Last updated on August 9, 2023
Real estate investing can be lucrative and rewarding for investors.
It offers the potential for financial return and personal satisfaction as well.
Whether you are a seasoned investor or just starting out, there are many opportunities in the real estate market to consider.
In this article, I’ll:
- Explore the benefits of real estate investing
- Cover the different types of real estate investment
- Delve into the financial considerations involved in real estate investing
- Go over the key metrics as well as financing options
- And offer some tips and strategies for success in the world of real estate investing
What you'll learn:
⓵ Benefits of real estate investing
There are many benefits when it comes to investing in real estate. These include the potential for passive income, appreciation of the property, and tax advantages. For example, when you own rental property, you can generate recurring income through monthly rent payments.
Also, the value of your property may increase over time. Which means you can make a profit if/when you decide to sell. or simply increase the monthly rent.
There are also several tax benefits to owning real estate, such as the ability to claim deductions for mortgage interest and property taxes (depending on the country you live in).
All in all, real estate investing can be a great way to build wealth and achieve financial security in the long term (yes, real estate investing won’t make you rich overnight).
Whether you are looking to increase your income, save for retirement, or simply diversify your investment portfolio, getting involved with real estate investing can be a smart choice.
⓶ Ideal hedge against inflation
Real estate investing can be a great way to protect against inflation, as the value of real estate tends to increase over time. This is due to a variety of factors, including population growth, economic development, and the increasing cost of construction materials.
When the value of your investments increases, it can help to offset the impact of inflation on your purchasing power.
But make no mistake, your rental property needs to be kept in good condition, be close to amenities, and meet your tenants’ needs so they don’t go away.
As I said above, rental income from real estate investments can also increase over time as rents tend to rise with inflation. This can provide a steady stream of income that can help to preserve your wealth and protect against the negative effects of inflation.
⓷ Types of real estate investments
There are several different ways to invest in real estate, each with its own set of benefits and drawbacks. Here are 4 common options:
❖ Rental properties
Owning rental property can be a great way to generate passive income while waiting for potential appreciation of the property. However, being a landlord also comes with responsibilities.
You’ll need to find and manage tenants while dealing with maintenance (unless you hire a property manager to do that for you).
In case you want to hire a property manager, you’ll need to pay him or her well. So take this into your calculations when evaluating a property as this will eat your profits.
However, a good property manager will make sure that your property is running at its optimal condition while keeping your tenants happy. Happy tenants = happy landlord. As simple as that.
❖ Flipping properties
Flipping properties involves buying undervalued (usually in bad condition) real estate, renovating it, and reselling it for a profit. This strategy requires a significant amount of time, effort, and expertise, as well as access to cash.
The potential rewards of flipping properties include significant profits. The opportunity to create value through renovation. And the satisfaction of completing a project.
However, the risks include the possibility of overpaying for a property, running over budget on renovations, and facing delays or setbacks in the selling process. In a seller’s market (when prices are up), flipping might be a good strategy.
However, if things turn around you risk staying without a potential buyer at your expected price. This means lowering your price. And losing a portion or all of your profits (if not going under).
❖ Real estate investment trusts (REITs)
REITs are companies that own and operate income-generating real estate (apartments, shopping centers, office buildings, etc). Investors can buy shares in a REIT, much like they would with any stock. And then receive a share of the profits generated by the real estate holdings.
If you want a hands-off approach then REITs offer that convenience of owning real estate without the hassles of being a landlord. And they can provide a steady stream of income through dividends.
However, REITs are subject to the same market fluctuations as stocks, and there are also management fees to consider.
❖ Real estate investment groups (REIGs)
REIGs are similar to REITs, in that they allow investors to pool their money to purchase real estate. However, REIGs are typically more hands-on, as investors are expected to participate in the decision-making and management of the properties.
Just like REITs, REIGs can be a good option for those who want to own rental real estate without the hassles of being a landlord. But with a slightly higher level of involvement.
No matter which type of real estate investment you choose, it is important to thoroughly research and understand the risks and potential returns. Each option has its own set of advantages and disadvantages. And the right choice will depend on your individual goals and circumstances.
⓸ Financial considerations
When it comes to real estate investing, there are several financial considerations to keep in mind. Understanding key metrics (more on these later on) like the cap rate and cash-on-cash return can help investors make informed decisions about potential investments.
Financing options like mortgages and creative financing techniques can also play a role in the financial side of real estate investing. Calculating return on investment (ROI) is also important for determining the profitability of an investment.
