What do you need to know to start investing in real estate?
The answer is dependent on whether you are merely looking to purchase or sale one house or if you are trying to make your career in real estate.
Whatever you do, don’t try to learn everything about real estate in an instance, instead focus on a specific segment of real estate (commercial/residential/multi-family) and learn as much as you can about that portion of the market.
Too many folks don’t get involved in real estate because of fear or not believing they have the funds to invest.
Don’t let this hold you back as there is always money out there for a profitable deal.
With that being said, make sure to focus on one segment as real estate because if you try to dabble in all areas, you’ll never be able to recognize a great deal and will always find yourself behind your competition.
While it is true that some people have made quick riches from real estate, most folks do their homework and due diligence before committing their finance.
Real estate can be extremely profitable when people have the knowledge to make astute investments.
Calculating the amount of money you can expect to make on an investment property is never as simple as a difference between money in and money out.
While keeping a record of total buying costs, renovation costs, time for turnover, monthly mortgage payments, and staff overhead is essential to reaching a general idea of which investment property will get you the most profit, there are a number of other more subtle considerations to keep in mind.
The calculation of a net operating income for a property is essentially the income coming in minus the operating costs for holding onto and/or managing the property.
If this number ends up being negative it is called a net operating loss, a clear signal of a poor investment property. Net operating income is a great tool to use when determining whether to invest in a property.
Personally, I rely on net operating income more than any other figure.
A few tips about deducting tax if you decide to start investing in real estate
One way that your investment property can add to your income flow is by saving you some money come tax day.
Real estate investments are full of instances where your investments are completely tax-deductible.
From property taxes, to interest on loans, to even the amount of money you save from refinancing; all of these costs can be filed as deductible expenses.
Another way that real estate provides a tax shelter is through depreciation of your property. While your land will never depreciate, you can progressively depreciate a home and write off a fraction of that property cost at a steady rate each year until it is fully depreciated.
Capital appreciation entails a rise in the market value price of your property over time. Whatever the reason, whether the neighbourhood that your property is in becomes more desirable, or if the public schools in the area improve, a rise in market price is a good thing for you, especially when you decide to sell.
Capital appreciation is a figure that property flippers pay close attention to in particular since the guiding principle behind flipping a home is buying a property at rock bottom and putting just enough money in to get to it market value for the most profit.
Typically, prospective investors visit the properties, research neighbourhoods and pay close attention to the data provided in a comparative marketing analysis.
You will want to calculate the after repair value of the home and what you can expect to get for the property.
Remember, time of the year will also play a factor in what price you can expect for a home; spring and summer are the best seasons to sell a home.
Buying property with little or no down payment is an appealing prospect, but there are major pitfalls to this strategy.
Put simply, leverage is cash that the investor does not have on hand, but has access to, in order to acquire an asset.
Mortgages and home equity loans are ways investors can acquire investment properties with little or no cash.
Some real estate investors use non-bank financing as leverage to buy property.
Though leverage can increase the amount of property an investor can purchase – for example, leverage might help an investor buy two properties instead of one – savvy investors don’t use it without understanding the risks.
You must understand the risk before jumping into a deal, if you don’t understand the risk than don’t even think about doing the deal. Many investors went bankrupt in the crash of 2008 because they borrowed too much money and were not able to pay the loans back when they came due, so make sure you are aware of the risks.
Understanding the types of mortgages available and the benefits of each as well as the risks is also critical to your success in this business.
Investors typically must have 20 percent of a property’s sale price to qualify for an investor mortgage.
Investors should shop around to find mortgages that offer favourable interest rates and proceed with caution when it comes to zero down, adjustable rate and balloon investment mortgage types.
In addition, investors can take out rehab loans, but be aware interest rates on these will be much higher than most so be sure that you are able to complete the renovation quickly so you can sell the property without having to pay too much interest on your loan.
You will obviously want to decide if you want to flip properties or if you want to buy and hold properties.
You will want to assess your skills and temperament to decide if you’re cut out to be a landlord or a flipper. If you want to be a landlord, you will need to keep your investment properties occupied, you’ll need to be available 24 hours a day, 7 days a week to address problems as they arise.
Of course, you also have the option of hiring a property manager to handle the day-to-day business operations. Holding properties can build wealth but there is also quite a bit of stress that comes along with rental properties, that is not to say flipping properties is stress free, quite the opposite.
With the real estate market on the upswing and properties moving quickly, the present time seems like the perfect time to dip your feet into the market. Before you dive into flipping or buying and renting houses, make sure you understand the risks, rewards, ins and outs of real estate investing.
Remember, you always make your money on the buy side so do all you can to buy properties at the lowest possible price possible. My recommendation is to find those motivated sellers and when you find those folks, don’t hesitate as those properties will not last very long.
Every investment you make comes with a set of risks.
This is as true for real estate as anything else, anyone who promises you an investment without any risk is lying and you should run for the hills.
The real estate market is volatile; your money can be tied up in a property for a long while. Due to this inherent risk in the market, it is not advisable to engage in risky lending processes, which can lead you down a very slippery slope. Even if you secure proper financing, be aware of the risks and pitfalls that may occur.
Doing your homework on your first property is a long and arduous process, but it is a critical and unavoidable step if you plan on making money off of your investment. Miscalculating your net operating income can saddle you with a property that loses capital, in other words will cost you money.
Connect with reliable contractors and professionals to get accurate estimates on rehabilitation costs, and factor in unforeseen funds for those costs that are bound to turn up in the process, I recommend factoring in a 5 to 10% contingency reserve.
While the professionals make renovations look painfully effortless on TV, if you’ve ever been involved in a renovation at your own place, you know these things can be quite expensive and almost always don’t go as planned.
Picking a complete fixer upper as your first project with minimal experience can tie up your time and money for a long time which would hinder you from growing your business as quickly as you may like.
Buying a turn-key property may not be the best route for maximizing your profit either. While many renovations do end up being quite costly, a number of smart projects on the other hand can drastically increase the market price and rental price of your property.
At the end of the day, the most important part of property investment is to be prepared, do your calculations and don’t skip any steps.
If the numbers don’t work than walk away! If you have your priorities and finances in order, the process will be far less of an uphill battle.
If you want to start Investing in real estate you must understand that this is a business and if you are serious about being successful you need to put in the effort and do your homework.
Don’t take this business lightly and think it will be easy as nothing worthwhile ever is, at the same token, if you put in the time and do your research and make fiscally responsible decisions than you have a great opportunity to have a great deal of success.
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