Essential Tips on How To Invest in Real Estate: Investing Guide for Beginners
Real estate can be a highly profitable investment, but it's also complex and risky. If you're thinking of investing in real estate, it's important to do your research first and understand the basics. In this guide, we'll go over some tips on how to invest in real estate to help you get started as a beginner investor.
Be Aware of the Risks
When it comes to real estate investing for beginners, it's important to have a realistic expectation of what you would potentially be able to earn from your investment. Real estate investments can be lucrative, but they're not without risk.
Let’s take a look at some pros and cons of investing in real estate, so you can assess them and make your final decision on whether this form of investment is right for you.
One of the biggest pros of real estate investing is that it’s generally much less risky than investing in the stock market. The housing market is not as volatile as the stock market, and you can usually count on a steady increase in prices over time. Additionally, real estate investments often provide a steadier cash flow than stock market investments.
Real estate investments also offer some great tax breaks. You can deduct mortgage interest, depreciation, property taxes, and a number of other expenses from your taxable income. This can help reduce your overall tax burden.
On the other hand, one of the main cons of real estate investing is that potential returns are not as high as they are with investing in stocks. Over time, stocks tend to outperform real estate prices by a wide margin. Additionally, real estate investing can be more complex and time-consuming than stock market investing.
Another downside is that buying property requires a lot of money. If you want to generate a steady income stream, you'll need a lot of cash on hand - either your own or money borrowed from others. Additionally, real estate investments are not liquid; in other words, they cannot be turned into cash quickly like stocks can.
Finally, managing tenants and building maintenance can be a challenge. You can either hire a property manager to take care of these things for you, or deal with them yourself. This can involve all sorts of unexpected problems, such as overdue rent, structural damage, and more.
However, there are some real estate investment options that can help you avoid some of these drawbacks. For example, you don’t actually have to own the real estate you invest in. You’ll be able to read more about all the different types of real estate investments later in the text.
Consider Your Financing Options
A common misconception is that you need to be rich in order to invest in real estate. While this is not true, investing when you only have a small amount of money requires some strategy. It’s best if you start preparing for your property investment early. There are a number of ways to finance your real estate investment, including:
- Conventional mortgages
- Private money loans
- Hard money loans
- Home equity loans
- FHA loans
- VA loans
Paying in cash isn’t an option for many, as it requires you to have the full amount on hand and ready to be invested in a property. Also, if you rent out that property, you won’t see any gains for a long time, since you’ll be receiving monthly payments.
Nevertheless, there are some benefits to paying in cash when investing in property. For instance, you’re likely to get a discount if you choose this financing option, and since sellers prefer being paid the full amount up front, you’ll have more options when choosing a property.
You’ve probably already considered a conventional mortgage as your real estate investment financing option, as this is the most commonly chosen option by real estate investors. What you should know is that these kinds of loans usually have higher credit score requirements and larger down payments, but they often come with lower interest rates.
If you plan on borrowing money from a financial institution, you should start building your credit score on time. Having a poor credit score won’t get you approved for a bank loan, so you should take steps to improve it.
Something you can do is request the credit report and proof it for errors. If you find any inaccuracies, you should report them immediately. Once you’ve made sure your credit report is error-free, you can use other strategies, such as:
- Getting a credit builder loan
- Applying for a secured credit card
- Increasing your credit limit
- Becoming an authorized user
If you manage to attain an excellent credit score, and can afford the down payment, a conventional mortgage could be the perfect option for you to get into real estate investing that pays off later down the line.
Home Equity Loans
Home equity loans are a type of second mortgage. You’re eligible for this type of loan once you’ve built equity in your home. This typically includes having paid off a specific portion of your primary mortgage.
The good thing about home equity loans is that they often come with lower interest rates than other types of loans. The amount you can borrow will be based on the difference between the equity in your home and the current market value of the investment property.
An FHA loan is a mortgage that’s insured by the Federal Housing Administration. This type of loan is a good option for first-time homebuyers with bad credit or no credit, as well as those with a limited budget. FHA loans require a lower down payment than conventional mortgages, but they also come with stricter credit and income requirements.
You need to have steady employment and a minimum credit score of 500 to be eligible for an FHA loan. Keep in mind that this type of loan isn’t suitable for all types of real estate investments, as it’s meant for residents rather than real estate investors. However, it can be a great choice for those planning to purchase a multifamily home for themselves and rent out a part of it.
A VA loan is a mortgage that’s guaranteed by the US Department of Veterans Affairs. These loans are available to eligible active-duty military personnel, veterans, and surviving spouses. VA loans offer a number of benefits, including no down payment, no monthly mortgage insurance, and lower interest rates.
Private Money Loans
If you don’t qualify for a bank loan, or if you want to avoid the hassle of applying through a financial institution, you can always try borrowing from private lenders who are willing to lend you money for your real estate investment.
The terms of these loans will vary depending on the agreement between you and the lender. If you have a friend or family member who is willing and has the means to loan you the money, this can be one of the best options for you to get the funds necessary to start investing in real estate.
