Content of the material
- Residential Real Estate Investing
- Real Estate Investment Trusts (REITs)
- 1. Online Real Estate Investing Sites
- How It Works
- What You Gain
- What You Risk
- 5. Invest in Real Estate by Flipping Properties
- Residential real estate can be very expensive
- 3. Option a Property
- How It Works
- Why would a seller choose one over the other?
- Why You Should (or Shouldn’t) Invest
- 3. Be unconventional
- 3. Find The Cash For Your Down Payment Or Investment
- 1. Get Educated
- Saving For Your Down Payment
- Why Is ROI Important?
- “House Hacking”
Residential Real Estate Investing
The first thing that comes to mind when people think of real estate investing is buying a residential rental property. That is perfectly understandable. Everyone knows what a house is and how one works, houses are found in the tiniest of towns to the largest urban areas of the country, and residential property is extremely easy to finance.
According to Zillow, the typical home value of homes in the U.S. is about $280,000. If you use a conventional loan with 5% as a down payment to finance your purchase, you will need just $14,000 to buy the home.
Investors looking for turnkey rental property already leased to a tenant can find houses for sale on Roofstock and Norada Real Estate Investments priced at less than $100,000. While most residential real estate investors hold property for the long-term, people willing to take on more risk with the hope of turning a quick profit can flip houses and wholesale homes.
But despite being a popular way to begin investing in real estate, residential rental property isn’t always the right choice for every real estate investor.
Real Estate Investment Trusts (REITs)
You don’t have to be a natural mogul in order to get into real estate. Both first-time investors and pros have the option to use real estate investment trusts (REITs) when looking for low-cost and entry-level investment options. Here’s a quick fact sheet on REITs:
- A REIT is typically a company that owns or finances a large portfolio of real estate that is used to produce income.
- To qualify as a REIT, very strict qualifications must be met.
- Many REITs are traded on major stock exchanges.
- Stockholders participating in open REITs get to earn shares of the income that is produced via investments without having to purchase and manage properties on their own.
- REITs are required to pay out at least 90 percent of their taxable income to participating shareholders.
Most REITs generate income by leasing space and collecting rent. Shareholders then receive the income that is generated via dividends. It is important to know that most REITs out there have minimum investment amounts that are required.
You may also need to meet an income requirement or have a net worth at a certain threshold (e.g. accredited investors) in order to participate in some private REITs. However, it is possible to find investment opportunities on public REITs that are available to all.
1. Online Real Estate Investing Sites
Online investing sites have changed the game in recent years. With these sites, you can own fractional shares of real estate projects. What this means is that you can get exposure to real estate, but you don’t need to come up with huge sums of capital or deal with tenants. This is a strictly passive income strategy.
For other sites, you must certify that you have a net worth over a certain amount or make a certain amount of money per year.
How It Works
With Fundrise, you can start with as little as $500. You open an account and select from a number of portfolio options. Fundrise charges a management fee of around 1% per year, which is fairly low compared with other options, and its 2021 annualized return was 22.99%! You can see how my Fundrise account has performed here.
What You Gain
Investing this way, you gain a ton of freedom and you gain exposure to the real estate asset class with very little money or effort.
What You Risk
You don’t get to really use any local expertise you may have, and you don’t necessarily get the pride that comes from visiting a real estate project that you wholly own, improve, and can see easily. For some people, that’s a big draw to investing the old-fashioned way!
Get Started With Fundrise
5. Invest in Real Estate by Flipping Properties
You don’t have to buy rental properties to maximize your profit from real estate investing. Buying and flipping properties is a common strategy, although like rental properties, flipping takes lots of work. It means renovating homes and learning to identify up-and-coming neighborhoods that will let you sell your purchases at a premium.
If your home flipping strategy involves renovation and construction, it means taking on extra risk and high out-of-pocket costs. Long story short, it’s not as easy as it may look on HGTV. You’ll need building permits for renovations, and remodeling costs may run higher than you expect, especially if you hire contractors or outsource other work.
