With any real estate investment, the goal is always the same: you put your money into an asset, and hopefully, that investment will provide you with a decent rate of return.
It sounds simple enough in theory, but as we all know, the reality is that there are many, many different investment options out there, and plenty of different ways to get started in real estate investing.
Which one’s best? Where should you start? What’s the best route for someone who’s new to investing –and uncertain about what to do first?
The best investment option for you will largely depend on your big picture goals; as well as your financial circumstances, and investment preferences. For example, if you’d like to get started small –and aren’t interested in having a tangible asset, then investing in an REIT might be a good option. Those who are looking for more immediate returns may be better served by considering a fix and flip, while for those who are looking for both immediate cash flow and long-term property appreciation, rental property would prove to be a better option. Of course, there are a number of other considerations as well, including tax benefits, your experience, comfort level with risk, and more.
Whether you’re a first-time investor, or an experienced professional: one thing’s certain: you want an investment that’s right for you; and one that’s going to perform well. Here’s a look at a few different investment options and tips for taking that critical first step.
Choose Your Real Estate Investment
First up, you’ll want to determine which type of real estate investing you should get started with.
Fix and Flip
One of the more familiar types of investment homes is the fix and flip. This investment has risen in popularity in recent years, popularized in large part by reality shows, where fix and flips are always wrapped up in under an hour and sold during the commercial break!
But while the high-stakes, high-excitement of a fix and flip might sound appealing to some, there’s a downside to these type of investments as well: risk. Because the profit is usually made by making repairs and timing the market, failing to buy –and sell, at the right time could leave an investor high and dry. Then there’s the stress of the remodel –while it’s something that may work for some, many people find these types of projects to be a lot more work than they first anticipated.
If a fix and flip appeals to you, then proceed carefully. Know exactly what you’re in for before you start. Once you’ve found a property, make sure you have an independent inspection by a licensed inspector before you sign on the dotted line. If you need to move quickly, make sure there’s an inspection contingency included in the contract. This way, the contract is not valid until you’ve had a chance to verify the condition of the property. Also, remember that with fix and flips, it’s all about timing the market, so look carefully for signs of an overheated market.
Signs to look out for include:
- Low Affordability: Housing prices skyrocketing past incomes is a warning sign. Beware if only 40% or less of the local population can afford to pay the median home price.
- Highly-Leveraged Property: Likewise, watch out for areas that look like they’re filled with new buyers with highly leveraged homes –especially if there’s minimal job growth or development in the area.
- Out of Control Bidding Wars: Bidding wars can also lead to artificially inflated housing prices. When bidding, take care that you don’t get so caught up in the prospect of buying that you end up going too high.
Residential Income Property
Investing in income property is another option, and for many investors, is how they got their start with real estate investing.
Rental property offers a number of distinct benefits, including the opportunity to generate cash flow immediately in the form of rental income. You’ll also have the added benefit of property appreciation, as you hold the property and it, ideally, increases in value. Not to mention there are some pretty good tax breaks that rental property opens the door to as well. Rental property also offers the advantage of being a less risky investment. Whereas with fix and flips, you’re largely at the mercy of the market, with rental property, you’re in it for the long-term, and therefore less likely to be impacted by short-term market fluctuations. This is especially true if you’ve negotiated a good deal, and have managed to make a sizable down payment –meaning you’ll have more equity as a cushion against short-term fluctuations.
Single-family investment properties are a good option for both long-term returns and immediate cash flow, and tend to produce a decent ROI. They also are one of the most sought-after homes when it comes to rental properties -meaning that you most likely will have a large pool of tenants to choose from and your tenants will most likely stay put longer.
Of course, no investment is entirely risk-free. With rental properties, you’re allowing people into your property, which means that there’s always the chance that things could go wrong. However, the good news is that these risks, for the most part, can largely be mitigated by an airtight screening process.
Then there’s the question of maintenance. While at first, it may seem entirely doable to tackle maintenance and repairs at your rental in your spare time, eventually many landlords find that the amount of work that’s involved going back and forth to their rentals becomes too much. And if you have a rental that’s out of town, doing it yourself becomes impossible. Help is available, though, and these days, investors frequently choose to hand the day-to-day responsibilities and tasks over to property managers. A good property manager can oversee your property for you, handling everything from tenant screening, rent collection, lease enforcement, and emergency call-outs.
Tips for successful rental property investing:
- Get your finances in order:
First up, it’s important to take a serious look at your financial situation. What can you do to put yourself in the strongest position to invest? Working to increase your credit score and paying down or consolidating debt can help you to qualify for a loan with a lower interest rate. You’ll also want to save up for a down payment, keeping in mind that a higher down payment can help you to reduce your risk and keep your mortgage payments low.
- Take advantage of available financing options:
If it’s your first time buying a property, you’ll want to consider taking advantage of an FHA loan –which means that you could qualify for a lower down payment and better interest rate than you would if you were buying an investment property. The only caveat is that you have to occupy the property yourself for a certain amount of time. Many first-time investors get their start buying a duplex or triplex as their first property, renting out one or two of the units while living in one unit themselves. The method allows you to get your foot on the property ladder more quickly than you’d be able to otherwise. If the property is in need of repairs, you’ll want to consider an FHA 203K loan.
- Set investment criteria from the start:
Only invest in properties that are projected to provide returns that are in-line with your long-term goals. Set your investment criteria, (10%? 12%? 15%?) Then resolve to only invest in properties that fall in line with these standards.
- Look for a good area to invest:
Pay attention to job growth, look for an area that’s poised to experience growth. Major developments –like an Amazon distribution center, are always a good sign. You’ll also want to look for property with features and amenities that will appeal to today’s renter. See: Trends to Look for When Forming Your Investment Strategy.
- Run the numbers: Always do the math for potential rentals; you’ll want to find one that will produce a decent rate of return. Be sure to calculate projected expenses and income, to find the cash flow. Then take it a step farther and find your cap rate, and cash on cash returns.
- Have a plan: Finally, make sure you have a plan for overseeing the property. This includes maintenance and repairs, tenants sourcing and screening, and call-out emergencies. Of course, if you’re planning on using a property manager, you can forgo this step.
REITs
REITs or real estate investment trusts are a great way to begin your foray into real estate investing –especially if you’re looking for an investment with a low entry barrier.
While REITs used to be largely limited to accredited investors, those with more than $1 million in assets not including their own home, changes to legislation have opened them up to everyone. Now, there are a number of REITs that allow you to get started with a low initial investment –sometimes even as little as $500.
Just like stocks allow you to invest in the profits of a company, REITs allows you to earn profits on the proceeds of a property investment, without having to be involved the property at all.
Benefits of REITs:
- Easy access to real estate investing
- Hands-off investing for those with no interest in being a landlords
- Potentially high returns
Fundrise and RealtyMogul are two of the main players in the REIT world. Be sure to check them out if you’d like to learn more about getting started with REITs.
While real estate investing can seem daunting at first, the good news is that once you get the ball rolling, it gets much easier each time. With the right approach and a careful strategy, you’ll soon be able to start growing your investment portfolio and reaping the returns of real estate investing.
First-time investors? Which investment option appeals to YOU?
Photo by Gustavo Zambelli on Unsplash
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