There are many ways you can invest your money, but there is no financial investment strategy quite like real estate investing.
Investing in real estate is not just about making money; it’s an adventure. If you like variety, adventure and risk all wrapped into one, then real estate investing might be for you.
Understanding how to invest in real estate is vital not just to maximize your chances of success when you become a real estate investor, but you want to approach real estate investing in a way that best suits you and your objectives.
Real estate investing has many different facets. It’s impossible to explain how to invest in real estate and become a real estate investor in a single post.
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My goal for this post is to cover some of the main themes associated with real estate investing, so that you at least have a foundation to start from.
Consider your risk tolerance
Real estate investing, like any other form of investing, comes with risk. Big surprise, right?
Whether you plan to wholesale, flip or rent, contracts can fall through, renovation costs can get out of control, tenants can stop paying rent, properties are vulnerable to vandalism and weather-related damage and the list goes on.
I recommend taking some time to consider whether you’re willing to take on the risks that come with investing real estate.
Unlike investing in the stock market, where buying and selling is relatively easy, getting rid of a bad real estate purchase may take months.
While real estate investing is a thrilling pursuit, it’s a serious time and financial commitment that shouldn’t be taken lightly.
Select your business structure
Part of learning how to invest in real estate has to do with figuring out how to best structure your business. I strongly suggest you work with a CPA from day one and line up a solid bookkeeper.
Real estate bookkeeping is more complex than just tracking income and expenses, so make sure you work with a bookkeeper who understands enough about real estate depreciation, capital gains and other nuances of real estate to ensure your books stay in order.
While you certainly want to seek advice from a CPA on the business structure that is best for you, the most common business structures include the following:
- Sole Proprietorships
- S Corporations
- Limited Liability Company (LLC)
You’ll want to choose a business structure that offers liability protection as well as a structure that is most advantageous from a tax perspective.
In addition to taxes and liability, another reason you should strongly consider setting up a business entity, with its own FEIN, is because you can apply for debt through your business entity and likely keep these debt obligations from appearing on your personal credit report.
Having business debt appear on your personal credit report can make it much more difficult for you to qualify for personal credit such as a mortgage for your primary residence, auto loans, personal credit cards, etc.
While there’s no guarantee that debt incurred under your business entity won’t show up on your personal credit report, according to credit.com, “…As standard practice, however, loans obtained strictly for business purposes don’t appear on consumer credit reports…”
Determine your level of involvement
Putting your money in real estate is not a “set it and leave it” type investment. It will require involvement on your part.
The level of involvement will depend on a number of factors, such as the amount of real estate in your portfolio, the kind of property you invest in and how much responsibility you decide to take on yourself.
In my personal experience, I don’t feel it’s wise to wholly entrust your real estate business to others like general contractors & property managers. However, whatever amount of your business you choose to delegate to others, just make sure you consider the cost of doing so.
Choose your strategy
Strategy is a huge part of knowing how to invest in real estate. Choosing the right strategy for you is vital as different real estate investment strategies will require different amounts of capital, different levels of time commitment and varying levels of risk.
There are three main real estate investing strategies: buy and flip, buy and hold & wholesaling. Let’s look at each one in a little more detail.
Buy & Flip
With shows like “Fixer Upper” and “Property Brothers” glamorizing and fueling the house flipping movement, this real estate investment strategy, doesn’t need an introduction. What I will say, though, is that you don’t necessarily need to renovate a property in order to flip it.
Regardless whether you renovate or not, though, with a buy and flip strategy, your goal is to sell as quickly as possible for maximum profit.
Check out my house flipping section for more tips and trick on flipping houses successfully.
Buy & Hold
A buy and hold strategy is for those who wish to build a real estate portfolio and keep properties long-term as rentals.
Some investors prefer to purchase move-in ready properties to avoid the hassle of renovating and delaying cash-flow, while others are keen on buying distressed properties (fixer-uppers) at a discount and renovating themselves to maximize equity.
In real estate wholesaling, you get paid an assignment fee to bring a buyer to a seller. Unlike active real estate listings, real estate wholesalers primarily work with off-market properties owned by motivated sellers who want or need to sell quickly.
The end buyers are typically real estate investors who pay with cash. Successful real estate wholesalers usually have relationships with property investors actively looking to pay cash for investment properties. Direct mail is usually the form of marketing wholesalers use to find sellers.
What makes real estate wholesaling unique is that the wholesaler is usually not the actual buyer even though their name is usually on the purchase agreement.
At closing, the contract is assigned to the end buyer from the wholesaler, and the difference between the amount the buyer paid and the amount the seller sold for, is what the wholesaler makes as a profit.
Financing for real estate investors
There are different ways financing can be used in real estate investing. You can get financing to purchase your investment property, renovate your investment or cash out of the equity in your investment property.
If you decide to acquire your investment properties with a bank loan, this is called a purchase mortgage. With a purchase mortgage, most lenders will require 15%-20% down.
If your strategy is acquiring fixer uppers, you’ll need money to repair them. If you don’t have cash to pay for the renovation work, you might look into a HomeStyle loan or getting a personal loan or line of credit from one of the following companies:
With a cash-out refinance, a lender is loaning you money against the equity of a property, and after other liens are paid off (if there are any), you get what’s left in cash.
For instance, let’s say you have a property valued at $100K, and you have a mortgage on the property with a loan balance of $50K.
A bank is willing to do a cash-out refinance up to 80% of the property’s value. So, here’s the math: $100K x .80 = $80,000 (maximum bank will loan) – $50K (pay off existing mortgage) = $30,000 cash paid to you.
Now there would be other fees associated with financing such as title work, appraisal, etc. but you get the point.
Cash-out refinancing can be a great way to get capital to fund your real estate investing pursuits.
Check out the financing section of this blog, for more on real estate financing.
Regardless if you’re planning on flipping houses or renting them out, at some point, you’ll likely get into the renovation side of property investing.
Property renovation is part art and part science that can really only be learned by doing it. If you’re thinking of renovating properties, I strongly suggest you start with a single-family property, forego a general contractor (if possible) and be very hands-on during the renovation process. You want to keep your costs to an absolute minimum and learn as much as possible.
Check out the section on renovating properties for tips and tricks.
If holding properties long-term and building a real estate portfolio is your main strategy, then understanding the property management side of the business is obviously vital. When it comes to managing properties, you’ve got two options: self-manage or hire a property manager.
Based on personal experience, I highly recommend managing your own rentals. I realize there may be times, when hiring a property manager is unavoidable, but avoid it all costs – at least in the beginning.
There are two main reasons for this: 1) it’s best for you to learn the business you’re investing in and 2) leaving your business in the hands of a property manager is very risky.
In many cases, when you sign your properties over to a property manager, you’ll just be a number. These guys often have many clients, and, unless they’re managing a lot of properties for you, you won’t get priority.
This could result in extended vacancies, slow response times to maintenance requests and you being left in dark.
Manage your properties yourself. If you get to a point, where you need to hire a property manager, fine. However, when you’re just starting out, I encourage you to do it solo.
Real estate investing is riveting, at least IMO. It’s an adventure, it’s risky, it can be profitable and it’s a blast (sometimes).
In this post, I’ve provided you with a foundation to get you started. Do lots and lots of research. Decide on the kind of real estate investor you want to be. Keep coming back to this blog for more great tips and tricks to help you succeed. Oh, and be sure to subscribe. All the best in your journey.