The Dream
Most of us are not going to get rich simply from working at a job. If we are looking to reach financial independence, we have to create some source of passive income. An income that isn’t dependent on a certain amount per hour. Smart profitable real estate investing can bring in big returns and grow your net worth.
Do you want to get going in real estate, but you’re not sure where to start?
There are a few fundamentals you need to know before you get started, but you may have no idea where or how to start.
To successfully get started, you must first do your due diligence to ensure that you understand your local market and to decide if it will be profitable to invest in.
The Risk
Real estate can be risky if you don’t know what you’re doing. There is nothing worse than owning a house and having tenants that are behind in their rent. Or heaven forbid… the tenants might be cooking meth in your rental and you might be forced by law to destroy the property.
Or… you just closed on a property and discovered some expensive hidden problems or unfortunate things about the neighborhood.
There are a lot of things that can and will go wrong in real estate.
Let’s face it… real estate can be quite risky, especially if you are a beginner or one without much experience.
Types of Real Estate Investments
At a basic level, real estate investing is a method of making money by owning, renting or flipping some type of real estate.
The following are the main types of real estate.
- Vacant Land
- Single Family Homes, Condos and Town-homes
- Small Multifamily Properties
- Large Multifamily Properties
- Commercial Real Estate
- Mobile Homes
- Notes (real estate Paper or Mortgages)
If you’re new at this, I recommend that you start with residential real estate (single family homes, condos or town-homes). Don’t get overwhelmed by taking on too much in the beginning. Keep it simple.
Regardless of the type of property you’re thinking about investing in, you can profit from real estate in different four ways:
1 - Rental Income
As an owner of a single-family home, you may generate rental income by renting out all or part of your property to a tenant. Many people investing in real estate choose to rent out a property to a tenant because it provides a steady, predictable, and consistent monthly revenue stream.
This is particularly true if you are located in a stable real estate market. However, be extra careful by checking out the vacancy rates in your area and to whom you will be renting.
Also, make double sure to watch out for negative monthly cash flow – this is when your monthly expenses are greater than your monthly income.
2 - Appreciation
In certain real estate markets where property costs are on an upward trend, property owners can earn money simply by purchasing and holding the property. The increase in a property’s value over time is called appreciation, and it will translate into a profit for the property owner when he or she decides to sell.
This is mainly for investors that are looking for long-term real estate investments.
3 - Tax Benefits
One of the most important considerations for real estate investors, that most newbies don’t consider, is the tax benefits. As a real estate investor, you are a business owner, and as a business owner, you get tax deductions.
I am not a lawyer or accountant, so you’d better check with your tax professionals about tax deductions, etc.
4 - Interest
This method of profiting in real estate is generally reserved for those that invest in some kind of real estate notes or mortgages.
In this case, you’ve created or bought a note and are acting as the bank, collecting principal and interest payment from the payor of the property. The interest is your profit, the principal is the reduction of the loan.
By the way, this is one of the most profitable real estate investing strategies that I will talk more about later.
Don’t Rush In
Investing in real estate is an exciting prospect, but people often get so excited about it that they move too quickly and purchase a property that doesn’t suit their needs or serve them financially.
If you are at all uncertain about a deal, wait or simply walk away. That said, don’t let fear keep you from getting into real estate altogether. If you do your homework, watch your local market and hold out for the right property, etc. it’s likely that you’ll do fine.
In the next article we’ll discuss some crucial things you need in order to be successful in real estate.