Just like any other forms of investment, investing in real estate entails a huge amount of risks, but gives a ridiculous amount of reward if done right. With the current upward trend direction real estate investing, people tend to blindly put all their money on real estate, thinking it will double, even triple their money in short amount of time. A common pitfall to not know the basics of real estate investing and will cost you a lot of fortune.
Fundrise.com published an article about the basics of investing in real estate, mentioning that real estate can be intimidating without the right starting point, but knowing the fundamentals will surely bring you a very long way to investing. Check out the article below:
How to Invest in Real Estate: The Basics
For many, real estate investing is uncharted territory. Unlike stocks and bonds — often called “standard assets” — real estate is considered an “alternative asset,” historically difficult to access and afford — until recently.
But just because investing in real estate may be an unfamiliar investment opportunity doesn’t mean that it should be avoided. When approached correctly, real estate can be a lucrative and reliable way to generate substantial returns. Real estate can create a consistent income stream while supplementing your portfolio with unique benefits, including appreciation potential, portfolio diversification, and tax advantages.
Despite those obvious upsides, real estate can seem intimidating without an obvious starting point. That doesn’t have to be the case, though. In this article, we discuss the fundamentals of real estate investing, including seven different ways that you can get started right away.
So, first things first: what is real estate investing?
What is Real Estate Investing?
Real estate investing is the purchase, ownership, lease, or sale of land and any structures on it for the purpose of earning money. Real estate generally breaks down into three categories: residential, commercial, and industrial.
• Residential real estate: Residential real estate consists of single family homes, multi-family homes, townhouses, condominiums, and multi-family homes that people use as a living space and not a working space. Homes that are larger than four units are considered commercial property. Some examples include freestanding homes, townhouses, and condominiums that occupants can own.
• Commercial real estate: Commercial real estate is property that is used for the purpose of business. Commercial real estate is classified as office, retail, land or multi-family. Some examples of commercial real estate properties include business offices (office), restaurants (retail), farmland (land), and large apartment buildings (multi-family).
• Industrial real estate: As the name suggests, these properties serve an industrial business purpose. Some examples include shipping or storage warehouses, factories, and power plants.
Ways to Invest in Real Estate
There are a multitude of ways to invest in real estate with any amount of money, time commitment, and investment horizon. Real estate investment options break down into two major categories: active and passive investments. Here are seven fundamental ways to invest in real estate with options ranging from intense, high-effort to hands-off low-effort.
Active Real Estate Investing (Doing it Yourself)
Active real estate investing requires a great deal of personal real estate knowledge and hands-on management or delegation of responsibilities. Active investors can work as real estate investors part-time or full-time, depending on the nature and number of their investment properties. They usually invest in properties with only one or a few owners, so they bear quite a bit of responsibility in ensuring the success of a property. Because of this, active real estate investors need real estate and financial acumen and negotiation skills to improve their cap rate and overall return on investment.
House-flipping is the most active, hands-on way to invest in real estate. In a house flip, an investor purchases a home, makes changes and renovations to improve its value on the market, and then sells it a higher price. House-flipping is generally short-term, because the longer the investor owns the home without leasing it to tenants, the more their expenses add up. This eats away at returns when they sell it. Investors can repair or renovate the home to increase its sale price or sell when its value in the housing market increases.
If you watch HGTV, then you have probably watched a house get transformed from rags to riches in under 30 minutes and sold for a sizeable profit by house-flipping pros. In these shows, house-flippers buy a home that they believe to be underpriced, add value through renovations — such as replacing countertops or flooring, or tearing down walls to change floor plans — and then sell the home at a higher price to turn a profit.
While house-flipping is exciting, it also requires deep financial and real estate knowledge to ensure that you can make over the home within time and budget constraints to ensure a profit in the housing market when the home is sold. The success — and the financial burden — of a house flip falls entirely on the investor. You need enough cash for a down payment and/or good enough credit to secure a home loan in order to buy a property before another flipper does. It’s a high-pressure and high-stakes real estate investment that makes for great TV, but a good investment opportunity only for certain knowledgeable investors. Click here to read the rest of the post…
It is very important not to ignore the fundamentals of real estate investing. As a matter of fact, it’s the most vital information that will bring you to greater heights. I have seen a lot of people joining the bandwagon of investing thinking that earning a profit is a piece of cake but turns out the exact opposite, burning their capitals before they can even act.
There are actually lots of ways to navigate the challenges in real estate investment. Pranav Sethuraman wrote an article in The Investor on how to accept and embrace these obstacles. Here’s how:
Real Estate Investment – Top 4 Challenges To Navigate
Despite a testing environment, investors and fund managers still value real estate as a strong performer.
However, it is not without its challenges.
While Preqin’s 2018 Global Real Estate Report showed the net rolling return from real estate funds was positive over 2017, it lags behind private equity, private debt and infrastructure.
