A Guide to Real Estate Investing For Beginners
When you think of investing in real estate, you might think in terms of purchasing a house. That remains the most common way to invest whether you purchase a home as a residence or a vacation property. You have many other options though, too, which we explore in this article.
Start Investing In Real Estate
While buying a home once provided the only method of making real estate investments, you have many options today. You could:
Buy a house or property,
Investing in a real estate company by buying stock,
Purchase a building with other investors.
You have further options within those three options, mostly in the manner in which you make the purchase. You do have options though, and that means you can start investing today. That’s because some of the options let you purchase fractional shares, so you can start with little to no money.
1. Buying a Home or Property
Most people think of buying a home or property when they think of investing in real estate. This can include your residence, your vacation home, homes to rent, home to flip, or business buildings. Commercial properties provide lasting investments since you can rent the various units in the building to different tenants. If one needs to move out, you still earn from the others. Here’s how you make money with the various property purchases. You pick the best investment plan for you.
Residence
You typically purchase your home with a traditional mortgage. This type of real estate investment builds equity as you repay the mortgage. Once you build equity, you can borrow against it to obtain a home equity line of credit (HELOC) or a loan. You can typically use these funds in any way you like, but most people use them to improve their existing homes or to purchase another home. As you build equity, you also build your net worth. Once you have repaid the mortgage, the full value of your home contributes to your net worth.
Vacation Home
You can purchase a vacation home to also increase your net worth. Most vacation homes provide rental income as well. You can use a vacation home as an investment property. It lets you have a spot that you can call your own where you can go for a vacation without needing a hotel. This allows you to use the vacation property that you bought whenever you have not rented it to other vacationers. Some owners of vacation homes turn that home into their primary residence once they reach their 70s or older.
Rental properties
Purchasing rental properties lets you earn income on your real estate from the moment you purchase it. That lets you earn income while you pay the mortgage on it. Setting the rent at the appropriate point means it will completely cover the mortgage payment and utilities if your renters do not pay them. Many homes bundle the utilities into the home’s rental cost. Most HELOCs provide enough for a down payment to a full purchase, depending on how much equity you have earned.
House flipping
You purchase an older home or dilapidated structure, fix it up, then sell it for a profit. This sounds simple, but the people who do best at house flipping already have extensive do-it-yourself (DIY) experience or they own a construction firm. This lets them do the work themselves and save money on the repairs. Construction professionals also get discounts on materials and tools that let them save money on the construction project. Ideally, the initial purchase price provides significant savings from the home’s typical value. Once remodeled, the home sells for market price or a little more since it contains updates no other home in the area does.
Commercial properties
Instead of purchasing a house to live in or rent, you could purchase a commercial property. You rent space to businesses to use as offices. You could also purchase an industrial building that you could rent to a company in need of manufacturing space. Many startups cannot afford to purchase a building but can afford rental space.
In each of these situations, you take out a mortgage loan. You need to be able to qualify for the loan, so you need a good credit score, and you need to be able to quickly pay it back.
Investing through real estate hinges on being able to make a profit from the beginning. The quicker you get to the point of making money on the investment, the better.
2. Buying Stock In Real Estate
When you purchase stock in a real estate holdings group, you purchase stock, but that gets you invested in numerous buildings such as apartments, retail centers, office buildings, restaurants, etc. These companies typically trade on the New York Stock Exchange, for example, American Realty Investors.
Using this method lets you invest fractionally. You also do not need to be able to obtain a mortgage and you can invest in many properties.
You can purchase whole shares from brokerages like Charles Schwab or you can purchase fractional stock shares using its Schwab Stock Slices option. That means that you do not have to purchase a whole share of any stock because you can purchase part of it during one purchase and part of it another purchase.
3. Purchasing a Building with Other Investors
You may want to actually own the building, not just share in it. Perhaps you cannot afford to purchase it alone. You can go in on the building with other investors. Yes, this means you form a cartel of sorts, not like the Medellín Cartel though.
You just form a group of investors who mutually want to own the same building and want to buy it outright. Each of the investors typically owns the same percentage of the home or commercial property.
If you have ten investors, each will own ten percent. You split the profits the same way. Each person earns ten percent of the profits.
In most scenarios, a group of friends purchases these buildings, either to form a group house or to invest in an affordable way. They each may want to own equity but can’t afford a full home on their own. They typically have the cash saved to purchase their share and pooling the money lets them purchase the home outright. Since they have no mortgage, they establish instant equity. If the home is valued at $200,000, then each of them has $20,000 of equity. Put another way, they each add $20,000 to their net worth.
Investing in Real Estate
In the 21st century, you have many options when it comes to investing in real estate. You can choose to use just one option or combine them all to maximize your profits.
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