For many, real estate investing is unchartered territory. There are so many ways to invest in today’s world, and real estate investments is one of the best ways to diversify. People will always need a space to live, a place to rest their head, and to call home. There is a huge opportunity for real estate investors to provide that space and see financial gains in the process. There is also a potential for loss with real estate investment, IF you are not working with the right realtor, contractors, property manager, etc.
When approached smartly, real estate can be a lucrative and reliable way to generate substantial returns. Real estate investing can provide consistent income, with the opportunity to appreciate rapidly in comparison to other investing models. There are also a host of tax advantages that can be seen from real estate – (talk with your your CPA to find out how this could help you).
REAL ESTATE INVESTING -WHAT IS IT?
Purchase, ownership, lease, or sale of land and/or structures on it for the purpose of earning wealth. Real estate can be categorized as:
- Residential Real Estate: Single family homes, townhomes, condos, and multi-family homes. Multi-family homes that are larger than four units are commercial properties.
- Commercial Real Estate: Property used for a business purpose, such as office, retail, land, or multi-family (over 4-units). Examples include business offices (office), restaurants (retail), farmland (land), and large apartment buildings (multi-family).
- Industrial Real Estate: Serve an insdutrial business purpose such as warehousing, factory, power plants, or shipping.
HOW TO BUILD WEALTH THROUGH REAL ESTATE INVESTING?
- Appreciation: When you purchase a property and put money down an/or start making mortgage payments, you are building equity. By the time you decide to sell that property it will probably have appreciated quite a bit. When you sell, you will be receiving a liquid form of the equity you have built up, plus the appreciation the property has seen over the time you have owned it. The appreciation, or increase in property value over time, is essentially your profit seen when selling the property. This is one long term return, versus rents being a short term cash flow from the investment property.
- Rent: When an investor owns a property they can create a monthly cash flow by leasing that property out.
- Rental amounts – (mortgage and management costs) = monthly profit.
- Management costs –
- Mortgage Payment – principal, interest, taxes, insurance + any association dues- if applicable
- Utilities if paid by landlord
- Property management fees – if applicable
- KNOW YOUR NUMBERS + INVESTMENT GOALS – Each type of real estate investment carries potential for both risk and reward. Regardless of how you decide to invest it is important to choose your investments wisely. This starts with choosing the right realtor that will help you with your due diligence- making sure it is financially sound and will meet YOUR real estate goals.
- CAP RATE – most investors want to look at a property’s cap rate to see if it is a worthwhile investment. The cap rate is essential the rate of return on the property based off sale price, monthly income, and monthly expenses. For many properties, the cap rate is higher than the going stock market rate. This makes real estate investing even more attractive (besides the opportunity to diversify investments).