To minimize the amount of effort in flipping properties, look for homes that don’t need major renovations in up-and-coming areas. This can be even more lucrative if you rent the property while waiting for home values to rise. Just remember, the neighborhood you think will become trendy might never catch on, leaving you with a property it’s hard to recoup your investment on.
Residential real estate can be very expensive
Residential rental property is often touted as the best way for real estate investors to earn passive income. If houses took care of themselves and tenants always paid their rent on time, that might be true.
But in the real world, many landlords find that renting a house is about as un-passive as it can be. As rising inflation pushes the cost of labor and materials to record highs, operating expenses can quickly spiral out of control. The result is negative cash flow, because you can’t raise the rent until the current lease comes up for renewal.
In some states, it can take months to evict a tenant who does not pay the rent. In fact, a recent post on the BiggerPockets blog estimated that the cost of a residential eviction can be between $4,000 and $7,000, depending on the area the property is in and how long it takes to evict the tenant.
If your positive cash flow is normally a few hundred dollars per month, it can take two or three years before those expenses are recovered and you – hopefully – begin to turn a profit once again.
3. Option a Property
A third way to make money in Real Estate investing without money or credit is to “Option” a property.
How It Works
This type of transaction is similar to a Lease Option, but very different as well. Consider it a Lease Option’s cousin, who is much hotter and more fun.
Here is the simple difference between the two:
- Lease Option: the seller has agreed to take a monthly payment for a specific amount of time, with a set purchase price to come at some point in the future. I do not accept any less than 5 years for these transactions and try to get ten years.
- Option to Buy: the seller is not accepting monthly payments. They have simply given you the exclusive right to buy a property at a certain price for a certain period of time.
Why would a seller choose one over the other?
Let’s look at a few circumstances and reasons that may persuade a seller to decide one way or another.
- With an Option, the seller can continue to live in the house. At the same time, he/she will continue to make the monthly payment and take care of all maintenance and repairs. The seller may not want to accept monthly payments, with the idea of someone else is living in their house. While they may be motivated to sell, the thought of someone else eating dinner and walking around naked where they raised their children may be too much for them to handle.
- They may not have the time required for a Lease Option. If a seller is ten months behind on their payments with foreclosure knocking on the door, and you (the investor) don’t want to make up those payments and there is still a TON of equity in the house, an Option may be your only choice, short of paying cash.
- With a straight “Option” the seller has nothing to lose. You have a set amount of time to buy their house, which you will only do if and when you find a buyer at a higher price than you have an Option for. In this type of transaction, your target audience is not the B/C credit buyer, but rather the individual with cash or the ability to go to a bank and get a loan.
Why You Should (or Shouldn’t) Invest
The positives for you the investor, are as follows: You are not dealing with tenant buyers, repairs left by tenant buyers, angry sellers, evictions, lawsuits, monthly payments with no tenant-buyer… the list goes on and on.
The negatives are you do not make any money at all unless you successfully find a qualified buyer within the time allotted in your Option to buy. The seller benefits because they pay no Real Estate commission, and they have the privilege of living in the house while you are trying to sell it.
3. Be unconventional
Everyone has access to Zillow, Redfin and other online listings sites. If you're bidding on a property that many other people are, chances are you are not going to get the best deal, Mehta says. "You need to think and work outside the box to have an edge on competition," he says.
Mehta suggests trying to reach out to sellers directly. "I personally bought my first two properties off-market, just driving through the streets in my favorite neighborhood and seeing for sale signs getting installed before the homes actually hit market."
Mehta also suggests connecting with local real estate agents. They often know what is going to be listed before it actually is.
3. Find The Cash For Your Down Payment Or Investment
At some point, you are going to come to the realization that you have to put away your disposable income so that you can fund your real estate investing dreams. You can do so even if you earn a meager salary, or even if you are a starving college student. You can do this, and the important thing is to begin with the end goal in mind.
