Real Estate Investing 101 – Ten Steps to Get Started!
Real estate investing can be pretty simple when you understand the fundamentals of investment, economics, and risk. You purchase properties, avoid bankruptcy, and earn money through rent to buy even more properties.
Real estate investing aims to put your money to work today to have more money in the future. The profit or return you get on your investments must be sufficient to cover both the risk and the taxes you pay. Utilities, maintenance, and insurance are other costs associated with real estate ownership.
Many things go into becoming successful in real estate investing. It’s not as easy as some people make it out to be. There are a lot of steps you need to take to ensure your success. No one-size-fits approach to real estate investing, but there are a few key steps that will help you get started on the way to success.
You need to know everything there is to know about the market you’re investing in. There’s no question that real estate is a sound investment.
Over the long term, property values tend to go up. And for those who are patient and strategic in their investing, there are opportunities to earn healthy returns. But becoming a successful real estate investor isn’t easy. It takes hard work, dedication, and a lot of research.
What Is Real Estate Exactly?
Real estate is divided into the land and improvements (a single-family house built on the lot). There are also physical and economic characteristics that distinguish real estate from other asset classes. Let’s look at some features of real estate:
- It is One-of-a-kind; no two pieces of real estate are precisely alike. That makes each property unique.
- Real estate is scarce. The land is limited in supply, and only you can build so many structures on a single plot of land.
- Improvements to the land can increase its value by generating more income or converting it to higher and better use.
- The nature of real estate is permanent. Once infrastructure such as houses, hotels, residential buildings, sidewalks, and streets are built, they are difficult to replace and cannot be relocated. The immobility factor of properties decides the value of the properties.
The previous factor leads us to another aspect of real estate properties: the location. The preferences of users such as good neighborhoods and school districts, population and job growth, and business-friendly governments can influence real estate supply and demand.
Why Should You Invest in Real Estate?
There are numerous advantages to investing in real estate. The benefits of investing in real estate include predictable cash flow, excellent returns, tax advantages, and the ability to leverage real estate to build wealth.
Are you thinking about making a real estate investment? Here’s what you need to know about real estate benefits and why it’s a good investment.
- Appreciation
Real estate investors profit from rental income, property-based business activity, and appreciation. Real estate values rise over time, and with a good investment, you can benefit when it comes time to sell. Rents also tend to increase over time, resulting in increased cash flow.
- Create Wealth and Equity
You accumulate equity as you pay down a mortgage—an asset that increases your net worth. And as your equity grows, you’ll have more leverage to buy more properties, increasing your cash flow and wealth even more.
- Diversification of the Portfolio
Another advantage of investing in real estate is the potential for variety. Real estate has a low – and sometimes negative – correlation with other major asset classes. As a result, including real estate in a portfolio of diversified assets may reduce portfolio instability and increase returns per unit of risk.
- Hedge Against Inflation
The ability of the real estate to hedge inflation stems from the positive relationship between GDP growth and demand for real estate. Rents rise as economies grow and the number of people seeking housing increases. This, in turn, leads to increased capital values. Thus, capital is preserved by real estate by bypassing inflationary pressures on tenants and incorporating through capital appreciation.
10 Steps to Get Started With Real Estate Investing
Over the years, it has consistently outperformed stocks, bonds, and other traditional investment vehicles. But like any other investment, there are risks involved.
If you’re looking to get into the real estate market, you may be wondering where to start. When investing in real estate, there are many things to think about, and determining what is most important can be difficult. That’s why we’ve put together this guide on the steps to real estate investing success.
We’ll start by talking about what you need to do before you even start looking for properties. This includes getting your finances in order. There’s a lot of information out there on real estate investing. Make sure you understand the basics before you start investing.
By following these steps, you’ll be well on your way to achieving real estate investing success!
- Build-Up Savings and Clean Up Credit
Some claim that you can start a real estate investment career with no money; however, this seems a little far-fetched. Experience has shown that real estate investors with cash and good credit have the best opportunities and the most options. You should not hold it on for any longer; get started on this step right away.
Sellers are unlikely to provide financing to a buyer with a poor credit history because buying real estate almost always necessitates borrowing funds. Check your credit report to ensure it is as accurate and positive as possible. Your credit score is essential for qualifying for real estate loans and negotiating the best loan terms.
Try and obtain a copy of your credit report as soon as possible and make any necessary corrections! Please ensure everything about any disputes that appear on your credit report. If legitimate delinquent balances appear, create payment plans and send written updates to the credit reporting firm demonstrating that the balance was paid or otherwise resolved with satisfaction.