In this environment, both fund managers and investors are now primarily concerned with continuing to deliver good returns from real estate.
Here’s a look at the top four real estate challenges investors face:
Valuations remain the key issue facing the industry, for the second consecutive year. In December 2017 half of the investors interviewed by Preqin predicted market expansion will continue, although half of institutional investors felt the market has peaked.
“I don’t necessarily think there’s a ‘disconnect’ here,” says Pranav Sethuraman from JLL’s Global Capital Markets Research team. “While valuations are a factor, investors have been more disciplined this time around than they were in previous cycles.”
“We should remember that, at the peak of the last cycle – and just prior to the GFC – cap rates were below risk-free rates in the United States. But now, all sectors maintain significant spreads to government bonds at the national level, despite the significant yield compression we have seen recently.
Having said that, investors still have a greater focus on occupier fundamentals as income growth becomes the main driver of returns rather than capital growth.”
Investors have also become more selective and are quite measured in their underwriting, in particular for prime assets in gateway markets, he said.
Both performance and deal flow are not as prominent issues at the end of 2017 as they have been previously, although both are impacted by current market conditions, Preqin says. Many institutions are adjusting their portfolios based on their perception of the market cycle.
However, the real question is whether the real estate’s performance trend is sustainable.
The industry’s strong performance in recent years is not only due to a macroeconomic recovery and rejuvenated fundamentals, said Sethuraman, but also because of “the wave of capital that came into the sector as investors ‘rotated’ out of fixed income – due to low interest rates and the widespread availability of credit.”
In this environment, real estate provided diversification as well as relatively higher returns from fixed income.
However, now that Central Banks around the world have indicated that the unconventional policy measures are winding down and interest rates are rising again, real estate investors stand to see lower risk-adjusted returns, explained Sethuraman. “While income growth prospects are slowing in a number of markets, economic fundamentals will continue to strengthen.
Now you know how to at least face and overcome these challenges to successful real estate investing and start earning money. The next step is to apply the basics and advance knowledge together with the steps to minimize the risks – resulting in more profits and fewer losses. Gus Ross published an article in BiggerPockets investing in affordable housing for the long haul. Learn how he does it and become very successful:
Why I’m Investing in Affordable Housing for the Long Haul
When you get started in real estate, it is best to choose a focus. That’s what I did. I decided I wanted to help working people in my community live in nice, affordable homes. It felt economically smart. Professionally, it filled me with pride. My chosen path is to buy affordable housing (grade C to B properties) with value-add components.
I planned my strategy to go this route based on greater economic conditions. I will continue to invest in this sector for the foreseeable future. As an advocate for buying affordable housing, I’ll list the factors that weighed into my decision.
Income Disparity and the Wealth Gap will Continue to Grow
Unemployment is low, but median income has not increased. The gap between the wealthiest and the less fortunate in society continues to widen. The middle class is hurting. The population in this segment is being squeezed out—either elevating to the upper class or moving closer to the poverty line. Logic says the majority of this segment will experience a trend in the direction of affordable housing. Demand for affordable housing is predicted to increase under these conditions.
There is Limited Supply in the Market
Affordable housing is in tight supply with no signs of that supply increasing. Simple supply and demand dictates that tight supply and increased demand ultimately lead to increased rents. Assets generally become more valuable under those conditions. Increasing rents should be done responsibly. There is a fine balance between raising rents to keep pace with the cost of living and inflation and becoming predatory. There is no circumstance where becoming predatory with rental prices is justified.
New Construction of Affordable Housing isn’t Cost Effective
New construction is going up in major cities across the country. The caveat is that the constuction taking place is not for entry-level homes and apartments. The bulk of what is being built is catered to grade B+/A properties with luxury finishes and amenities. Generally, these are backed by institutional investors with vast amounts of capital to deploy. Their calculations lead them to the luxury segment in major metropolitan areas. It simply is not economically feasible or attractive enough for builders to enter the affordable-housing arena. Despite all of this, there still remains a predicted increase in demand for workforces.
Recession-Resistant Demand for Rents is Appealing
Markets are cyclical. Real estate is local, but it’s also cyclical. Economic indicators suggest we are closer to the top of a cycle than the bottom of one. If there is ultimately a downturn (and at some point there inevitably will be), affordable housing demand should remain strong. Predicting the future is a fool’s errand, but in a downturn, it is logical to assume that the asset class most likely to experience strain is the one most exposed to price fluctuation. These areas tend to be coastal metropolitan cities with luxury properties.
There are always be ups and downs in real estate investing due to several factors affecting the rise and fall of its market price. Equipped with the right knowledge, risk tolerance, and the skills to overcome the challenges that may come your way, you’re absolutely in good hands. Now if you’re looking for some capital to start your journey to investing and decided to sell your homes in Baltimore, Dependable Homebuyers will help sell your homes fast and less hassle. Visit https://www.dependablehomebuyers.com/sell-your-house/ and we’re glad to help you.
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