Real Estate Investing For Dummies

Real estate investments are a great way to diversify any portfolio. Whether you’re investing to supplement your retirement income or for more immediate cash flow, take advantage of the many opportunities.

Real estate investing for dummies starts with knowing the basics of real estate investing. It’s not as hard as you think. We address the ways you can invest in real estate and grow your portfolio below. After reading, you can get started by checking out the Roofstock Marketplace.

 

What Is Real Estate Investing?

When you invest in real estate, you usually invest in a physical property in most cases. You can also invest in an asset that funds an investment property if you don’t want the responsibility of the tangible asset. 
 
Either way, when you invest in real estate, you own some or all of a piece of property. Your investment usually appreciates with time and/or as you pay any liens (mortgage loans) down or off.
 
You own the asset (with your money tied up) until you sell the property. You can buy and hold the property or buy and sell it right away, usually for a profit. If you invest in a real estate asset (such as a REIT), your money remains tied up until the asset matures. 

How Does Real Estate Investing Work?

Like any investment, you need cash to invest in real estate. Fortunately, you can also use mortgage financing to purchase a property.
 
That’s one aspect many people don’t realize about real estate. When you buy an investment property, you can take out a mortgage, just like on your primary residence. The mortgage offsets your capital gains since you have to pay the debt off in full before you realize any profits, but with appreciation and regular payments, you’ll pay the mortgage down.
 
The mortgage helps you have the money necessary to buy an investment home. Using mortgage financing isn’t the only way to invest in real estate, though. As you learn more about real estate for dummies, you’ll see you can buy a property in cash, or invest in real estate crowdfunding, providing the necessary funding for other investors to buy properties while you realize a part of the profit.
 
No matter how you invest in real estate, the bottom line is the same. You may earn cash flow from rent or dividend payments from a real estate investment (REIT). When you sell the property, you earn capital gains or the difference between the sales price and any outstanding liens.
 
No matter how you invest, watch your tax liabilities. Capital gains and monthly cash flows incur tax liabilities. As a business owner (real estate investor), you may write off some of your expenses, which reduces your liability. Always work with your tax advisor to make sure you cover all your bases.

Ways To Invest In Real Estate

There are more ways than most people think is possible when investing in real estate. Here are our top ways to invest in real estate.

Buy A Fix And Flip

If you love DIY projects, or you don’t mind managing contractors and subcontractors on the job, buy a fix and flip property.
 
You can usually buy a fixer-upper at a rate much lower than the market value, leaving room in the loan for property renovations. Before you buy a rundown property, though, do your homework. Know the area. Will the home be worth enough after you renovate it for you to make a profit? Know what the average home in the area sells for and compare it to your bottom line. Is there a profit?
 
Investors usually buy and sell a fixer-upper within a 6- to 12-month period. Any longer and the carrying costs may be too much to afford, depleting your profits. Before you buy a fix and flip, do your research. Know what you can and can’t do with the property and how it will affect your profits.

Invest In Rental Properties

If you’d rather buy homes that need little to no work, consider buying and holding. When you rent out properties, you earn the cash flow, which is the difference between the cost of owning and maintaining the home and the rent you charge.
 
Just like fix and flips, make sure you buy properties in highly desirable areas where you’re likely to have renters and little—if any—vacancies. Don’t focus on the home alone, but on the neighborhood and area too. Is it a desirable area for families, couples, or older people? What resources are in the area? What is the average market rent for the area?
 
The more research you do, the higher your chances of earning a positive cash flow become. Don’t assume every property is perfect for renting, know the market and its possibilities before investing.

Rent A Room Or Part Of Your Home

If you aren’t ready to own a separate property but have room in your home, consider renting it out. You can have a long-term contract and rent out to one individual or list it on Airbnb and have multiple renters throughout the year, depending on when you list the home.
 
Make sure you’re clear in the contract what’s included in the rent, what areas of the home are for their use, and how you’ll handle any maintenance or repair issues that come up.
 
Some homeowners use this trick when they’ll be away from their home for an extended period. It’s a great way to make some passive income when your home isn’t in use.

Take Advantage Of House Hacking

To own property, but aren’t sure about having it separate from your home, consider buying a multi-unit property. Most loan programs, including conventional and FHA loans, allow you to buy a multi-unit property with one loan. 
 
