How to Make Money In Real Estate: A Beginner’s Guide to Investing
Curious to learn more about how to make money in real estate? Real estate can be a solid investment as part of an overall portfolio, and a great way to ramp up cash flow. But what’s the best way to invest in real estate—without too much risk? Do you have the chops to be a real estate investor? Real Estate Investing 101 starts now.
There are two main real estate investing strategies: 1) Fix and flip, or 2) buy and lease out your real estate purchases. Here are the pros, cons, and money-making potential of each real estate investing option, to help you determine what’s right for you (based on expense, income and risk).
The fix and flip
Flipping houses makes for must-see TV, but it can also make for a lucrative strategy – if you do it right. A recent RealtyTrac report found homes flipped in the first quarter of 2016 yielded an average gross profit of $58,250—the highest average gross flipping profit since the fourth quarter of 2005. It also found that home flippers received returns of almost 50% in the first quarter of 2016.
Advantages of flipping
Aside from sizable profits, here are some of the other main benefits of this approach (particularly in the case of multi-unit and single-family homes):
- Flipping is cheap: Find distressed properties such as foreclosures, which are usually sold for under market value. It translates into a smaller upfront investment and less mortgage loan financing needed from your lender.
- Flipping is fast: Buy a single-family home, make repairs, and you’re out. Bam! Get your cash, and get out. The average length of time it takes to fully rehab and sell a property or piece of real estate is about six months, according to RealtyTrac. This means that you or your investor’s capital won’t be tied up indefinitely in your real estate purchase. And another win? You’re unlikely to be affected by market fluctuations.
Potential flip flops
But real estate flipping does come with downsides, like the following investing detail:
- Transactional costs: Obviously, the first action you take with a real estate flip is the “fix,” and home repairs can be expensive. You can cut costs by doing some of the rehab work yourself. Find a contractor you trust to give you a realistic estimate of the budget. Once renovations begin, remember that time is literally money in real estate. If you don’t have an efficient timeline for the work, you’re likely to sacrifice precious cash. And don’t forget the mortgage interest payments, which accumulate while the property is being rehabbed.
- Unforeseen complications: These might range from zoning or permit complications to gas, electrical, or septic problems. Due diligence can help you sidestep many issues and protect your real estate investment, but be sure to include room in your budget for unanticipated hurdles. Make sure your renovations are done with the proper permits and paperwork; otherwise, you may have trouble selling it later.
Buy and rent
Recent RealtyTrac data found rents are rising faster than median home prices in 45% of the markets analyzed, which may make snagging a rental property an attractive income-producing option. That means more profits for wannabe landlords and real estate hawks who decide to buy property, then rent it out for a continuous income stream.
Advantages of renting
This “buy and hold” approach comes with its own unique benefits, like the following:
- A steady income stream: Rent, right? Ideally it covers your mortgage payment, but also your property taxes, HOA dues, insurance and all other costs, with maybe a little something left over for you, the hard-working investor.
- Long-term wealth potential: Since real estate has historically appreciated over time, it is likely that the longer you hold the rental property, the more you can make. You can also outlast the market dips, sitting out market downturns until conditions improve, while continuing to collect rent and chip away at your mortgage pay-down (if you have one).
The risks of renting
Yet there are dangers to this investment strategy as well:
- Maintenance hassles: The fix-it list can be endless, and many rental property owners are tasked with handyman duties, as well as coaxing their tenants to pay their rent on time. Don’t underestimate the challenge of finding and keeping quality tenants! If you’re not cut out for all that work, you can hire a property manager, but it comes at a cost, of approximately 6% to 12% of the monthly rent payment.
- Tied-up capital: While you will probably be receiving a monthly cash flow from your rental, the bigger payoff can be a long way down the road, since you’re holding the property longer than you would a home you’re flipping. That means that you could miss out on other real estate investment opportunities, since your capital is not available until you sell.
Interested in buying your first investment property? Contact DiVito Dream Makers today!
Article originally appeared on Realtor.com.