Hard Money Loans
Hard money loans are short-term loans secured by real estate. Unlike conventional mortgages, they aren’t offered by traditional financial institutions. Moreover, they take less time to obtain. While you may wait around 60 days for a conventional mortgage, getting a hard money loan can take approximately a few days, up to two weeks.
You should keep in mind that hard money loans tend to have higher interest rates than conventional loans. Nevertheless, they are suitable for beginner real estate investors with poor credit scores, as a high credit score isn’t a requirement to secure this type of loan.
Do Your Research Before Investing in Real Estate
If you're thinking of investing in real estate, it's important to do your homework first. There are a number of factors to consider before making an investment, such as the location and condition of the property, and the current market conditions.
Apart from that, you should also be familiar with different real estate investment options, which is where your research should begin. To help you better understand your options, we’ll explain them in more detail in the following section.
Take Into Account Different Real Estate Investment Options
You should know that, besides owning a property you invest in, there are also types of real estate investments that don’t involve property ownership. We’ll discuss both options, so you can make an informed decision regarding where to invest.
Real Estate Investments With Property Ownership
When we think about investing in real estate, most people associate it with owning a property. Here are the most common ways to invest in real estate that involve property ownership.
One of the most popular ways to invest in real estate is through rental properties. You can purchase a property and then rent it out to tenants. This can be a great way to generate passive income each month.
However, being a landlord does come with its own set of responsibilities, such as screening tenants, collecting rent, maintaining the property, and dealing with eviction notices if necessary. Therefore, this is a viable option for those willing to put in the work, and there are a number of software solutions for property management that could help you.
House flipping takes a lot of work and planning but can still be pulled off by beginners. This involves finding a fixer-upper in a good location, repairing and embellishing it, and then selling it for a profit. It’s a great option for those who are skilled in renovation or can afford to have someone renovate homes for them.
Another option is micro-flipping. It can be more convenient than regular house flipping, as it typically requires no renovation. It’s similar to wholesaling, with the difference being that you don’t need to put in a lot of effort when it comes to searching for good opportunities.
Instead, everything is done on the computer using special software that allows real estate investors to scout for properties and analyze data. Micro-flipping is generally a quick process, but you should keep in mind that profits tend to be on the low side.
Real Estate Investments Without Property Ownership
Owning real estate can be a big commitment and a lot of work. If you're not interested in being a landlord or dealing with repairs and maintenance, there are other ways to invest in real estate. Some of them include investing in mortgage real estate investment trusts, real estate crowdfunding, and real estate companies.
Mortgage Real Estate Investment Trusts
A real estate investment trust, REIT, are companies that own and operate commercial real estate, such as shopping malls and office buildings. Investing in mortgage REITs is different from equity REITs investments, as the latter involves property ownership, while the former doesn’t. Therefore, by investing in a mortgage REIT, you can get exposure to the real estate market without the hassle of owning and managing property.
A major benefit of investing in mortgage REITs is that it doesn’t require a lot of capital. When you invest, you receive a portion of the interest earned from loaning money to property owners.
Real Estate Crowdfunding Platforms
Real estate crowdfunding is a new way to invest in real estate. Unlike traditional methods, which typically involve working with a broker or investing directly in a property, real estate crowdfunding allows people to pool their money and invest in a property together. This can be an attractive option for people who don’t have the time or the resources to invest in real estate on their own.
While there are some risks associated with this type of investing, as it typically requires a long-term commitment that can be as long as five years, there are also potential rewards. Mainly, real estate crowdfunding can allow people to invest in expensive properties that they wouldn’t be able to afford on their own.
Additionally, it can provide a way to diversify one’s investments, which can help reduce risk. Overall, real estate crowdfunding can be a helpful tool for people who want to invest in real estate but don’t want to or are unable to do so on their own.
Real Estate Companies
You can also invest in real estate companies that own and manage properties. This option offers a more hands-off approach, as you wouldn’t be dealing with any properties directly. You’d also be investing in a team of professionals responsible for managing the property. This option can be a good choice for those who want to diversify their portfolio.
As you can tell, there are many ways to start investing in real estate. There is no one “right” way to do it, and the best approach depends on your individual circumstances and goals.
Regardless of whether you opt for house flipping, investing in mortgage real estate investment trusts, or any other option, it’s important that you carefully evaluate your financing options and don’t make any rash decisions.
What kind of real estate is best to invest in?
If you’re a future real-estate investor, you have plenty of options. You may choose to own the property you invest in or to make an investment that doesn’t involve property ownership.
If you’re more interested in the first option, you can invest in rentals, or start house flipping, for instance. On the other hand, if you choose the latter, you could try investing in real estate investment trusts, or real estate crowdfunding, among other options.
Can you get rich from real estate investing?
There's no guarantee that you'll get rich from investing in real estate. However, if you're smart about your investments and manage your properties well, you can make a lot of money.
Is investing in real estate a good idea?
Investing in real estate can be a good idea as long as you do your research and approach it with due diligence. If you know how to invest in real estate, not only does it offer the potential for appreciation, but it can also provide a source of passive income.
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