Of all the ways to make a passive income, real estate investing is perhaps one of the most popular. Currently, the average annual ROI for residential properties is 10.6% and 9.5% for commercial properties.
That said, while property investing is considered a relatively low-risk and lucrative investment, it does not come without its challenges. If you are considering getting into the real estate investment market, doing your due diligence is important.
If you want to make the most of your efforts and reap the rewards, it’s necessary to do a bit of research first and spend some time understanding the ins and outs of how this type of investing works. Fortunately, we’ve got a fair bit of experience and insight into the world of property investing and have put together this handy guide to help.
The Pros and Cons of Real Estate Investment
First, before diving into the specifics, it’s a good idea to understand what you’re getting into, which means weighing both the risks and the benefits of property investment.
The Pros:
A Steady Stream of Income — One of the most significant benefits for those of us who seek to invest in real estate is the steady stream of recurring income that it provides. If you invest in a rental property, for example, the money you get in return for renting it is often enough to cover the cost of the property while also providing you with plenty of extra to pad your monthly income.
Portfolio Diversification — If you are trying to build an investment portfolio, real estate investment is a great way to diversify. Traditional investments, including bonds and stocks, are more volatile and subject to price swings, whereas property investment is more steady because it has a low correlation to the stock market.
Tax Benefits — Investing in real estate can also help reduce your tax bill. When you file your taxes, there are a few common deductions that can help you save money, including those for leasing fees, maintenance, property taxes, mortgage interest, and various other expenses.
Inflation Hedging — Because of the relationship between gross domestic product growth and the ever-increasing demand for real estate, property prices tend to increase faster than the rate of inflation. However, these costs can be passed on to tenants by raising the rent, which can alleviate inflationary pressure.
The Cons:
More Involved — While traditional investments like bonds and stocks require little of your time and effort, property investment is more management-intensive. When you invest in real estate, you do not get to simply sit back and watch the money roll in. You will have to be actively involved in managing the property, which can take up a lot of time depending on the size or type of property and how many properties you have. A property management company can help, but that lessens your return on investment.
Ties Up Capital — With property investments, you will likely have more of your money tied up until you start to see a significant return on your investment. You won’t be able to make an income off of it until you either flip and sell it or rent it out.
Liability — Because real estate investment involves bringing others onto the property, such as tenants, their guests, and even contractors who are fixing up the property, you are more susceptible to liability issues. For example, if someone gets injured on your property, they could sue you, which could also impact your capital.
How You’ll Earn Money as a Property Investor
Now let’s focus on the good stuff — how you’ll earn money and build your wealth through real estate investment.
Again, property investment is quite popular because it’s generally an easy method to earn a passive income. However, the way you make money off of this venture can vary depending on your available funds and your risk tolerance.
There are typically two primary ways to earn money as a real estate investor:
1. Rental Income:
Buying properties and then renting them out is a common way of earning real estate investment income. This is because the property will appreciate over time, but in the meantime, you can earn a monthly income by collecting rent. When you opt for this method, you can either choose to become the landlord and handle all of the tasks of managing the property yourself, or you can hire a property management company to do most of the tedious work for you.
2. Value Appreciation:
Another reason why real estate investment is such a great addition to investment portfolios is because properties naturally increase in value over time. This historical trend of property value increasing is called value appreciation. For example, if you buy a property in a neighborhood that eventually gets revitalized, the value of your property will go up as the desirability of the neighborhood increases. Additionally, if you put a lot of work into fixing up the property, this will also add to its value.
What Makes a Good Real Estate Investor?
In addition to understanding the pros and cons of real estate investing and how you’ll earn money, it’s also wise to check that you have the right traits or skills to be a good investor. While property investment is relatively easy to get into, being a truly successful investor can depend on your knowledge and skills.
