Investing in real estate is a popular investment vehicle, particularly for the middle-upper class. While excitement about real estate investing has been tempered due to the mortgage crisis, property prices are falling to the point where investors are once again thinking about buying real estate.
However, investing in real estate is not like investing in the stock market. It is much less of a passive investment, as running a rental property or fixing up a house requires a lot more work than buying a stock.
How to Invest in Real Estate
Learning how to invest in the real estate is not an easy process. There are a lot of things that go into buying a house. First off, before you even look for a house, you have to figure what type of investment you want to make. There are two primary ways to make money off of real estate:
- By renting out the property.
- Through appreciation of the property’s value.
After the mortgage crisis, many investors have looked towards profit from rentals rather than appreciation as a means of investing. The reason for this is rental prices may not always fall during a recession, whereas property value can drop sharply during this time. Rent can sometimes even increase during recessions as people are more reluctant to buy real estate during this time.
One investment model would be to disregard appreciation and focus on finding a property where real estate values have fallen to the point where rental prices may bring in more money than the mortgage. Eventually, rent will pay off the mortgage and it will be “all profit”.
Some investment models rely on appreciation of the property’s value rather than making a profit on rent. This is often the case in vacation properties, where condo or association fees and off-seasons may prevent the owner from generating much (if any) profit from rent until the mortgage is paid off.
Naturally, most properties will rely on both methods in order to generate a return on your investment, but you should consider both factors when analyzing an investment property.
Investing in Real Estate – Negative Factors
Not only do you have analyze means through which your property can generate revenue, you need to understand the different ways through which your property may bleed value.
Before buying an investment house, you need an inspector, an agent, and a lawyer, just like with a normal home. If you are buying into a home that has already been lived in, you should realize that many houses need a lot of work (sometimes 5-6 figures worth of work) before they are deemed “livable”.
Do not get the mistake of looking at your property through rose-colored glasses. Do not fall in love with your property – it is not your home but your investment. Always have an inspector check the property and get estimates for any needed repairs and make sure any calculations you make include these costs. Additionally, compare the property’s value to rental prices in the area, and projections for the value of real estate in that area.
How to Invest in Real Estate – Getting a Loan
Unless you have the money to purchase a property up-front, you will need to get a loan for your investment property. Getting a loan for your investment property is much, much harder (especially after the mortgage crisis) then it is for a first-time home-buyer. Banks know investors will default on their investment loans before they default on their own homes and risks are adjusted with that in mind.
You will not only need a great credit score, but also good equity and plenty of money to put down on your investment property. Since the 2008 meltdown, it is hard for young or new investors to get into real estate investing. This may chance once interest rates rise again.
Find out more about how to qualify for a loan and how to get a good deal on one in our article: Investment Property Loans.
Why Invest in Real Estate?
Now that you know how to invest in real estate, you might wonder why would anyone invest in real estate? It is a lot more work and is more complicated than the stock market, and you have to spend a lot of time to manage your properties.
Homes also need work, and as a landlord you have to provide ongoing maintenance for your properties. Tenants may destroy the place, skip out on rent, or even disappear in the night when they cannot afford to pay (or simply choose not to).
For these reasons, investing in real estate is not for everyone. However, many people think that real estate is a great investment, particularly for middle-class individuals who have just as much time as they do money to invest. If you fix up a house or do a lot of maintenance yourself, you can generate a big return on your investment – assuming you can find good tenants.
Learn more about the advantages and disadvantages of owning property in our article: Why Invest in Real Estate? Why Buy Property?
How to Invest in Real Estate Conclusion
To summarize what was said earlier, the primary steps to investing in real estate are figuring out your business model, finding a property to match that business model, inspecting the house, calculating whether or not that property will be profitable, and then finally applying for a home loan. Just be sure not to dive in on real estate and really take the time to learn how to invest. There are a lot of different intricacies to owning property and not being aware of them may lead to losses.