As a new real estate investor, you should look for ways to supplement your income while maintaining or, ideally, reducing your current expenses. Even if you find properties where the seller provides all financing, you won’t be able to avoid certain out-of-pocket costs or the opportunity cost of lost income.
Most people generate wealth and achieve a higher standard of living by sacrificing and living below their means. To avoid such risks, you better save up. Preparing a clean credit score and saving enough is the first step in preparing for real estate investment.
- Buy property in the Way of Progress
Locate properties in areas that will continue to improve due to new investment and economic activity. Because you cannot physically relocate your property, analyzing the location and its future potential is critical. Following the identification of the best cities or neighborhoods, two types of underperforming real estate assets are typically sought:
- Those rental properties are tired and worn out, with many unfinished businesses.
- Those who are physically fit but are poorly managed
Your unique set of skills and resources will determine your preference. Top investors prefer well-located and structurally sound properties but have simply underperformed due to poor management. They can use their property management skills and expertise to upgrade the properties and attract new tenants.
Properties that have not been properly maintained cosmetically or where the current owner or manager has not kept rents at market levels are particularly appealing. The location is the most important factor in determining the value of a property, so conduct extensive research on the neighborhood and its development.
- Purchase the Best Property at the Lowest Possible Price
Always buy real estate at the best price possible. Although this strategy is simple and intuitive, it may be easier said than done. You can do it if you follow a few simple rules.
Most of your real estate purchases should be classified as fixer-uppers and priced accordingly. You want to buy properties that provide specific challenges that match your skills to use your abilities to upgrade and increase the value of the property.
A “Get-Rich-Right” real estate investor will not purchase a new or fully renovated property unless it is in a prime location or in the path of development. Because the current owner has already accumulated the value-added or appreciation, these properties may be suitable investments. You’re still only getting market rent and increases in value.
Purchasing a new or fully renovated property, on the other hand, can be a good investment in some cases. For example, an investment property at the start of an oceanfront community or in a one-of-a-kind location that cannot be replicated may produce excellent long-term results. Because the developer must pre-sell a unit in the first phase of new development, the pricing in the first phase is frequently favorable.
Discipline and the ability to predict the potential for appreciation are two essential characteristics of successful real estate investors. You don’t want to lower your purchase price to cover the cost of repairs because the value you add to the property should far outweigh your out-of-pocket expenses. As a result, it is critical to consider these factors when purchasing a home.
- Renovate Property the Right Way
The strategy entails locating properties where development is likely to occur and then renovating them to increase cash flow and value. Spending too much money on physical enhancements, on the other hand, is not a good idea. Only make improvements or renovations to increase the property’s desirability to your target market.
Your property is a rental unit, not your residence. You may want to install high-quality countertops and appliances in your home. Still, you will not get a good return on your investment if you over-improve your Rental Property.
Ownership pride is important, but you’re running a business. Spending too much money on one property will limit your ability to save for the next down payment. Build your portfolio and achieve financial success.
Although doing the work yourself is usually less expensive, consider the time and experience factors. It makes no sense to keep a rental property off the market for weeks in an attempt to save that a contractor would charge. A good contractor will almost certainly do a better job than you.
Whether you are willing to work yourself or hire a contractor, all necessary permits should be obtained. Make sure all improvements are following applicable building and occupancy codes. You will be in charge of obtaining the necessary permits and inspections. But make sure your agreement clearly states who is in charge of arranging all required inspections.
You can get three identical bids from licensed, competent professionals if you use contractors. However, suppose you already know you have a competitive offer. If a contractor can reduce their bid by 10%, you can speed up the process. Yours most frequently used contractors may be aware of your routine and overprice their proposals by 10% or more. With practice, you will be able to determine what constitutes a fair bid for all types of work that you routinely bid out.
Improvements should allow you to raise your rent or increase the value of your property. It should be at a rate that is twice the cost of the improvements. Most inexperienced real estate investors prefer fixer-upper properties that require only minor repairs. Painting, landscaping, and little maintenance produce excellent results for relatively low costs. Most real estate investors have honed their skills by maintaining and upgrading their own homes, so these simple repairs are also within their skill set.
- Keep Updated on Market Rents
One of the most difficult challenges for most landlords is determining the appropriate rent to charge tenants for newly renovated rental units. This aspect of property ownership and management necessitates research and planning. Every property is unique, but a market survey of comparable properties will provide you with the most accurate estimate of the market value of your renovated property.