1. Get Educated
The best approach is to learn all that you can with the free resources available for your immediate consumption. You need to learn the basics, but you also have to ask the right questions when presented with information.
While you may be bombarded with images of expensive real estate investment seminars, that is not a requirement to be successful in real estate investing. You can learn the basics from useful free guides online to get a jump start on the basics. There are plenty of real estate books, podcasts, and free information online as a good place to start. You can also speak with other real estate investors.
Here are the main types of properties and investments available for real estate investment. Each type of investment has its own nuances that you should understand before you invest.
- Vacant Land
- Single Family Homes
- Small Multifamily Properties
- Large Multifamily Properties
- Commercial Real Estate
- Mobile Homes
Once you learn about the different types of options for the real estate listed above, you will want to think about the one that fits your budget, time, and requirements.
You will also want to learn how to properly evaluate a neighborhood in order to make the best investment. You may not be familiar with the city or locality where you are investing, so you will definitely want to check out how to evaluate the locality or neighborhood you are investing in to make an informed decision.
Saving For Your Down Payment
The next item on our list to answer the question “how much money do you need to invest in real estate: the down payment.
As with the purchase price, less is more. The more leverage you have when borrowing to buy your investment property, the less cash out of pocket is needed and the higher your cash-on-cash return.
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To illustrate, which of the following two scenarios looks better to you when purchasing a $100,000 property and getting a loan with a 6.5% interest rate:
A) Put down $20,000 with mortgage payment of $505 and own one property.
B) Put down $10,000 with mortgage payment of $568, and have more money available to buy a second property?
If you guessed B, you’re correct! Did you notice the difference in mortgage payment was only $63/month?
You will pay a little more per month, but as long as your rental income covers the amount, then you’re now much closer to being able to repeat the process and have twice the benefits of property ownership.
Why Is ROI Important?
Because the sooner you get your investment back, the sooner you can buy another house, the sooner you can pay down the mortgage or the sooner you can live off the cash flow.
Cash gives you options.
Some people would choose the lower payment, but by doing so they are tying up all their cash in one house.
Personally, I would rather buy two houses and put $10,000 down on each than $20,000 on one house.
Either way, you’ll benefit from appreciation and suffer from depreciation.
But 30 years from now, would you rather have one free and clear house or two for the same amount of money invested?
Seems pretty simple to me. Buy in a market that is set for long-term, stable growth, and get as much leverage as you can.
Along those same lines, if you’re wondering how many mortgages you can have, you can find that answer right here.
The best way to do this is called “house hacking.” It means getting an owner-occupied loan (as low as 3.5% down with FHA) instead of a loan meant for real estate investors (usually 10%).
But don’t game the system! Follow the guidelines closely, which state that you must make the house your personal residence for at least one year.
Now, you might have to put off buying your dream home for a year to live in this one, but 12 months later you’ll have enough cash on hand to do it again because you didn’t tie it all up in one big down payment.
Some investors buy duplexes or fourplexes using FHA loans, then live in one unit while renting out the rest. The income from the other units offsets or even covers their own housing payment.
But, even if house hacking isn’t for you, just remember that less money down is usually better, and 10% down is still better than tying up 20% or more.
In addition to the down payment, you’ll have closing costs, to pay for title company fees, lender fees, loan escrows, first year’s insurance, a property inspection, and the deed preparation fee.
You can get what is called a Good Faith Estimate from your mortgage broker to find out a more specific idea for your location and loan type, but to get a rough idea expect it to be about 3.5% of the purchase price.
There is no cut-and-dry answer for how much money is needed to get started in investing. It very much depends on the situation. By taking stock of your financial foundation and building your “financial moat” properly, first-time investors can start from a position of strength. That way, you will be well-poised to navigate the wonderful world of real estate and begin to build your portfolio.