There are several financing options available for real estate investors, including traditional mortgages and creative financing techniques like owner financing and lease option agreements. It’s important to research and compare these options to determine the best fit for your financial situation and investment goals.
If you wish to get involved in real estate investing, then you need to understand key metrics, explore financing options, and be able to calculate ROI. This is a must for everyone who wants to avoid losing money in a real estate deal (and even then there are risks involved).
⓹ Tips and strategies
There are several tips and strategies that can help real estate investors succeed in the market.
❖ Do your research
Conducting market research is a crucial first step in identifying potential investment opportunities. This can involve analyzing local real estate trends, researching demand for rental properties in a specific area, and considering the potential for appreciation.
❖ Team up with pros
Building a team of professionals is another key strategy for real estate investing. This can include a real estate agent, a property manager, and a financial advisor. Each of these professionals can offer valuable expertise and support throughout the investment process.
❖ Start local first
Diversifying your portfolio is another important strategy to consider once you have enough experience (and access to cash). This can involve investing in a variety of property types, in different locations, and at different price points.
Diversification can help spread risk and potentially increase the chances of success. However, starting locally (where you live) is a great idea for all beginners. Because that is the area that you already know well. And this can give you an edge over the competition.
All in all, conducting market research, building a team of professionals, and diversifying your portfolio are all important strategies for success in real estate investing.
By following these tips and staying informed about the market, you can maximize your chances of success while minimizing your risk (minimize, not eliminate).
⓺ Top 10 real estate investing metrics
There are several key metrics that are important to consider when evaluating real estate investments. Some of the most important metrics include:
❖ Cap rate
This is a measure of the profitability of a rental property, calculated as the annual net operating income divided by the property’s value. A higher cap rate indicates a higher level of profitability.
❖ Cash on cash return
This is a measure of the return on an investment in a rental property, calculated as the annual cash flow from the property divided by the amount of cash invested. A higher cash-on-cash return indicates a higher level of profitability.
❖ Gross rental yield
This is a measure of the return on an investment in a rental property, calculated as the annual rental income divided by the property’s value. A higher gross rental yield indicates a higher level of profitability.
❖ Occupancy rate
This is a measure of how fully occupied a rental property is, expressed as a percentage. A higher occupancy rate indicates a higher level of demand for the property.
❖ Appreciation
This is the increase in the value of a property over time. A property that appreciates in value can provide a good return on investment.
❖ Debt-to-income ratio
This is a measure of the amount of debt an investor has relative to their income, which can impact their ability to finance a real estate investment.
❖ Leverage
This refers to the use of borrowed money to finance an investment, which can increase the potential return on investment but also increase risk.
❖ Return on investment (ROI)
This is a measure of the profitability of an investment, calculated as the return on the investment divided by the cost of the investment.
In real estate investing, ROI is often calculated as the property’s annual rental income divided by the initial investment (purchase price plus any renovation costs). Some investors also consider the potential appreciation of the property when calculating ROI.
❖ Gross rent multiplier (GRM)
This is a measure of the relationship between a property’s price and its rental income. It is calculated by dividing the property’s price by its annual rental income.
A lower GRM indicates a potentially better investment, as it suggests the property is being sold at a lower price relative to its rental income.
❖ Debt service coverage ratio (DSCR)
This is a measure of a property’s ability to generate sufficient income to cover its debt payments. It is calculated by dividing the property’s net operating income by its total debt payments.
A DSCR of 1.0 or higher indicates that the property is generating enough income to cover its debt payments.
⓻ How to evaluate a real estate rental property quickly: Use the 1% rule
You can use the 1% rule. This rule implies that your rental property will generate 1% of your invested money (all expenses included). So lets say you spent $200k on a 2-bedroom apartment. And you spent another $30k on renovations. Your total cost comes up to $230k.
Then, based on the 1% rule, your investment (to be sustainable) should generate $2.3k per month. Remember that you should save at least 25-30% of this for renovations and other expenses of your property.
This is a simple formula to quickly calculate when you first try to evaluate a rental property. Some say that this is not feasible anymore because of the high prices. However, there are still some deals that fall within this rule.
Of course, it doesnt need to fall exactly under this rule. The point is to have a quick way to evaluate several properties at once.
Some investors choose to buy a property even when it doesn’t provide a positive cash flow with the intention of holding them for when the area picks up and prices go higher so they profit from the rising rental prices as well as from the rising selling price (capital gains) of their property.
⓼ Real estate investing FAQ
❖ How much money do I need to start investing in real estate?