It is recommended that you keep the rent level for existing long-term tenants slightly below the total market rent. It shows appreciation and encourages them to stay. A vacancy means a difficult-to-recover rent loss, as well as the additional expense of advertising and preparing the rental property for the next tenant.
The results of your rental survey will tell you whether you are asking too much or if there is still room for negotiation in your rents. As a result, once you’ve purchased and upgraded your rental property, the new rental rate structure to work by quickly renting out your vacant leasing space. You can make similar improvements for existing tenants and raise their rents to comparable levels after nesting new tenants paying higher rents.
One strategy is to renovate units upon turnover and provide an excellent, financially qualified, and stable existing tenant with the option of transferring to the upgraded unit at a higher rent. The unit they are leaving can then be renovated. This process is repeated until all rental units in your property have been fully occupied.
- Recover Renovation Money
Keeping your capital active is one of the most important aspects of the “Get-Rich-Right” strategy. Another is to use leverage wisely while retaining enough equity to weather the ups and downs of real estate cycles and local economic challenges.
You had to spend money in order to purchase and renovate your rental property. Nonetheless, you increased your income, which added value. You can now refinance the property and cover your initial acquisition and renovation costs with the increased value.
You should avoid overborrowing and leveraging your real estate investments. You also don’t want to be over cautious and underestimate your cash needs. Because refinancing is so expensive, you should only refinance the property every few years.
Suppose you need money right away to deal with an unexpected problem. Short-term funds can be prohibitively expensive in this case. To cover reserves, borrow additional funds, or have an available untapped line of credit (some lenders offer at no cost to their best customers).
Before pursuing investment real estate, you should always own your own home and have (and maintain) a healthy cushion of equity. The lessons of a falling real estate market are difficult for all investors to learn, but they are completely devastating for the few who borrow too much against their own homes.
It’s essential to remember about the real estate markets cycle. You don’t want to be too aggressive and discover that your real estate empire has crumbled to the point where you are unable to even afford to rent one of your former apartments!
Real estate speculators and real estate investors are not the same things. Overleverage can be very tempting in a strong real estate market, but don’t get carried away. Don’t use all of your home equity to purchase an investment property.
- Recast the Property to Better Tenants
Repositioning your property with new, more financially qualified tenants is a good way to increase the income and value of your newly renovated investment. As a result, consider upgrading your tenants by marketing to a different tenant profile and re-leasing the property.
Often, your renovation efforts will evict your current tenant anyway. Still, you probably don’t want to renew their leases even if you can work around them.
The current tenants may have been the reason the previous owner decided to sell the property (which is in desperate need of a complete renovation)! Such tenants are unlikely to change their ways in an instant. They will continue to use and abuse the property, oblivious to your investment.
A new, more financially qualified tenant is one of the best ways to increase the income and value of your newly renovated real estate investment. As a result, think about upgrading your tenants by marketing to a different tenant profile and re-leasing the property.
Increase the security deposit as long as you stay within the legal maximum to improve cash flow stability and reduce the likelihood of problems with your tenants. However, keep in mind that market conditions typically limit the amount you can charge for the security deposit.
Renew the lease of an irresponsible tenant who has ruined the current flooring. It is preferable to find a new tenant if you need to replace the flooring or carpeting in a rental unit. Similarly, you don’t want to keep a tenant who cannot pay the higher rent that your fully renovated property now commands.
- Hire an Outstanding Property Manager
Superior management distinguishes between average and excellent long-term returns. You must retain tenants and minimize turnover after renovating and repositioning a property with new tenants at higher rents. You can also increase net operating income by controlling expenses effectively and efficiently.
The homeowner must consistently implement their long-term investment strategy by operating and managing the property as refinancing or preparing the property for sale.
Your ideal buyer will be someone who wants to buy a property that is in good working order and does not require renovations or tenant changes for personal use, as a prime rental unit, or as a coupon clipping investment (steady, highly predictable stream of income like bond investors receive).
Properties with a proven track record of high Net Operating Income will be valued more highly by appraisers. Keep in mind that to maximize value, you must have consistent income from market-rate rents, a stable tenancy, and reasonable expenses. However, don’t skimp on maintenance at the risk of losing curb appeal.
- Refinance or Sell and Wait
Despite the decline in property values in most areas, many rental property owners discover a significant amount of equity tied up in their property due to the appreciation across much of the country over the decades. Having some equity in the property is beneficial and keeps you from floundering if the local real estate economy suffers. Having too much equity simply sitting in a property reduces your overall returns.