In our experience, the following are the top traits and skills of some of the most successful real estate investors:
- Personable
- Passionate
- Patient
- Self-disciplined
- Economical
- Creative
- Adaptable
- Determined
- Principled
Additionally, if you want to be a good investor, you should:
- Have good money management skills
- Be capable of making calculated risks
- Have good analytical skills
- Be able to network and make strong connections in the business
- Have a social media presence and understand the basics of property marketing
- Have strong negotiating skills
On top of the above traits and skills, it is also important to develop a working knowledge of the market. You do not want to enter into property investment blind. This means spending some time looking into economic conditions, market trends, demographic shifts, and anything else that can impact property values and investment.
Ways to Start Investing in Property as a Beginner
Understandably, breaking into the real estate investment industry can feel intimidating. If you are just starting out and still getting comfortable with how it all works, we’ve got a few ways to help you get started that are perhaps a little less daunting.
Live-in Flip — A live-in flip is what we like to call the lazy way to invest in real estate. That’s not to say that this strategy is bad, but simply that it’s an easy, entry-level way to get into property investment. A live-in flip is quite simple. Instead of buying a property as an investment, you initially buy it as your primary residence.
While you are living there, you can work on fixing it up, and then sell it for profit once you are ready to move out. This is a great option as you can more easily get funding through an FHA or VA loan, if eligible since you are initially purchasing the home for yourself.
House Hacking — This is another great option for new or young investors looking to break into the market. With house hacking, you would buy a multi-family home, such as a duplex or even a four-plex, and then live in one of the units while renting out the others. This gives you rental income for the mortgage which you can use to save up for another investment property or that you can turn around and put into the multifamily home if you eventually want to sell it.
Prehabbing — This strategy involves buying a property and only putting in minimal work. You would purchase a property, such as a residential home, make minor updates, and then turn around and sell it for a profit to a more experienced investor. That investor will then do the rest of the work needed to fully rehab the property.
Rental Properties — Rental properties are a very common and fairly easy method of getting into property investment. You simply invest in a property, whether it’s a single-family or multi-family home, an apartment complex, or even a commercial property, and then you rent it out to tenants. However, when you do this, you will need to decide whether you have the time to devote to being a landlord or if you want to hire a property manager. If you hire a property manager, you may need to have more funding upfront to afford to do so.
REIT Investing — REIT stands for real estate investment trust, which are companies that own and manage properties that produce income. This is a great option if you want to invest without directly owning the property. With a REIT, multiple people pool together their funds to buy a property, such as large complexes or even bulk single-family homes. Once those properties start earning an income, the REIT distributes the profits to those who invested.
REIGs — Similar to REITs, a real estate investment group (REIG) pools money from multiple investors to purchase larger properties. Think of them like small mutual funds. The REIG will buy the property or multiple properties and then allow investors to buy those properties through their company. The REIG manages the property and takes a percentage of the monthly income.
House Flipping — Unlike live-in flipping, traditional house flipping is when you buy a property that you have no intention of living in. You simply buy the property, rehab it, and then sell it for profit. When you do this, you generally want to flip the property as quickly as possible—around three to four months—to avoid losing any money.
How to Find Investment Properties
Now that we’ve addressed ways to invest in real estate, let’s take a look at how you can find properties to invest in. Thankfully, the internet makes real estate investing a lot easier these days. There are several options for finding investment properties online, including:
- MLS: The multiple listing service (MLS) is one of the most comprehensive databases for properties in the country. You can easily sort properties by region and criteria to find what you are looking for. When you search properties on sites like Zillow, Trulia, and Redfin, you are essentially searching the MLS.
- Craigslist: Craigslist is a website that works like the classifieds section in a newspaper. Here, you can find just about anything that someone is looking to sell, including property.
- Auctions: Online or in-person auctions are another great way to find and purchase property at a more affordable price. However, while you might be able to get a property at a reduced price this way, auctions will generally require you to have all of the money upfront in cash to complete the transaction.
- Real Estate Agent: If you have the money to spare, you can also go the more traditional route of hiring a real estate agent to help you find a property. This is a good option if you don’t yet have a lot of knowledge of the market. A real estate agent will know the ins and outs and have the expert knowledge to help you find the best property to suit your budget and needs.
Of course, word-of-mouth is also an option. When you are ready to start your hunt, let everyone you know to keep an eye out for any properties that fit your criteria. Multiple eyes searching for a property are better than one.
