“Buy land. They are not making it anymore.” ~ Mark Twain
Real estate is one of the oldest asset classes in the investment landscape. Right from the time of first settlers, real estate has held its value. A thorough analysis of the investment advice from great investors/industrialists like Andrew Carnegie and Franklin D. Roosevelt echoes the importance of real estate in long-term wealth creation. Real estate is one of the only investment options that generate multiple sources of income, namely capital appreciation, rental cash flow, tax benefits, depreciation benefits, and the ability to use leverage. These benefits are more than enough to lure anyone towards property investments.
If you are planning to add real estate to your investment portfolio or to take up active real estate investing, here is a guide that’ll help you cover the basics of real estate investments.
Benjamin Franklin said that investment in knowledge pays the best interest. One of the prerequisites of successful real estate investing is to acquire as much knowledge as you can. Experienced real estate investors practice lifetime learning. Every single deal offers a new experience; good or bad, each lesson takes you a step further.
Real estate is diverse, and it could be confusing to get started. Instead of jumping on your first deal, start studying the different investing niches in real estate. Some potential investment niches include:
- Land acquisition for development
- Single-family rental homes
- Duplex or triplex units
- Small apartments
- Large apartment buildings
- Passive real estate such as mortgage notes, tax liens/deeds
- Commercial real estate investment
Understand that it’s going to be confusing, and at times, it might seem overwhelming. The trick is to learn a little every day. Start reading real estate investment blogs, join investment communities, listen to podcasts, and learn from investing guides.
Once you have chosen a real estate niche for your first investment, the next step is to learn how to analyze deals. Several factors affect the value of a property including location, neighborhood, condition of the property, size of the property, appreciation potential, capitalization rate, and cash flow. It’s perfectly fine to be lost for a while, as it takes time to understand and apply these factors. You can utilize online property analysis tools in the beginning, but learn to do them on your own in the long run.
Market cycles are critical, and finding the right market cycle could boost your investment returns manifold. Novice investors often follow the masses and buy property at inflated prices only to book losses during a correction. Instead of relying on your understanding of market trends, find a mentor, online or offline, and follow his advice. Do understand that the key is to verify the suggestion first and proceed afterward.
Real estate is a capital-intensive business, and access to capital is critical for success. Seasoned realtors understand the importance of capital in time-sensitive real estate deals. You’re likely to realize it within the first couple of months of investing. Your personal finances will be critical for the initial deals, but they won’t help you get ahead in the long-term. Similarly, there are only a given number of conventional loans you can apply for. The three long-term financing options you should eye are private lending, hard money loans, and partnerships.
Private lending offers quick access to capital with limited paperwork requirements. It is one of the best funding vehicles for quick fixer-upper deals. The personal relationship between the borrower and the lender could help you land favorable lending terms.
Hard money lending is different from private lending in a way that you may not necessarily know the lender, and the sole purpose of the lender is to make profits from the deal. These loans are available on interest-only payments, making them an affordable financing option for multiple deals. Make sure to do a background check on the lender before borrowing.
Partnerships are critical for long-term success in real estate investing. You can collaborate with other people on investments and split the profit. Unlike private money or hard money, the financing comes without interest, and all the participants are equally responsible for gains or losses.
“If you want to go fast, go alone. If you want to go far, go together.” ~ African Proverb
Some of the best real estate investors became so because of their network and relationships. Let us take an example for clarity. A person with a reliable network of lenders, real estate agents, local administration, and contractors is likely to win most of the times. It is the power of his network that turns the circumstances into his favor. A lot many people relate the term “it’s not what you know, but who you know” with nepotism, but its crucial for success in any field.
As soon as you embark on your real estate journey, start developing relationships. Some of the best places to network include local RE meetings, investment groups, and education seminars. Understand that these relationships are a give and take arrangement, so make sure you offer value in return. Having the right network could open numerous opportunities for you.
Real estate investing is a full-time commitment. Patience and the ability to learn will define your long-term success. An ideal strategy to achieve everlasting success is to stick to the basics and improve your knowledge with every closed deal.
Let us know your favorite real estate niche in the comment section below.