franchise bank like Quicken Loans.
A Federal Housing Assistance (FHA) loan is an excellent option for low-income earners. FHA-insured loans are government-assisted housing loans that require as little as 0-3.5% down payment. The only drawback is that they’re only available to move-in homeowners — you have to live in the house.
Fortunately, there’s a workaround in that you can fund a home with up to four living units in the building. But that restricts your real estate journey to rental property, which is a great place to start anyways.
If you’re interested in renovating rundown properties in remote areas, a 203(k) is your best bet. A 203(k) loan covers the mortgage and cost of rehabilitation — including the cost of materials and contractors.
If you qualify for the loan, you can get your feet wet in real estate investment with a multi-family unit. However, like an FHA loan, it has to be your primary residence and is only available to low-income households.
Hard Money Lender
A hard money lender is similar to a loan shark, except no one’s going to bat you around if you fail to make payment.
So, basically, hard money loans are perfect if you’re skeptical about parting with a huge payment or have bad credit. All the lender needs to know is that your investment property will be profitable. In other words, its after repair value (ARV) should be “in the green”. That way they can seize the property and still not make a loss.
Hard money lenders only give short-term loans (within 1-3 years) so they’re best for flippers looking to sell within the year.
Doing Makes You Money
Studying real estate investment and researching your local market important steps to take before investing. But a lot of folks get into a mental masturbation zone where keep reading but never take action.
To succeed, you must leave your comfort zone and talk to experts, friends about your ambition. In the process, you may find a mentor or sweat deal.
And within months, you’ll have started your journey to financial freedom through real estate.