What to Look For in a Property
Before you start your hunt, it’s important to spend some time creating a list of criteria for what you want in a property. Just because you won’t be living there necessarily doesn’t mean you shouldn’t have a list of wants or demands. Having a list of criteria can help you narrow down your search and avoid wasting time on properties that simply don’t match what you are looking for.
The criteria can vary depending on your individual needs, but some good things to look for and consider when searching for an investment property include:
- Potential for long-term profit or appreciation potential
- Buying in an area with a good job market and population growth
- An enticing location or desirable neighborhood
- A property that is in good condition and won’t require too many expensive upgrades
- Low property taxes
- A property that will have low operating expenses or will be fairly easy to manage
If you are looking to buy a residential property, it’s also a good idea to look for a home that has features that renters or homeowners will find most desirable and valuable. For example, a property with a covered garage can significantly increase property value, which means you can likely sell or rent the property for more money.
Homes with a garage are said to recoup about 65% on average or add about $34,000 to a property’s resale value. This is because a garage offers a secure place to park, it adds more living space, boosts curb appeal, and provides extra storage.
In addition to a garage, properties that have a nice outdoor space, especially a well-designed backyard can also increase value. When you invest in a residential property, you can more easily entice buyers or renters by putting some time and effort into the outdoor spaces.
Some general landscaping can help, but if you want to wow people and be able to charge more, consider adding in these highly sought-after backyard features:
- Functional outdoor living spaces with furniture, dining sets, outdoor kitchens, lighting and temperature control, fire pits, and audio systems.
- Sustainable landscaping, such as hardscaping, plants that support local wildlife and ecosystems, meadowscaping, and watering systems that conserve water.
- Wellness features that foster better mental and physical well-being, such as hot tubs, pools, cold plunge tubs, tranquil water features, and spaces for outdoor yoga and meditation.
These are just a couple of examples to consider, but there are many other features you can add when fixing up a property to increase its value before renting or selling. It’s important to take your time and do your research to determine how to make the most of your rental property based on what is trending at the time.
Financing Your Real Estate Investment
For all the many great benefits that come from property investing, none of it would be possible without the right financing. While you don’t necessarily need a lot of money to get started, you will still need a solid strategy to ensure you have the capital you need to turn a profit and be successful.
There are a few different financing options that are available to you, including:
Home Equity Loans — If you already own a home, you could use that as a source of money to help finance your investment in another property. Many lenders or banks offer various options including home equity lines of credit and home equity installment loans.
Hard Money — When you obtain financing through a private business or even another individual, this is called hard money. However, it’s important to be cautious when obtaining loans from private lenders as you can find yourself in a tight spot if the money runs out.
Owner Financing — It may be possible for you to make payments to the owner of the property you are looking to purchase from instead of to a bank or a lender. If the property owner owns the home free and clear and no longer has an existing mortgage, they may be willing to fund the purchase and let you pay them back monthly.
Conventional Mortgage — Of course, you can always go the conventional route. This means opting for a standard mortgage loan where you will need to first make a cash-down payment. If you have the money to make that down payment, this is a good option as conventional mortgages generally offer lower interest rates.
Cash — If you are lucky enough to have a substantial amount of money in savings or perhaps even a family member who can lend you the money, you can avoid dealing with a lender or bank and simply pay for the entire property in cash.
FHA loans — FHA loans are only for those who intend to live in the property they are purchasing. So if you want to go this route, you will need to do a live-in flip or buy a multi-family property and live in one of the units while renting the others out. This is a good option if you don’t have enough for a down payment, as rates are generally lower.
Commercial Loans — If you are looking to buy a commercial property, commercial loans are another option. The standards for these types of loans can vary depending on the lender, but just know that fees and interest rates are typically higher.
Wrapping Up
Property investing is a great way to achieve financial growth and earn a passive or supplemental income when you are just getting started. Once you get more comfortable, you can even turn it into your main source of income and full-time career if you are successful enough. The key is to take your time and do your research. The more you know and the more you plan, the more likely you are to succeed in your endeavors.