The Beginner’s Guide to Making Money With Real Estate
Making money with real estate is easy, once you’ve learned the basics. Here’s a beginner’s guide full of how-to’s, tips, and tricks to help you get started.
The lion’s share of all personal, corporate, and national wealth is wrapped up in real estate. In fact, real estate makes up about 60% of the entire world’s assets.
With a statistic like that, it’s pretty clear that real estate investment is something you should consider when you’re looking to invest some of your capital.
But before you jump into that market, you need to understand how it works. Informed decisions are key to making money with real estate, without them you’re playing a losing game.
We’ve written this article to give you a general overview of real estate investing and we hope that by the end you can make a solid choice about whether or not this lucrative market is right for you.
So… What Exactly Is Real Estate?
When you hear the term “real estate”, what do you think of? Is it plots of land, a home, or other buildings or structures?
You’re half right, if so. Those are some of the factors involved in real estate, but that alone doesn’t give you a complete picture.
The Uniform Standards of Professional Appraisal Practice defines real estate as “an identified parcel or tract of land, including improvements, if any.”
The reference to improvements there is really the key to understanding real estate. It emphasizes the fact that it also includes something being fixed or attached to the land. And this category is pretty broad. Much more so than a lot of people might think.
Improvements, by the USPAP definition, can include any kind of structure that’s built on the land. It also extends to the things that are built on the property, like roads, streams, trees, fences, just to name a few.
Real estate also includes the air, water, and mineral rights to any natural resources that are under the land.
What is a Real Estate Investor?
A real estate investor is a person, business, or entity that invests in real estate by buying, leasing, or acquiring the rights to any piece of real estate. It also extends to the rights inherent in that piece of real estate.
There are a lot of different kinds of real estate investment. It deals with the things that people usually think of when they hear the term “real estate” like owning properties to improve and resell them.
But they also include a lot of other opportunities, like purchasing and leasing the land’s mineral rights or investing in a real estate investment trust.
Today, this investment can include real estate crowdsourcing.
The Benefits of Real Estate Investing
There isn’t a single investment venture in the entire world that could promise you a profit, or even the protection of your initial investment. Anyone who tells you otherwise is selling something.
However, real estate, through history, is one of the safest assets for investors.
There are a lot of possible benefits with real estate that you might not consider for other investments. We’ll list some of them for you here.
Leverage
One of the best opportunities in real estate is the ability for you to leverage your capital over and over again. This means that you can use borrowed funds to invest in real estate that you might not be able to afford out of pocket.
This increased leverage does come with risks, though.
Tax Advantages
Investing in real estate also comes with some tax benefits. The government treats it like capital gains, and they’re taxed lower than the income you get from your job.
Also, the tax basis can decrease over time, because the tax code lets you depreciate your real estate every year. And if you’re earning a cash flow from a rental property, you might also be able to avoid paying the self-employment tax.
Control
When you invest in real estate, you get an additional level of control you just can’t have with other investments. When you buy stock or mutual funds, all you can do is wait for them to increase in value. It’s an entirely passive process.
And unless you hold major stock in those companies, you don’t have any say in how they operate. So there’s nothing you can do to improve your investment’s value.
But real estate gives you the power to control almost every aspect of the investment. You can learn more, negotiate better, improve the property, and find other, creative ways to increase its value.
There are a ton of real estate investment benefits. You can protect your capital against inflation, have tax write-offs against your other income, and more.
Turn Key Investments
If you’re one of the people who want a relatively easy investment where they don’t have to be present for any of the nitty details, turnkey investments are available.
These allow investors to buy and fix a property and then let someone else deal with managing it. This makes the process super simple, and all you have to do is “turn the key.” You can read more here about turnkey investments.
The Risks of Real Estate Investment
Like we said, no investment is without its risks and we would be remiss to not talk about the dark side of making money with real estate.
When you actively invest in real estates, like buying a house to rent it out, you run the risk of vacancies, a downturn in real estate market, and terrible tenants.
There are risks to passive investment as well. Passive investments include things like owning shares in REITs or investing in real estate crowdfunding. Here, the value might decrease over time.
You need to do your research before you take the plunge to real estate investment, just like you do with any other kind.
How to Invest With Little Money
You might be one of the many people who believe real estate investment is only available to people with a lot of money. But this isn’t actually all true. Sure, some investments are more expensive than others, but you can actually invest with very little.
There are a lot of real estate companies that trade their stock publically. You could invest in some stuck in those companies.
You could also buy into a real estate investment trust or REIT. We’ll talk more on that later.
Also, as we mentioned before, crowdfunding is quickly becoming popular. This lets you join in without spending a whole lot of money.
REIT
A REIT, or a real estate investment trust, is a real estate company that works sort of like a mutual fund. It pools the capital that investors raise to buy real estate. They usually specialize in one specific kind of property, like office buildings, apartment complexes, or self-storage units.
These are also usually publically traded and anyone can buy shares like any other stock, but some are private and open only to more sophisticated investors.
If you don’t have a lot of capital upfront, you can make a small investment in a REIT.
But even if you have a lot of money to invest and would manage to make it into a REIT for accredited investors, if you’re new you should really start with companies that are publically traded.
This is because the REITs that are traded on the stock exchange have to deal with the same financial disclosure rules as any other publically traded company. And that means you’ll be able to learn more about them than the private kinds.
Also, you can read a very detailed analysis of the public REITs, because they’re rated by stock analysts.
Crowdfunding
This is a peer-to-peer lending service that will connect you to other people who also want to invest in real estate. They’re in need of capital and they can structure their investment opportunities as debt or equity financing.
Basically, this means that people who are researching crowdfunding opportunities and can invest small amounts.
For the most part, you will have to meet certain criteria, like a minimum net worth or household income in order to participate in these.
Even though crowdfunding for real estate is pretty new, it’s already a booming, multi-billion dollar industry, so it’s worth your time to look into it if you think you might qualify.
Making Money with Real Estate
While making money with real estate isn’t easy, just like any other investment, that doesn’t mean it’s not a good idea to consider using it as a means to invest your capital. There are so many different ways you can get involved in this market no matter what your available starting funds are.
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