Have you ever wondered if real estate investing is a good idea for you? Has flipping houses, running rental properties, or buying commercial properties something you have ever been interested in?
If you answered yes to the questions above you’re in luck because we have an awesome guest post from Cara Palmer. Cara owns six rental properties and writes about real estate and money tips over at CaraPalmer.com. You can also find her on Pinterest and Facebook.
I know for us real estate investing is something we have always been very interested in. We are hoping over the next couple of years, we have our opportunity to get started. Kelan actually went to school and got certified as a home inspector and planned on getting his real estate license before we started our blog. We have always dreamed about flipping houses in the summer when I have off as a teacher.
Some of you might just be wanting to purchase your first house and that’s totally fine! Making your first home purchase is one of the most exciting times of your life. It’s often times the first step people take to get started in real estate investing.
Below is some great information that will help you understand real estate investing, the types of investments there are, and how to go about getting started.
If you are interested in getting starting in real estate but don’t want to go through all the hassle, a company like Fundrise is the perfect solution. They offer real estate investing with expected returns ranging from 8%-11% yearly.
Why Invest in Real Estate?
As noted by Fortune Builders, there are several benefits to investing in real estate. One major benefit is tax incentives that are provided by the government to encourage people to own property. Renting a property you own can also increase your cash flow.
Any money collected after your mortgage, taxes and other property expenses goes directly into your pocket.
Real estate investments are also considered to be a hedge against inflation, as rents and property values rise along with inflation instead of lagging behind like other investments. Additionally, real estate provides the opportunity to build both equity and wealth through the same investment.
Types of Real Estate
When considering an investment in real estate, perhaps the first thing you should think about is what sort of property you’re interested in. According to a post from Fundrise, real estate properties fall into three different categories:
- Residential: This includes single-family homes, as well as privately-owned condominiums or townhouses within a larger complex. Smaller multi-family buildings of two to four units are also considered residential properties.
- Commercial: Unlike residential properties, which are used only for living space, commercial properties include spaces meant for businesses, such as office buildings. However, larger multi-family dwellings such as apartment buildings with more than four units are also considered commercial property. Likewise, so is vacant farmland.
- Industrial: Industrial real estate includes properties such as warehouses, shipping yards, and factories.
Types of Real Estate Investments
Fundrise explains that real estate investments can either be active or passive. The more hands-on knowledge and participation that the investment requires, the more active of an investment it is.
Active real estate investments include house flipping, wholesaling, as well as both long-term and short-term rentals.
On the other hand, passive real estate investments allow for investors to only put forth the money for the project while leaving the work to professionals. This is the service Fundrise offers that you could even start today.
Some examples of passive real estate investments include:
- private equity funds;
- real estate investment trusts (REITs); and
- online real estate investment (crowdfunding) platforms.
Some of the Risks of Investing in Real Estate
There is no such thing as a completely risk-free investing. Real estate investing, while providing a number of benefits, also poses a number of risks.
Here are a few of the common pitfalls that one might encounter when investing in real estate, as listed by the type of investment.
1. House flipping risks
House flipping entails buying a residential property in need of repairs, fixing it up, and selling it quickly for a profit.
You’ve probably seen this presented on a number of HGTV shows. However, there can be many hidden expenses involved in repairing a property, ranging from foundation issues or toxic mold hidden within the walls of a property to faulty wiring, zoning violations, and more.
In addition, there is no guarantee that the newly renovated home will sell quickly. Not to mention, selling for the right price in order to cover the cost of the renovations. The risk of house flipping lies in the unknowns.
According to an article from USA Today, one way to reduce the risk of house flipping is to partner with an experienced contractor who can provide as accurate of a cost estimate for repairs as possible, as well as considering the possibility of living in the home while fixing it up so as to avoid paying to live somewhere else while still affording the mortgage on the property during the time it takes to repair and sell it.
2. Rental risks
While owning a rental property has cash flow benefits, it also comes with risks of its own. Every month that the rental property is vacant, the owner misses out on the income of the property. In addition, landlords face the potential risk of unreliable renters.
Renters may not pay their rent in a timely fashion or cause expensive damages to the property. Not to mention, market factors may make it hard to find a renter for the property.
Owners who don’t wish to deal with marketing the property, screening potential renters, collecting rent, or maintaining and repairing the property can use a professional property management company, though this option is an additional expense that draws away from the cash flow that makes owning a rental property so enticing.
There are two types of REITs available—private and publicly funded.
Privately funded REITs are generally limited to those with a lot of money to invest over a long period of time.
Publicly traded REITs do not pose the same limitations, meaning there is no minimum investment. However, because they are correlated to the public markets, this form of investment poses the highest volatility of any real estate investment, Fundrise reports.
Knowing the Market
One doesn’t have to know a lot about real estate to invest in it, at least in a passive way. However, some knowledge is certainly helpful and perhaps even necessary.
While it is impossible to mitigate every risk that real estate investments entail, knowing the market where one is investing can go a long way in helping to make responsible investment decisions.
According to a post from Real Estate Sales LLC, if you purchase property in a market that is already hot, you must be aware that it might not stay hot. Meaning your investment may not be worth as much when you go to sell it.
If the property is in a town where there are only a small number of major employers, understand that risk is higher due to the impact to the real estate market if one of those employers shuts its doors.
The old real estate adage “location, location, location” is true not only for those who are buying properties to use themselves but also for those buying properties to renovate and sell or rent to others, as well.
Doing your homework and approaching your investment cautiously is important.
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