There’s a strong case to be made for real estate investment. Compared, for instance, to bonds and stocks, the real estate industry does not go through bullish and bearish movements on the regular. That means you can take it easy knowing your money’s not at risk of going kaput in a blink of an eye.
Also, if you take the traditional route in real estate investment – meaning, property purchase – you get to have a tangible asset. For newbie investors, that’s a most welcome option because it allows for a physical testament to your hard work.
If those arguments are enough to convince you, by all means, pursue your plans of real estate investment. Just make sure that before doing so, you give yourself ample time to learn the market inside out. Here’s to get you started with that goal.
How to Earn from Real Estate?
There are different ways to make money from the real estate industry. Here, we cover the basics.
Real Estate Appreciation
Technically, this applies to all types of real estate properties. Whether you bought the house you live in with investment as your main motivation or you did solely for providing a roof over your family’s head, chances are your property’s value has appreciated over the years.
Real estate appreciation hinges on several factors. There’s market fluctuation, for starters. Perhaps one of the most relevant examples is how the COVID-19 pandemic helped people realize the value of being safely tucked at home. There’s also the growth prospect of the neighborhood you chose. Lastly, if you made architectural improvements to your home, that, too, will result in the property’s augmented value.
Cash Flow Income
This applies to investors who acquire real estate assets to rent out. Types of properties you could entrust to tenants include apartment buildings, storage units, retail buildings, office spaces, and rental houses. The monthly rent gives you a steady flow of passive income. You can also come up with specialized contracts where you agree on long-term tenant-ship at a more affordable cost.
While we mentioned passive income, do not be mistaken. Renting out real estate properties requires you to be hands-on. And, in most cases, you will be responsible for the properties’ upkeep, unless the tenant-ship contract declares otherwise.
Real Estate Professional Income
You can be a professional real estate investor. By that, we mean pursuing a career in the industry as a broker or agent. Here, you will work with people who are either selling or buying. For your services, you get a commission on top of your professional fee. This is a viable option for people interested in investing in the ever-growing real estate market without going the traditional route, which is property purchase.
Of course, you will need to have the relevant skills set to succeed in this career. Those should include expertise in communication and management.
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Picture this, you own a building with office spaces distributed among a pool of tenants. On top of rental income, you can maximize earnings from your investment with ancillary income, too. Think vending machines strategically situated throughout the building. You can sell things sleep-deprived office workers need such as soda, coffee, chocolates, and what-not.
Meanwhile, for rental apartments, you can introduce a laundry room or a barbershop. Since you have semi-captive customers, you can rest assured that your business within a business won’t tank.
Types of Real Estate Investment
If you want to join the real estate industry as a newbie investor, here are your options.
1. Residential Property
This is most applicable to first-time home buyers. Chances are if you’re in the market for a house, you’re looking for a place to live in. Reselling for profit is likely not among your priorities. But even then, you can rest assured that the property you acquire will appreciate and, therefore, you get to grow your money while having a safe place to live.
Alternatively, you can turn your home into an additional source of income via short-term rental. There’s Airbnb for that purpose. You can schedule dates where you’re free to rent out your house.
2. Rental Properties
You have an array of assets at your disposal if you’re considering becoming a rental property owner. Think single-family homes, condo units, vacation homes, and commercial real estate. You can even invest in luxury real estate and offer it to a discerning pool of prospective clients, who could also expand your professional network. Whichever route you take, be ready to take the helm of this business venture.
You buy this type of real estate property either to live in or sell. Either way, you hope to augment the asset’s value by fixing it up.
If you plan to sell a fixer-upper, you’re doing what is called house-flipping. And that’s a potentially lucrative business if done right.
Before getting into house-flipping, be mindful of expenses. On top of what you shell out for property acquisition, you will have to spend for the house’s repair. If your calculations show that after repair there’s no considerable profit margin to be made, look elsewhere.
4. Real Estate Investment Trusts
It takes guts to invest. That’s true regardless of where you choose to put your money. Now, if you’re not yet ready to invest in real estate via property acquisition, there’s a low-risk alternative you may consider. REITs.
Real estate investment trusts allow you to buy stocks from large real estate investment portfolios. It’s a relatively non-intimidating way to join the industry, where you’re not obliged to let go of huge sums of money. Your investment will earn depending on how the market moves.
5. Real Estate Crowdfunding
This is another way to participate in the real estate industry as an investor without property acquisition. You participate in crowdfunding efforts initiated by reliable real estate stakeholders. You can either sign up for debt or equity-based investment.
Debt-based investment means you’re basically a lender. You will get repayment plus interest. For equity-based investment, you earn a predetermined portion of whatever profit the investment yields over time. Either way, you get the opportunity to grow your money with little to no effort.
Things to Consider Before Investing in Real Estate
Before signing above the dotted line of a real estate investment contract, make sure to consider the following in earnest.
Define your objective. That will determine your investment options and strategies. Are you buying for self-use, or do you intend to lease? If you’re keen on reselling, for how long do you wish to hold onto the property you acquire? Selling short-term could mean quick profit. But compared to holding on to a property for a relatively long period, you get a smaller earning.
You want to acquire real estate property in an area that has growth potential, if not already the hub of lifestyle and commerce. This can spell profitability. A house that’s a short walk or a quick drive away from good schools, public transport, and commercial centers will always be sought-after. That means your property will earn you considerable profit should you decide to resell in the future.
Existing Property vs Pre-Selling
Decide with certainty which option appeals better to you. If you opt for the latter, research the developer. See what previous clients say about them and their projects. Make sure you buy from a company that will deliver on its promise. Keep in mind that it’s possible for pre-sold real estate properties to completely miss the mark in terms of target completion dates or client expectations. You don’t want to have that story.
Source of Income
It’s a waste of money if your acquired property suffers foreclosure because of failure to pay the mortgage. Plus, that will be an absolute downer.
So before acquiring a real estate asset, make sure you have enough money saved for contingencies. Ideally, the amount should cover at least six months’ worth of mortgage payment. That way, should you lose your job, you won’t have to defer payment. Also, it’s in your best interest to diversify your source of income—you could take advantage of freelance work on top of your regular job, especially if you have most of your weekends free.
Most new real estate investors will rely on bank financing. If that situation applies to you, you need to get your credit score in order. Banks will look at your credit history. If they see that you’re a responsible payer, they’ll approve your mortgage application.
Your mortgage plan should suit you well. If you require flexibility, there’s the adjustable-rate mortgage (ARM). If you’re more at ease with something standard, there’s the fixed-rate mortgage. Whichever you choose, mind the fine print. You do not want to be caught off guard by contract stipulations that are against your favor. Have an investment lawyer by your side if you can.
Summing It Up
Real estate investment is no rocket science. But it’s not a piece of cake either. If you want the best result, you have to put in the effort. Begin with learning everything you can about the industry. From the different ways you can earn from the market to the types of real estate properties at your disposal, you need to be in the know.
As they say, knowledge is power. And when your hard-earned money is on the line, the last thing you want to happen is getting into any kind of investment blind.