As long as you live in one unit, you may rent out the others. You don’t have to worry about qualifying for an investment loan because you live in one unit. Lenders consider the property owner-occupied.
 
Charge rent for the other units and use the money to cover the total mortgage payment, as well as taxes, insurance, and upkeep. Any leftover money is your cash flow, which you must claim as income.
 
This is a great way for new investors to start since you don’t have to worry about qualifying for an investment loan, which is tougher than a mortgage for an owner-occupied property. You’ll get lower interest rates and even need a lower down payment with the house hacking trick. 

Invest In A REIT

If you aren’t ready to jump in headfirst, consider investing in a Real Estate Investment Trust (REIT). This is like crowdfunding for real estate. You and hundreds (or more) of other investors pool their money with you. 
 
The fund manager chooses the right options, either investing in equity or debt. Investors usually earn dividends or monthly cash flow, which can be invested in other REITs or kept as cash flow.

How To Buy Your First Real Estate Property

Before you buy your first real estate property, prepare yourself financially using these steps:

1. Check Your Credit

If you need to borrow funds to buy the property, your credit score will make or break the deal. Lenders look at your credit score and credit history first. They want credit scores of 680 or higher and solid credit histories.

Look at your payment history and outstanding credit versus your credit lines. Don't have any late payments, and if you do, bring them current. Look at your credit balances too. Are they over 30 percent of your credit line? Pay them down quickly to help your credit score.
If you have any collections or judgments on your credit report, take care of them right away. If you can’t pay them in full, work out payment arrangements with the creditor and make your payments on time.

2. Save for a Down Payment

Lenders view investment properties as riskier than primary residence properties. Because you don’t live in the property, you’re more likely to default on the loan. Because of this, lenders use a larger down payment to offset the risk.
 
Every lender and loan program differs, but plan to have 20 percent or more to put down on a home unless you use the house hacking trick and buy an owner-occupied property and rent out part of it. You may get away with a lower down payment.

3. Do Your Research

 Investing in real estate is exciting, but scary too. If you invest in an area where renters aren’t interested in living, you could be stuck with a vacant home. Work with a licensed real estate agent who understands the area and the market.
 
Discover the average market rent in the area and how populated the area is with renters. Does the home fit the bill for what renters want?

4. Decide How You’ll Manage the Property

If you’re keeping the home and renting it out, will you manage it or will you pay a management company?
 
If you’ll manage it, do you have the time and resources to collect rent, handling middle-of-the-night phone calls for repairs, and dealing with the legalities if the renters don’t pay?

5. Work With a Real Estate Agent for Fix and Flips

If you buy a fix and flip, work with a licensed real estate agent or professional appraiser. You’ll look for homes in foreclosure, short sale, or for sale by motivated sellers.
 
The key is to buy a home at rock bottom prices, fix it up, and sell it for much more. This only works if you know the home is undervalued and your improvements will improve the value. Working with a real estate agent and appraiser will help you understand if the investment is worth it.

How To Invest In Real Estate With Little Money

You don’t need to be well off or invest in real estate. That’s one of the best things about learning real estate investing for dummies. Anyone can invest if you know how to get the necessary capital.
 
If you have little money, here are the top ways to invest in real estate:

• Tap into your primary residence’s home equity and use the equity as a down payment on an investment property. 
• Buy a multi-unit property, live in one unit, and rent out the others. You can use the cash flow to pay the mortgage and manage the property maintenance.
• Use a piggyback loan. All you need is a 10 percent down payment and two loans - a first and second mortgage. The first mortgage covers 80 percent of the home’s value and the second mortgage acts as 10 percent of the down payment, with the other 10 percent coming from your funds.

 
It’s all about thinking outside the box. Lenders have many more programs today and even sellers are often willing to help make your purchase more affordable. For example, if you need help with the closing costs, turn to the seller, they are often willing to help. 

Real Estate For Dummies: Start Investing In Real Estate Today

The longer you wait to invest in real estate, the more money you waste. Choose your method and start today. There are many ways for investors to enjoy the profits the real estate industry offers, whether you invest directly and build your real estate portfolio or indirectly, such as in a REIT.
 
No matter what you choose, always diversify your portfolio. Choose a variety of real estate options. When you don’t rely on one type of income, you have a higher chance of a greater return on your investment.

Photo by Breno Assis on Unsplash