5 Beginner Tips For Investing In Real Estate
The new year brings new possibilities to improve your health, lifestyle, and finances. Maybe your journey toward financial prosperity led you to explore investing in real estate. Congratulations! Real estate can significantly increase your net worth and improve your economic well-being. However, now that you’ve decided to invest in real estate, the problem is you don’t know where to start! Purchasing property as a financial investment can mean anything from buying a home to live into renting a home on a vacation rental website (like Airbnb) to flipping houses.
While we can’t cover every scenario or answer every question in this article, we have some expert advice. As a real estate agent with over 40 years of market experience, Jim Westerfield and his team of licensed agents are here to give 5 beginner tips for investing in real estate.
8 Ways You Can Invest In Real Estate
The real estate market is a relatively stable and continually growing industry with plenty of investment options. Let’s briefly touch on the top 8 ways you can invest.
1. Buy A Property And Live In It
Owning and living in a home is the simplest form of real estate investing, and while some might not see it as investing, a primary home is a wonderful investment in many ways. First, the housing market generally increases in value over time. Second, a primary home will boost your net worth over time. Third, it is also an excellent way to invest in the market when you don’t have a large amount of capital. Finally, if you decide to move, you can opt to keep the home and rent it out, earning passive income.
2. Multi-Family Home
A multi-family home is a fantastic stepping stone into the world of real estate investing. You can purchase a house with 2, 3, or 4 units and rent out the extra units. You then get the dual benefits of owning a home to live in and investment units to rent out. While this method has many benefits, there are also some challenges. First, you will need to find and screen tenants. You will need to orchestrate the repairs and perform regular maintenance if any damage occurs. In addition, you will need to collect the rent and ensure your renters fulfill the rental agreement.
3. Buy A Property And Rent It Out
Buying a property and renting it is a passive form of investment. You find and purchase the home and then find suitable tenants. Once your property has renters, you have passive income from rent each month. Keep in mind that you will still need to maintain the property!
4. Buy A Vacation Property
If you know of a prime area where vacationers regularly seek a place to stay, purchasing a vacation rental property in the area is a great way to make money. You can rent your home on Airbnb or VRBO for a pretty penny during tourist season! As an added bonus, you can easily book your place for your own vacation! Another benefit is affordable financing. Second-home mortgage rates are only slightly above primary-home mortgage rates. You just have to verify that you’ll stay in the property for at least part of the year.
5. Fix and Flip Properties
We have all seen the transformation of a team of experts who take a rundown home and turn it into something breathtaking. An active form of investing, the fix-and-flip investment, involves making improvements (hopefully cosmetic ones) and selling them for a profit. This process is a lot more hands-on than other investment options. Not only will you find a property that needs remodeling, but you will also need to complete or coordinate the completion of the repairs. After the remodel, you can (hopefully) sell the property for a profit. While flipping properties offers a faster return, be careful. Home structural issues can easily hide, and you may find yourself stuck with a home with structural issues and no way to pay back what you owe on it.
In addition, financing a fix-and-flip home is potentially tricky. Since you won’t be able to use a standard mortgage on a fix-and-flip home. This means you may have to finance it yourself using savings or the equity in your current home. You can achieve this with a second mortgage or cash-out refinance).
6. Create or Join A Real Estate Investment Group
An investment group is a great solution if you desire to invest in real estate but do not have the capital to invest independently in the market. The group will combine their resources and invest together to purchase a property and then share the profits from renting or future sales.
7. A Real Estate Crowdfunding Platform
This is a similar investment strategy to joining a real estate investment group. However, instead of investing with people, you know you are investing with people through social media platforms or other online avenues. It allows you to buy into the property and become a shareholder without purchasing the entire property. This method helps reduce your risk and diversify your investing assets by not having all your capital tied up in one investment (i.e., a single home or property).
8. Consider Non-Traditional Real Estate Investments
Real estate investment does not necessarily mean you choose to invest in single-family homes, multi-family homes, or apartment buildings. You can also invest in storage unit complexes, industrial space, warehouses, and office buildings. Any of these options will generate rental income.
5 Tips For Investing In Real Estate
1. Timing Is Everything
It is vital to know your local market. While knowing what the real estate market looks like on a national level is helpful, your target local market is where you need to focus your energy. Your local real estate market is the primary influencer for your property choice and your success.
Generally speaking, try to avoid investing in hot markets when your area is “trending.” While housing does continue to rise, the real estate market moves in cycles due to the desire for economic profits. Every real estate market is in a slightly different phase of its housing cycle. Look for markets in the expansion phase. This is when sales and prices start to rise, and construction increases, but affordability is good, and capital investment is high. When the need for housing increases, construction needs increase. However, the new construction boom typically lasts a little longer than the peak housing demand. When this happens, you can purchase when there is an oversupply and lower prices.
2. Location, Location, Location
Always look for property in good neighborhoods. A great deal may not be great if the home is in an undesirable location. Instead, invest in developing up-and-coming neighborhoods with all the basic amenities nearby and a high population density.
Before choosing a location, look to see if it meets the following criteria:
- Low crime rate
- Reputable schools
- Access to parks and leisure destinations
- Access to medical care
- Access to public transportation
- Access to shopping malls and restaurants
- Good walkability
Unless you want a vacation rental property, try to avoid buying in an area with only one economic driver (such as tourism). If you invest in a property in an area with only one appealing quality, what happens if traveling restrictions apply or the factory holding the economy tanks?
3. Buy Low
How great your return on investment really depends on how great the deal was that you bought the house for. The lower you buy, the bigger your return on investment. However, just because the price is low doesn’t mean your investment return is high. An inexpensive house in an undesirable neighborhood will yield a low return on investment in most cases.
4. Know Your Costs
Before you invest in real estate, you need to know your upfront costs. It isn’t just the cost of the home. You must also pay for repairs, closing fees, and a home inspection. If you do not work construction, estimating the cost for repairs (or overestimating your ability to make the DIY) can cost you – Especially when it comes to meeting the code requirements for plumbing and electrical work. You need to accurately estimate costs to repair an electrical problem, rid the basement of pests, remodel the bathroom, etc. Budget for your repair, closing, utility, and insurance costs to avoid losing money on what you initially thought was a good deal.
5. Know Your Market
Knowing and understanding your real estate market will help you avoid problems and make smart investment decisions. Knowing and understanding the market is more than knowing what cycle the market is in. You need to understand the price point for the houses in neighborhoods in your area. What is the typical house in a quality community worth per square foot? What is the rent price you could charge for that investment? What features does the property have that appeal to buyers in your area? What renovations can you make that will make your investment more appealing to buyers?
Investing your time to know the ins and outs of your local real estate market will help you make smarter and more profitable financial investments in the market.
Final Tips For A Beginner To Become A Successful Real Estate Investor
Real estate is a wonderful investment option for those who desire financial freedom. It offers a multitude of possibilities and opportunities for better cash flow. However, you need to invest your time and energy to really understand your market and take your time to find the best investment for you. As you embark on your investing journey, be aware of all opportunities, keep an open mind, and always adapt. If you want to find your next vacation home, rental home, or personal home in Southwest Florida, consult Jim and the Westerfield group. With decades of experience in marketing and business, Jim provides knowledge and insight into the real estate market and the business side of investing. Working in the Southwest Florida real estate market for years, we understand the local market and can offer you insider tips and information to guide your investment decisions. So if you want help making your dreams of financial freedom come true, call us today!