We all hear the various infomercials, commercials, and programs to sell you on real estate investing, but what does it mean to invest in real estate? A real estate investment can be a simple rental property, a renovation (“flip”) or something more complex such as a 401k real estate Investment. Just like any typical investment, real estate investments fluctuate with the market. The market can be influenced by such factors as housing trends, politics, and the economy. While it may always sound like a good idea to invest in real estate, it is imperative that you educate yourself on the current market conditions as well as the risk involved.
One of the more common investment types is a rental property. You see “For Rent” signs everywhere, then the next week they are gone! While these are much more common in urban areas, they are still prevalent in most suburban areas of the country. Why would someone rent a home vs purchasing? Millennials (those ranging from 18-34) dominate the rental market. There are often factors which prevent them from being able to obtain homeownership at a young age, such as student loans, poor credit, un-established credit, lack of income, and the drastic increase in home prices over the last 20 years. While this article is in no way, shape or form intended to be a Debbie Downer, this may work to your advantage as a real estate investor. Landlords often target their tenants through local universities, Craigslist, and quite frankly the location.
When investing your funds in a rental property, there are a few key factors to consider. Location should be the biggest concern for a rental property, this will ensure a quick turnaround for finding new tenants, as well as the biggest rate of return on your investment. The condition of the property should also be a concern. You may not have the time or the extra capital to continue dumping money into improvements, updates and renovations. I’d say if you’re handy enough to be able to take on the challenges of small fixes here or there, then you should go for it! However, realistically speaking this isn’t an area where you will want to focus most of your time and energy. Investors make a profit off of their tenants by charging a higher rate than what their mortgage payment is. The real estate investor has two options when collecting rent payments, the investor can take the profits from the months’ rent or he can apply the month’s profits to the mortgage (if applicable) with the intention of accelerating his payments. It is also not uncommon for the investor to continue to make payments in addition to the rental income for a much quicker payoff.
Another main focus area for real estate investors are flips. A flip is when an investor purchases a property at a competitive price and renovates the property with the intentions of a quick turnaround and profit. When an investor determines a property to flip, the property is typically in pretty rough shape. They are often cash deals with multiple offers that sell below the tax assessment. With that being said, not every property is the ideal flip. It is imperative to understand the current market statistics before making the quick decision to flip a property. Large scale renovations usually take investors around 3-6 months. Often these investors use several high end finishes throughout the property to make it appeal to more home buyers. These finishes are often new floors, all new paint, granite countertops, stainless steel appliances, and updated kitchen cabinetry. Just like Rentals, these are much more prevalent in urban areas. Another new encumbrance is that most government loans will not allow for contracts to be written within the first 90 days of renovation. It’ll be important to factor in at least three months of carrying costs to accommodate for this new lender’s flip rule.
An untouched and uncommon area of real estate investing is the ability to invest your 401k into real estate. This form of investing allows you to put money into an IRA to reduce your taxes, this is a common form of investing for Sole Proprietors and 1099 employees. So how exactly does this work? You take the funds from your self-directed IRA and use them to purchase a property. The advantages to this form of investment allow you the ability to have delayed taxes on investment gains, tax-free growth through the IRA as well as protection against inflation and market volatility.
Overall there are numerous ways to invest in the real estate market, through rental properties, renovations, and IRA investments. However, the most common form of a real estate investment is still homeownership. Homeownership allows you the ability to build equity and value to your home as the housing market continues to improve. Interested in learning more about investing in real estate? Be sure to check out our guide to real estate investing or read on about the top 10 underrated and undiscovered destinations for investment homes.