Real estate investing can be a great way to grow your money and diversify your portfolio. For some people, real estate is a main source of income. For others, it supplements other ways of making a livelihood. The trick to having success in this sector of the economy is to use great care when considering where to put your money. Like any kind of investment, the risk is real. However, real estate investing for beginners doesn’t need to be intimidating. Here are some tips that you can use to help you feel comfortable when you are first entering real estate.
Real Estate Investing for Beginners: 9 Pro Tips
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1. Understand How Real Estate Investors Make Money
There are several ways to make money through real estate. You can earn profits when the market goes up. This happens when you purchase a property, and it accrues value over time from a number of different factors: gentrification of the area, improvements you make on it, etc.
You can also profit from cash flow income. The most common way is by purchasing a property and collecting rent from tenants. Finally, you can collect ancillary income, aka money that comes from small businesses like vending machines or coin-operated laundry facilities that you run on your properties.
2. Get Your Start Through House Hacking
“House hacking” is a term that refers to the practice of buying a home to rent and living in one of the units. It is how many people enter real estate. The biggest benefit is that you can live rent-free while you pay off your mortgage through the cash flow your tenants generate.
3. Consider Renting One Room in Your Home
If you are interested in starting very small and don’t feel ready to buy a rental property, you can offer one room to rent on Airbnb. There is very little commitment with this strategy because the people who rent from you usually don’t stay more than a few days. Another perk is that these short-term renters are screened a little bit. In the event that damage to your home occurs, Airbnb will cover some of the expenses, depending on the situation.
4. Start By Being Your Own Property Manager
People who make money from rental properties have an important choice to make. They can either respond to calls about broken toilets and other property issues themselves, or they can hire a property manager to do this sort of day-to-day work. When you are beginning, it is often beneficial to be directly involved in the management of your property. You will learn things about maintaining properties that can help you find ways to cut your expenses and plan your future investments.
5. Assess the Value of Your Investments Carefully
Before you buy a property, it is important to understand whether or not it will be profitable. Consider the area in which you are buying and check to see that the cost to rent has been going up for the past few years. Sometimes, it is best to avoid areas where the cost of living is very high. The amount of money it takes to acquire a property in these areas is often much higher than in other parts of the country, and appreciation is not guaranteed.
Some pros use the 1% rule when deciding whether or not to buy a property. To do this, compare the cost of purchasing the property against one month of rent. If the rent you can realistically expect to charge is 1% of what you will pay, the investment is likely good.
6. Understand All of Your Expenses
Some experts assert that when it comes to real estate investing for cash flow, 50% of the money your property brings in will go towards expenses. These costs include taxes, homeowners’ association fees, repairs, property management, etc. Your mortgage is not included in this 50% figure. One way to save money and beat the 50% rule is to manage the property yourself instead of hiring a property manager.
When choosing whether or not to buy a property, consider all of your expenses and the amount of money you will put towards your mortgage every month. Compare this number against the rent you will charge. If the math doesn’t work out in your favor, you can try looking for a different property, negotiate a cheaper mortgage, or see if it is possible to charge more rent.
7. Try Investing in a Real Estate Investment Trust (REIT)
REITs are similar to mutual funds. They accept investments from individuals who want a stake in the real estate market without the hassle of actually owning the properties. When the market goes up, these investors receive dividends from the REIT. As a beginner, making your investments this way allows you to get started without a large sum of money. It is also good for people who don’t have time to act as landlords.
8. Position Yourself to Get a Good Mortgage Rate
When you take out a mortgage on a property, you will get a better rate with lower interest if you have good credit and money saved for a big down payment. The larger your down payment, the better your terms. Similarly, you will pay less in interest if you have good credit and can show lenders that you are trustworthy. Stay aware of your credit score and frequently check it for errors. Pay all of your bills on time and educate yourself about responsible credit card usage.
9. Consider Flipping Properties in the Future
Flipping is the practice of buying inexpensive property, improving it through renovations, and selling it at a higher price. Real estate investing for beginners typically does not involve flipping, because estimating the cost of improving the property can be tricky. After you have some experience choosing valuable rentals, feeling out the market, and managing your property, you will be in a good position to start flipping.
Build Your Assets With a Strong Start in Real Estate
Real estate Investing for beginners comes with a lot of excitement and challenges. When done mindfully, it can set you on the path towards earning passive income, thereby your wealth without spending an excessive amount of time. To put yourself in a position for success, educate yourself about the market, start small, and be clear on how your potential earnings compare to your expenses.