Real estate prices have increased astronomically over the past half-century. In addition, the cost of rent continues to increase across the country. If you haven’t invested in real estate yet, now is the time to start.
Investing in real estate might seem like something only very wealthy people do, but it’s possible for anyone to be a successful real estate investor.
Real estate investing for beginners can be very intimidating, especially if you don’t know the industry. But with this real estate investing guide, it doesn’t have to be.
How Do You Make Money Investing in Real Estate?
When done correctly, real estate investment is a great way to make money. You can do it in a variety of different ways. Let’s take a look at six different ways to profit from real estate investing.
Appreciation
When the value of a piece of real estate increases over time it is called value appreciation. As a general rule, property values tend to increase over time. At present, the average appreciation rate in the U.S. is 14.5 percent.
This means you can buy a home, live in it, and expect that when you sell it the home will be worth more than you initially paid for it.
The number one factor in determining how well a piece of real estate will appreciate is to be aware of the desirability of its location. The more desirable the neighborhood, the more valuable the real estate.
As a general rule, it’s a better investment to buy the cheapest/worst house in a good neighborhood than a great house in a bad neighborhood. Figure out what will be the next up-and-coming area and invest before it pops.
Rental Income
Another way to grow your wealth through real estate investment is to use it as an income-generating rental property. When you rent your home, you earn a monthly income and the value of the home appreciates over time.
Ideally, the income you generate from renting your home will pay for your mortgage and turn some profit. Once you pay off the mortgage, the rental income will be all profit.
You always need to factor in maintenance and repairs as well. Eventually, the boiler will break, the basement will flood, or you’ll need a new roof.
In addition, you need to decide whether you will landlord the property yourself or hire a property management company.
Exchange-Traded Funds
Traditionally, investing in real estate indicates property ownership. This could be individual or group property ownership. However, today there are options for investing in real estate without owning a property outright.
This is called investing in real estate exchange-traded funds. You can do it using crowdfunding companies like Fundrise, PeerStreet, and CrowdStreet.
Private Real Estate Investment
Commercial real estate investing is another option through crowdfunding. That way you can invest in high-value projects you would not be able to afford if you were investing alone.
Private real estate investment offers transparent fees and the potential for a high return on investment. It’s also a great idea if you want to guarantee you’ll have zero management responsibilities.
Brokerage
If you have a knack for real estate investment, you can earn money investing in real estate for other people.
It’s complicated to set up a brokerage to invest other people’s money, but if you have the skills it’s worth it.
Ancillary Investments
Let’s say you’ve invested in commercial properties. On top of appreciation and rent, you can profit from doing something like placing vending machines on the property.
That way you can earn additional income from the vending machines.
Real Estate Investing Tips for Beginners
It’s easy to make mistakes when you’re investing in real estate as a beginner. Here are some of the most important things to keep in mind as you get started.
Protect Yourself Legally
It is always a good idea to have legal protection from liability when you own a property. This is especially important if you rent your property out.
When you own property directly, you can be held liable for anything that happens on the property. For example, if a tenant gets injured, they can sue you. This can cause you to lose your personal assets.
A better idea is to hold the property in a limited liability company (LLC). This provides you with more legal protection should something terrible happen.
Keep in mind that opening an LLC doesn’t mean you’re automatically protected from all liability. Consult an experienced real estate lawyer to determine your best options for legal protection.
Research the Real Estate Market
If you’re planning to get involved in real estate investment you need to understand the real estate market. You also need to stay up-to-date with your market research.
The best place to start researching is the best place to start is right where you live, especially if you’re planning to landlord your own property.
Have Multiple Exit Strategies
Not every project goes according to plan. In fact, many of them don’t.
An experienced investor knows you always need to have a backup plan. A great investor has backup plans for their backup plans. Ideally, you should have multiple contingency plans in place in the event things go south.
Real Estate Investment Strategies
If you aren’t familiar with the real estate industry, getting your toes wet investing can be really intimidating. Honestly, it can take months to feel educated and confident enough to get in the game.
That’s why it’s such a great idea to start with some beginner-friendly strategies. The strategies we will discuss next are suitable for beginners and have the potential to be very profitable.
Wholesaling
Wholesaling is a strategy that places investors into the role of middleman between buyers and sellers.
First, a wholesaler buys a piece of property for a price under market value. Then they assign that real estate contract to an end buyer.
Prehabbing
Prehabbing is what happens when you resell a property for more than you invested by adding a few cost-effective cosmetic updates.
After making these minor improvements, the owner sells the property to an investor. The investor completes the full rehab the previous owner got started.
REIT Investing
A company that owns and manages a series of properties that generate income is called a real estate investment trust, or REIT. This type of company allows investors to buy shares of valuable real estate.
Online Real Estate Platforms
Using an online real estate platform is a great way for investors to connect with real estate developers. An investor helps with financing the developer’s project and in exchange, the investor gets regular payments with interest.
Real Estate Investing for Beginners
Real estate investing for beginners can be pretty intimidating if you aren’t confident you know what you’re doing. Do your market research, make sure to protect yourself legally, and proceed at the pace you feel comfortable.
There are many ways to make mistakes investing in real estate, but when done properly, it can lead to a very profitable investment over time.
If you found this real estate investing advice helpful, consider joining the buyer’s list at Memphis Investment Properties. We sell real estate to out-of-state investors in California, Georgia, and Texas.