Property investing can be scary for beginners, especially when they’re unfamiliar with the workings of the real estate industry.
The good news is that it’s not as complicated as it seems. In this article, we’ll take you through the basics.
What is property investing?
Property investing is the purchase, ownership, and management of real estate for sale or rent. The term ‘real estate’ generally includes all kinds of property, such as houses, units, commercial properties, blocks of units, offices, and everything in between.
How does property investing work?
The property investment process is simple. In fact, it’s all in the definition – “the purchase, ownership, and management of real estate for sale or rent.” In simpler words, you purchase real estate and use it to make a profit.
There are several ways to profit from a real estate asset, and we’ll discuss them in the section below.
How real estate investors make money
Real estate appreciation
Appreciation refers to how much a property’s value will increase over time. It affects how much equity you have in a property, influences your future home sale, and, more importantly, how much you make from it.
It arises from causes such as
Infrastructure development
Development is crucial for real estate price appreciation. Any new connectivity, roads, transport, or transit hubs, will drive growth, as they encourage population growth, and eventually, more demand. Investors who read the market right can benefit from their assets.
Available or planned amenities
Imagine a house with a beautiful, vibrant loan. Now, imagine a similar property without it. This difference can account for as much as a 15% price difference, particularly in urban centers where there isn’t much greenery. Property owners who constantly upgrade their property will get better rates than the overall market valuation.
Local development
A property will appreciate if the local neighborhood and social infrastructure support growth. A property in an enclosed residential estate with an operational residents’ welfare association will attract higher prices than one in a conventional colony. In the same way, security surveillance, urban facilities can also drive property appreciation.
Policy changes
Real estate appreciation is heavily influenced by government policies such as lending rates. When the government makes it less expensive to borrow, more buyers come onto the market, driving up demand and appreciation. Similarly, a decline in circle rates and stamp duty rates.
Economy
A country’s economic outlook will affect property prices as well. If the inflation rates are high, the value of money will decline. This means foremen will spend more on inputs like permits and construction materials. This may drive property prices up. Several other economic factors affect this trend, like the unemployment rate, gross domestic product, and purchasing power parity.
Cash flow income
This approach focuses on purchasing real estate, like an apartment building, then managing it. It allows you to collect a steady stream of cash from tenant rent fees.
Your cash flow will be the profit leftover after collecting all the income, settling all outstanding bills, and setting money aside for future repairs. This is the primary income generation strategy for buy-and-hold real estate investors. Harnessing the power of cash flow as a newbie investor provides several benefits
It creates more opportunities.
Rental cash flow allows you to reinvest the proceeds from one asset into another. This makes it an excellent way to grow your portfolio.
Safety
Cash flow constitutes an additional income stream that will enable you to create a more significant savings reserve to protect you from unexpected life expenses (sudden illness, car maintenance, and so on).
Freedom
If you build your cash flow to the point where it can cover your monthly expenses, you won’t need a day job. You’ll have more opportunities to spend time with friends and family or focus on other pursuits that matter to you.
Lease options
Lease options are an excellent way to make money in real estate without vast sums of startup capital or credit. In essence, they are legal instruments between sellers and buyers. They involve a lease with a monthly rental fee and include an option to buy (for a preset price) at any moment during the agreement.
Lease options are most effective when the real estate market is climbing. Since you’ve already signed an agreement, you’ll acquire the property at the same price even after its value increases.
Tips for your first property investment
Evaluate your financing options
Investment properties usually require larger down payments than owner-occupied properties. While you may pay as little as 3% for a home where you plan to live, it won’t work for an investment property.
In most scenarios, you will be asked for a 20% down payment at the very least, considering that mortgage insurance isn’t available on rental properties. You might be able to finance the down payment through bank financing or a partnership with other property investors.
There’s more on that in the video below
Cut back on personal debt.
Experienced investors might get away with carrying debt as part of their investment strategy. However, beginners should avoid it. If you have unpaid medical bills, student loans, or similar kinds of debt, you might want to pay it off before investing in a rental property.
There are caveats to this, of course. You need not pay down debt if your real estate investment returns are greater than the cost of debt. The key here is to not put yourself in a position where you don’t have the money to make payments on your debt. You should always have a safety margin.
Should you buy or finance?
The choice between buying with cash and financing your investment will depend on your goals. Paying with cash will help you generate positive monthly cash flow.
Study the industry
Your success hinges on your ability to pick suitable properties and locations at the right price. Even if you get an excellent deal, you will still need to know which renovations to spend on and which ones you should avoid. You’ll also need to understand applicable tax and zoning laws and know when to cut your losses and exit a project before it becomes a liability.
You don’t want a rental property in a declining area instead of a stable or growing community. The best investment opportunities usually lie in cities or locations with revitalization plans and growing populations.
You’ll also want to look out for areas with low property taxes, good schools, and social amenities like malls, parks, movie theaters, and restaurants. In addition, neighborhoods with public transport access and low crime rates will guarantee larger pools of potential renters.
Be patient
Successful investors take their time and wait for the right property. In contrast, beginners will usually rush and buy the first house they see. They’ll then hire contractors to do the work they can’t handle on their own. Needless to say, this often leads to avoidable/unnecessary expenses or losses.
Professionals will maximize their profits by doing most of the work themselves or building a team of reliable contractors.
Conclusion
You now have a basic understanding of how property investing works. That said, it always helps to have a constructive community of peers and mentors to help you get started.
If you feel it’s the right niche, we’ve got our property education courses that will make you a pro in no time at all. Our platform also comes with free access to fellow property investors and mentors who will help you make the best investment decisions.
