If you live in an area with a booming real estate market, you, like many others, have thought about investing in real estate. It may sound like a good idea, but understand that it’s a significant commitment. In a recent survey, only 15% of the respondents say they invest in property other than their own home. Even so, most agreed that it’s a worthy investment. About 40% of those surveyed are confident that they have the skills necessary to flip a house, and 80% of millennials believe that real estate investing is too complicated.
Because property investment is such a specialty, it’s important to understand what’s in store before you make the commitment. Real estate investing is not for everyone, and whether or not it’s a smart idea hinges on your personal situation, finances, and goals. It can definitely pay off if you approach it strategically and only after understanding the process.
Types of property investment
Let’s look at four common types of real estate investing. First and the most common is home ownership.
If you’ve bought a house, then you’re technically an investor. However, investing in your own home won’t yield any cash flow. If you have a mortgage on your home, then paying it off is an excellent long-term investment. Most experts agree that whenever possible, paying off your home before jumping into other investments is the best plan. Once your home is paid for, you also have collateral for obtaining a loan. Lending institutions can provide some attractive home loan or home loan refinance offers to help you pull cash from your home if you need it for a short term investment.
A second type of property investing is rental property. Generating income from rental property is a top reason that investors buy houses. The value of this type of investment is cash flow, because it will provide a revenue stream that can add a lot of money to your income each year.
Also, if the property increases in value, you can profit from a sale at some point. Renting can include anything from a room in your home, to an apartment or house, or even commercial buildings. You’ll find challenges to renting out property such as problem tenants, property upkeep, taxes, and insurance.
Another type of real estate investing that has become popular over the past several years is house flipping. Flipping means that you buy a house or condo, make updates and improvements and then sell it for a profit. This all takes place in a short amount of time, sometimes a few weeks or more. Because it’s a quick process, investors like to use flipping because of the cash flow it can generate.
Flipping has become more common with the rise in popularity of home improvement shows on television, in blogs and on YouTube. The risk with flipping is buying the wrong property, investing in the updates and then being unable to sell it for enough to make money on the deal. The key is to do the research to make certain you are making a sound investment and that you don’t spend too much money on the home to be able to turn a profit. The good news is that even with the ups and downs of the real estate market, most properties increase in value over the long term.
Real Estate Investment Trusts
A fourth type of property investment is called Real Estate Investment Trusts (REITs). These are companies called trusts that own a property and sell shares to investors who reap a portion of the profit when the house is liquidated. With this type of investment, you will not have complete control in making decisions regarding the property, and is therefore not recommended by most successful investors. Instead, stay with purchasing your own property so you have control over your investment.
Six steps to property investment
Pay cash. It will save you thousands in interest and you will not have to concern yourself with any of the details of a mortgage.
Diversify. A rule of thumb used by many successful investors is to not have any more that 5% of your net worth tied up in real estate because market fluctuations can be devastating if you’re invested too heavily.
Buy local. Invest in property to flip or rent that’s in the same geographical area where you live. Managing investments such as real estate from a distance can be difficult and frustrating.
Expect unexpected costs. In the case of rental property, some tenants will not pay rent or will damage your property. You must be prepared financially to deal with these circumstances. Also, with rental property, you’ll always have maintenance costs, some of which can be costly.
Start small. If you have never invested in real estate before, perhaps find a small property that has minimal risk and start there. This could even be just renting out a garage apartment that may be part of your home.
Find a real estate agent and adviser. When you first consider property investing, having a conversation with a good real estate agent is a priority. They can offer valuable advice to save you from pitfalls. The agent can also be your purchaser when you find properties to buy, flip or rent.
Real estate investing has its pros and cons, and it’s not for everyone. If it’s something you’re considering as part of your plan to gain wealth, first, meet with a financial adviser to make sure it is a good fit for your personal situation and also to get you started off on the right foot.