The amount of money you need to start investing in real estate will depend on the type of investment you choose.
For example, buying a rental property typically requires a larger upfront investment, as you will need to put down a down payment and potentially make repairs or renovations.
Flipping properties or investing in real estate investment trusts (REITs) may require less upfront capital. It’s important to carefully consider your financial situation and determine how much you are comfortable investing. Increasing your earned income might help with raising the cash needed.
❖ What are the risks of real estate investing?
Like with any investment, real estate has risks. Like market fluctuations, tenant issues, and the possibility of natural disasters (insurance is a must).
It’s important to carefully research the specific risks associated with the type of real estate investment you are considering and to diversify your portfolio to mitigate risk.
❖ What are the potential rewards of real estate investing?
Real estate investing can provide you with a regular income from rental properties, the opportunity to increase the value of a property through renovations, and the potential for appreciation.
It’s important to carefully consider your financial goals and choose an investment strategy that aligns with them.
❖ How do I choose the right real estate investment?
Consider the following factors: your financial situation, investment goals, and level of risk tolerance. It’s important to carefully research and compare different investment options. And to seek the advice of a financial professional if needed.
❖ How do I finance a real estate investment?
You can take out a mortgage, use cash, or seek financing from a private lender. It’s important to carefully consider your financial situation and explore all available options to determine the best fit for you before investing in real estate.
❖ What are some of the popular real estate investing books?
Some of the most highly regarded and widely recommended books on the subject include “The Millionaire Real Estate Investor” by Gary Keller and Jay Papasan. “The Book on Rental Property Investing” by Brandon Turner. And “Rich Dad Poor Dad” by Robert Kiyosaki.
These books offer practical advice and strategies for getting started in real estate investing (both for beginner and experienced investors).
⓽ Top 9 real estate quotes and their meaning
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
— Franklin D. Roosevelt
This suggests that real estate is a safe and secure investment because it is a tangible asset that can’t be easily taken away or destroyed.
“The three most important words in real estate are location, location, location.”
— Unknown
This quote emphasizes the importance of the location of a property in determining its value and appeal.
“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”
— Russell Sage
This suggests that real estate is a valuable and reliable asset because it is durable and tends to increase in value over time.
“The person who buys the right property at the right price and holds it until the right time will make a fortune.”
— John Paul Getty
What we can understand from the above is that successful real estate investing requires careful consideration of the price, location, and timing of a property purchase.
“Real estate is an ever-changing field. It’s important to stay on top of what’s happening in the market and to continually educate yourself.”
— Barbara Corcoran
The quote above emphasizes the importance of staying informed and up-to-date in the field of real estate.
“The best investment on earth is earth.”
— Louis Glickman
This suggests that real estate is a wise investment because it is a tangible asset that has value in and of itself.
“The most important thing in real estate is location, location, location.”
– Dave Ramsey
Like the earlier quote, this one emphasizes the importance of location in determining the value and appeal of a property.
“Real estate is not about owning dirt. It’s about owning the most valuable dirt.”
— Grant Cardone
This quote suggests that successful real estate investing involves identifying and acquiring properties that are located in desirable or valuable areas.
“A man’s home is his castle.”
— English Proverb
This quote emphasizes the importance and personal significance of owning a home. It suggests that a home is a place of security and personal identity.
Final thoughts
Investing in real estate is an old method for building wealth. However, it won’t happen overnight. it takes time, effort, money, and skill. By understanding the various types of real estate investments, considering financial factors, and implementing effective strategies, you can increase your chances of success.
Never forget that real estate investing carries risk and it is not guaranteed to be profitable. You should carefully consider your own financial situation and risk appetite before making any investment decisions.
However, for those who are willing to take on the risk and put in the effort, real estate investing can be rewarding and fulfilling at the same time. You can start by following the tips and strategies outlined in this article, to position yourself for success. And potentially achieve your financial goals through real estate.
Personally, I prefer a portfolio allocation of 50% in stocks and 50% in income-generating rental properties. Stocks tend to outperform real estate when money is cheap (low interest rates). And real estate tends to outperform stocks when inflation is high and money is expensive (high interest rates).
There are many differences between stocks and real estate so make sure you understand the risks involved before investing your money. The important thing is to start. Even if you start small. You can learn along the way.
You should spend the first year just doing research, viewing properties, and talking to real estate agents before you close your first deal. This alone will teach you a lot.
And always remember: if you don’t love a property at first sight then walk away.
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