Investing in real estate: Beginner’s guide
Here are six ways to start investing in real estate.
There are many ways to put your money into real estate. Some involve a lot more work than others. And each of them will require a different amount of money and time. you can be like the real estate firm Cincinnati.
How to get started with real estate investing:
With these six, we’ll look at residential properties in more depth. If you want to buy commercial property (like stores, hotels, offices, warehouses, factories, etc.), this won’t help you.
1. Buying a house with several units
A multifamily home is often the first investment property that people buy. When you buy a house with 2, 3, or 4 units, you get a place to live and one or more units that can be rented out as investments.
Even at the beginning, you may find that the rent you get covers most or all of your mortgage. And as time goes on and rents go up, you might end up with a good income.
You can use almost any standard mortgage to finance a multifamily home with up to four units, as long as you plan to live in one of them yourself. Some choices could be:
Conventional loans: 3-20% down payment, a minimum credit score of 620
FHA loan: 3.5% down, 580 credit score minimum
VA loan: 0% down, 580-620 credit score minimum
Keep in mind that this method might not always work. There are a lot of things that need to be done when you own a rental property. You need to find tenants and screen them. You also need to make repairs and do maintenance.
And if you don’t have enough money to pay someone else to do these things, you’ll have to do them all yourself. “A typical property manager will cost you about 10% of the rents you get,” Meyer says.
So, before you go this route, you should ask yourself, Should you become a landlord?
2. Buying a holiday home
A vacation home can do two things for you: give you a place to stay when you travel, and make you money when you’re not there by renting it out.
That rental income can help you pay the mortgage on your vacation home and cover other costs, like maintenance, repairs, property taxes, and homeowners insurance.
Another good thing about having a vacation home is that it’s easy to pay for. Mortgage rates for a second home are only a little bit higher than those for a first home, and all you have to do to get one is prove that you’ll live there at least part of the year.
Of course, just like any other landlord, people who rent out their homes for vacations have to pay a lot of costs. If you can’t clean, talk to vacationers, solve problems, collect rent, and market yourself, you’ll have to pay someone else to do all of these things.
See Five questions to ask yourself before buying a vacation home for more information.
Check if you can get a loan for your vacation home. Start here (Sep 30th, 2022)
3. Buying a property as an investment
An investment property is a single-family or multiple-family home that you don’t live in but rent out full-time. Over time, these kinds of properties can bring in a lot of money, especially if you own more than one. But it’s usually not easy at first. Your mortgage and maintenance costs will probably be high if you don’t do most of the work yourself.
If you don’t want to or can’t take care of your investment properties yourself, it’s a good idea to get quotes from local property managers or set up your own direct labor before you buy.
Another problem is that sometimes there is a long time between tenants. And that means the rent money won’t come in.
In fact, when your mortgage lender does the math, it will usually assume that your vacancy rate (the number of days you don’t get paid) will be 25%. That means you’ll need a big income or a lot of savings to make sure you can pay your mortgage even if you don’t have tenants.
Getting the money to buy an investment property is a little harder than getting the money to buy your own home. You’ll need better credit, a bigger down payment, and more cash flow.
Still, your rental income in the future can help you get the loan. “Based on current leases and/or an appraised rent schedule, lenders can count 75% of future rents as qualifying income,” says Meyer.
If you can afford the initial costs, buying investment properties can be a great way to make a lot of money over time.
See our Guide to mortgages for investment and rental properties for more information.
Check to see if you can get a loan for a rental property. Start here (Sep 30th, 2022)
4. Flipping homes
Anyone who has watched HGTV for more than 10 minutes knows what flipping is. You buy a run-down house, fix it up (hopefully mostly on the outside), and sell it for a big profit.
This is how some people make a good living. But there can be major problems with the process. The scariest thing that could happen is that you could buy a place that has major structural problems that you didn’t notice before you bought it.
If you don’t have all the necessary skills, you can reduce the risks by working with others who do. Many people who flip houses well have the numbers of their favorite real estate agents and contractors on speed dial. So they know the numbers and the likely amount of work right away. Some of them even team up with experts.
Fix-and-flip homes can also be hard to pay for. On a fix-and-flip home, you won’t be able to use a regular mortgage. So you might have to pay for it yourself with money you have saved or the value of your current home (this can be done with a second mortgage or cash-out refinance).
You could also work with a friend, family member, or business partner who is willing and able to pay for the project in exchange for a share of the money made when it sells.
5. Buy, fix up, rent, refinance, and do it again (The BRRRR method)
The BRRRR method stands for “Buy, Fix It Up, Rent It Out, Refinance It, and Do It Again.” And it’s a bit like buying and selling houses. Except that when the house is ready to sell, you rent it out instead.
But if you haven’t sold the last house you bought and fixed up, how do you pay for the next one? Simple! You refinance the last home and use the money to pay for the next project. And you do it again and again.
You can quickly build up a number of rental properties this way. Some people find it to be very profitable.
But you need all the skills you need to flip a house and all the skills you need to be a good landlord. And because there’s so much work to do, you’ll probably have to hire other people to do a lot of it.
The BRRRR method is a complicated and involved way to invest in real estate. Before you join, learn as much as you can and talk to experts.
You can start by reading the following: Buy, fix up, rent, refinance, and do it all over again.
6. Real estate investment trusts (REITs)
REITs are an investment that has been around for a long time. That is, you put your money into the value of real estate without having to buy, fix, run, or sell the properties themselves.
The Securities and Exchange Commission (SEC) of the United States says:
“Real estate investment trusts, or “REITs,” let people put their money into large-scale, income-generating real estate. A REIT is a company that owns and usually runs real estate or other assets that bring in money.
“Unlike other real estate companies, a REIT doesn’t build homes to sell on the market. Instead, a REIT buys and develops properties mainly to run them as part of its own investment portfolio.
REITs may be the easiest way to put money into real estate. There are no mortgages to set up, repairs or maintenance to do, and there are no tenants. You can really relax and let the money come to you.
But, just like with any other investment, the bigger the return, the bigger the risk. So do your research and be careful with each REIT, just like you would with any good investment.
REITs that are registered with the SEC and traded on a stock exchange are likely the safest ones.