How to invest in Real Estate?
Whether you are looking to invest in Single Family homes, Commercial Real Estate, Multi Family or Flipping, investigating your options is a great place to start.
With Residential Real Estate you'll be investing in buying houses, apartment buildings (more than 4 units is considered commercial), townhouses, and vacation homes where a person or family pays you to live the property. You can also renovate the property and sell it for a profit.
Commercial investment can be divided in a few categories:
Office buildings, where individual offices are leased out to generate income.
Industrial, which consists of storage units, car washes, manufacturing and other special purpose real estate that generates sales from customers who temporarily use the facility. Industrial real estate many times have significant fees and service revenue streams which increase the ROI (Return on Investment) for the owner.
Retail, where the investor acquires shopping malls, strip malls, and other retail store fronts. In some cases the landlord (investor/owner) also receives a percentage of sales generated by the tenant in addition to the base rent to provide incentive to keep the property in excellent condition.
Real Estate Investment Trusts (REIT), which includes "trade like" stocks and owning a portfolio of underlying real estate properties or real estate mortgages.
When you invest in real Estate there are several ways you can make money.
1. Real Estate Appreciation - When the property becomes more valuable due to change in real estate market and/or renovations made to it that attract more buyers. This is a tricky game and can be risky. The rule of thumb is usually that you can make most of the money when you buy at 70% or lower of the market price from a motivated seller. Then leverage that gap to renovate and increase the overall value of the home in a neighborhood that is not located in a declining market, but rather in an appreciating one. Buy the "ugly house" in the best neighborhood.
2.Cash flow income - In this scenario you or your company ( always recommended to operate under an LLC or corportation) become a landlord, and collect monthly rent from tenants of your property. Whether you buy an apartment building, individual single family homes, townhomes, villas, etc.. It is always a great idea to evaluate hiring a property management company. You can also benefit from cash flow income by investing in commercial units that can be leased for car washes, office buildings, storage units and more.
1. Buy and hold - Rent while the property appreciates.
2. Flip - Property is purchased at a deep discount, from motivated sellers or secondary market wholesalers. The home gets a reasonable renovation to keep it profitable based on the market value and gets sold for a profit.
3. Wholesale real estate investing - is where an investor takes the opportunity to put under contract a deeply discounted property and instead of undertaking the purchase and renovation efforts, he/she assigns the contract for a profit to an investor interested in renovating and flipping the property. The new investor involved will look at the after repair value to determine the value of the deal.
Investment property financing opportunities are accessible to borrowers seeking to purchase income-generating properties, while residential mortgage loans are given to borrowers seeking to purchase primary residential properties.
The nature and location of the investment property are very important factors that lenders consider when determining the applicable interest rates on a loan. Lower interests would usually be available for properties that you intend to rent and higher ones for properties that you intend to flip (rehab and resale).
When it comes to financing you can go in multiple directions depending on your needs. Your options include but are not limited to : Fixed Rate Mortgages, ARMs, Balloon Payments, Traditional Financing, Portfolio-investor lending, Hard money lenders, Equity investors, etc.. If you are investing for retirement, consult your financial advisor and consider using your ROTH IRA as an investment vehicle where all earnings are tax free as long as the money earned is handled by a 3rd party and gets deposited back in to the retirement account; it is a great way to catch up in retirement funds.
Other items to consider include:
1. Property Taxes: Each county applies their own rates and formula depending on where the asset is located. Contacting the County tax assessor to get a better idea of what the property taxes will be will help in calculating costs that will affect the cash flow of the property.
2. Insurance: Before purchasing a property you should always reach out to a couple of insurance agents to obtain quotes on estimated insurance premiums for the target property as an investment property ( which will not be owner occupied).
3. Entity: Speak to a real estate lawyer or asset attorney about acquiring these properties under an LLC or other entity. This will potentially provide additional protection from issues that may go beyond your control as an investor.
4. Management: In calculating Cash flow for properties that will be leased you should take in to consideration the cost of a property management company, which could include leasing fees, advertising fees, eviction protection fees, etc.
5. Maintenance, Repairs, Utilities : All these Items are negotiable in the lease, make sure that you account for those in cash flow for the portion you plan to cover. Have a 4to6 month reserve of the rental amount to help cover for potential repairs and potential unforeseen vacancy and repairs to be made during that period.
6. Mortgage payments: When evaluating the monthly cost of the investment keep in mind to include not only the principal and interest, but also the monthly cost of possible PMI ( Private Mortgage Insurance) in situations where less than a 20% down payment has been provided. Being proactive and requesting the removal of the PMI premium once the equity is more than 80% can save investors a good amount of money yearly.
7.HOA Fees: Find out what the projected fees are for the upcoming year as it will affect cash flow and make sure the property is up to date with payments before purchasing unless willing to pay off past due HOA