This strategy suggests that you use the equity in your current properties to increase your real estate holdings by investing in additional properties to diversify your overall risk. You can use that equity to generate the cash you require in two ways. Refinance your rental property conservatively or sell the real estate investment in a tax-deferred exchange.
Market conditions determine the best option. It is recommended that you refinance your stabilized long-term properties when favorable financing terms become available. You can use the proceeds to replenish your capital account, allowing you to invest in more rental real estate or make other investments.
The best part is that you can withdraw the cash equity from your properties tax-free. Borrowing in moderation is not dangerous.
You can also sell the property to keep your equity working for you. Aside from excess or lazy equity, some owners prefer the tax-deferred exchange option. It allows them to make better depreciation to shelter their real estate income. Any competent accountant or tax advisor can help you choose between refinancing and a tax-deferred exchange.
- Integrate Holdings Into Larger Properties
Fortunately, many real estate investors can grasp the concepts of purchasing and renovating a rental property. However, they frequently become so successful that their real estate empire takes over their lives.
Although having a diverse portfolio of rental properties has some inherent benefits. There will come a time when your extensive real estate holdings will create management burdens. Most long-term real estate investors discover that their management responsibilities and duties no longer correspond to the lifestyle that they can afford. They frequently decide to simplify their lives by hiring professional property managers to deal with the four Ts: tenants, turnover, toilets, and trash.
However, finding and paying for a qualified property manager for a diverse portfolio of small rental properties is difficult and expensive. The potential efficiencies of property management are reduced when you have many single-family or condo or small rental properties spread across a large geographic area.
Instead, consider a tax-deferred exchange to consolidate your real estate holdings into one or a few more significant properties that they can manage professionally. You will continue to have the benefits of real estate ownership without dealing with the day-to-day management challenges.
Types of Real Estate Properties You Can Invest in
There is also a great increase in demand for real estate properties above the supply in the current market, making now an excellent time to begin your investments. However, you must first understand the various types of real estate investment available before beginning. Depending on their needs and goals, these different property types can benefit multiple investors.
- Commercial Real Estate
Commercial real estate is any property primarily used to house business operations and services. Typical examples are apartment complexes, stores, gas stations, hotels, hospitals, parking garages, and other commercial properties.
Typically, investors in this category are business owners who want to establish their brand in a specific location or create a working environment for their employees. While sales and transactions are essential in creating cash flow, most returns come from the property’s rental profit.
- Residential Real Estate
Any property used for housing is referred to as a residential real estate. These include single-family homes, cooperatives, duplexes, and condos where the investor or a party renting the property resides. This type is ideal if you want to start a family or build your dream home.
Condos, for example, continue to be in high demand due to their primary location. These properties are popular due to their proximity to essential services such as malls, hospitals, and stores.
- Industrial Real Estate
All lands, buildings, and other properties that accommodate industrial-sized activities are referred to as an industrial real estate. Production, assembly, warehousing, manufacturing, research, and distribution of goods and products are examples of these activities.
Zoning laws typically specify which areas developers can designate of a city for real estate properties to avoid disrupting residential and other nearby regions during their operations. The return on this investment is affected by various factors, including the type of property you select.
- Raw Land
Undeveloped or agricultural land, such as farms, ranches, and timberlands, is commonly referred to as raw land. Many investors consider these properties suitable investments because they are tangible and have limited resources. Furthermore, these properties save you the trouble of running renovations and repairs.
Compared to purchasing a residential property or a warehouse, raw land can be a significantly less expensive investment that does not require property insurance. However, one significant disadvantage is that it cannot generate income independently.
- REITs
A real estate investment trust (REIT) manages or owns income-producing commercial properties. These companies can be invested in through an exchange-traded or a mutual fund.
REITs are one of the assets that outperform in the real estate market, resulting in higher returns on your investment. There are also various REITs to choose from to better leverage your portfolio, including retail, office, healthcare, residential, and mortgage REITs.
Because of the potential returns, residential real estate is a good investment. For example, in the Philippines, a real estate company will typically have a pre-selling period during which you can purchase properties at a lower price. Investors take advantage of this opportunity to buy and sell them later when their market value rises.
Real estate investing can be pretty simple when you understand the fundamentals of investment, economics, and risk. You purchase properties, avoid bankruptcy, and earn money through rent to buy even more properties.
Real estate is like a big sea with endless possibilities and opportunities. You can only reap the benefits when you learn to swim and dive into the waters. You can begin by taking small steps and learning more about it. You shouldn’t fear the market even before tackling the real deal; go out there and learn. We hope that this article has been helpful to you.
