Investing in real estate can be a great way to diversify your portfolio. Relying only on the stock market can leave you devastated if the market crashes. Most financial advisors suggest that you diversify your portfolio outside of investments involved in the market, and real estate is a great option.
You don’t need to be a millionaire to invest in real estate. People of all income levels can invest in it if they know how to do it right. The best thing about real estate is you can leverage your investment, meaning you can invest a small amount of cash yet make a significant investment thanks to mortgage financing.
If you’ve never invested in real estate before, here are five great ways to get started.
5 Ways To Start Real Estate Investments
Getting involved in real estate investments isn’t as far-reached as you’d think. Today many loan programs make it easy to leverage your money. Before you invest, use these five tips to get you started.
1. Save Money And Think About Your Options
It’s no secret that you need money to buy real estate investments. But the good news is you don’t need 100% of the sales price.
Most lenders allow you to borrow with as little as 20 – 30% down. That’s $20,000 – $30,000 for every $100,000 in sales price. It’s not a bad deal to invest in something worth $100,000 for only $20,000, right?
As you save money for your investment, think about how you want to invest – you have two main options:
- Fix and flip – As you see on shows like Fixer Upper, you too can buy rundown properties, fix them up, and sell them for a profit. Unfortunately, you won’t make nearly the money they make on the show, but you get the idea. If you have the resources to find an undervalued home and the cash (or financing) to fix it up, you may flip a profit.
- Buy and hold – More typical for new investors is the buy and hold real estate investment strategy. When you buy a home in an area desirable to renters, you own the home but rent it to tenants. It’s a great way to make monthly cash flow while earning the equity and future capital gains in the house.
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2. Find Homes To Invest In
Here’s the more challenging part. You have to find homes that are a good investment. Just perusing the MLS listings won’t be enough. Sure, you’ll find properties for sale, but is there money in them after all of your operating expenses?
Instead, you need either a licensed professional to help you find homes that make a good investment or use a real estate investment platform. If you use a platform like Roofstock, not only will you find properties perfect for investors, but you can bid on properties that already have renters.
See also: How to Invest in Real Estate Online
Buying turnkey real estate takes less work upfront since the home already has tenants and doesn’t need renovations. It also provides almost immediate cash flow since you start earning rent from the day you close on the property.
As a turnkey investor, you take over the lease on the property. Your tenants stay in the property, and the only thing that changes for them is who they write a check to each month.
3. Determine Your Operating Expenses
A big part of investing in real estate is understanding your operating expenses. Just like a business, you’ll have costs that come off the top of your earnings. Your net profit is the total rent charged minus your monthly expenses.
Determining your operating expenses yourself can be overwhelming, especially if you’re a first-time investor. Here’s a simple breakdown of the most common expenses investors face:
- Real estate taxes
- Homeowner’s insurance
- Home maintenance and upkeep
- Major home repairs
- HOA fees
- Mortgage loan payments
- Property management fees
4. Build A Team
It takes a village to make real estate investments work. Even though you have the money to invest, there are many other pieces to the puzzle. Trying to take it all on yourself is too much and doesn’t work.
Your team should include several professionals, including:
- A licensed appraiser to determine the fair market value of the home to make sure it’s a good investment
- A property management company to handle managing the physical property and dealing with the tenants.
- A lender to provide the financing under terms you can afford
- An attorney to oversee the real estate process
- A financial advisor to help you decide if real estate investing is the right choice
5. Seal The Deal
After you’ve assembled your team, done your homework, saved enough money, and found a home on Roofstock Marketplace, your next step is to make an offer and close on the deal.
If you use Roofstock Marketplace, you do everything through their platform. It’s simple to negotiate back and forth with the seller and finalize the sale.
Once you reach an agreement, you provide the sales contract to your lender and finalize financing. Closings take place within a few weeks of signing the contract, and when it’s done, you are a new real estate investor.
What Is The Minimum Amount To Invest In Real Estate?
Investing in real estate doesn’t have to seem impossible. Even though you’re investing in a property worth a couple hundred thousand dollars doesn’t mean you need that much money. It’s this thought that holds many would-be investors back.
Because you won’t live in the home, lenders want a larger down payment than they’d require if you did occupy the property. Owner-occupied loans can get away with a down payment as low as 3.5% in some cases.
To invest in real estate, though, you’ll need 20% – 30%. It sounds like a lot, but when you’re investing in something worth much more, you’ll see the benefit in the down payment.
Not only are you able to secure financing when you make a decent down payment, but you’ll have equity in the home.
Equity is the difference between the home’s value and your current mortgage. If you were to sell the house today, you’d get the difference between the value and the loan’s balance. When you start your investment with a decent amount of equity, you’ll walk away with an even larger capital gain when you sell the home.
Is Real Estate Ever A Bad Investment?
All investments have risks. There isn’t anywhere you can invest your money except a savings account that carries no risk.
So is real estate a bad investment? It can be if you don’t do your due diligence. But, when you work with a reputable platform like Roofstock Marketplace, it’s easier to make suitable investments – investments that earn you monthly cash flow and allow your equity to grow.
Even using Roofstock, always do your research. Before you look for homes, know what you want. Ask yourself:
- Do I want to invest long distances? Frequently you’ll find better deals investing halfway across the country. This is especially true if you live in a high-cost area. Sometimes the prices get too high to afford. Finding affordable properties a few states away, though, may open more possibilities, but you’ll need to trust a property management company to handle the property.
- What type of property do I want to invest in? Most first-time investors invest in a single-family property. There are fewer restrictions (no HOA to answer to), and single-family homes hold their value better than condos or townhomes.
- What type of lease do I want? When you buy a turnkey property, it already has a lease and active tenants. Knowing the type of lease you want and the terms you’ll accept is essential. Do you want a lease that’s ending soon, or do you want a long-term tenant so you don’t have to worry about vacancies?
- What are the values like in the area? Don’t focus on the homes’ current values but on the historical performance of the houses. Have they regularly appreciated, or did their values look a bit like a rollercoaster ride? Focusing on areas with steady values keeps your investment secure.
Can You Lose Money Investing In Real Estate?
You can lose money investing in real estate, just like you can lose money investing in the stock or bond market or any other asset. The key is in the research you do to make sure the investment is as sound as possible and has few risks.
Is Owning Rental Property Worth It?
This is where many people get stuck. They see the work involved in real estate investments, and they think it’s not worth it.
But, when you work with a reputable platform like Roofstock Marketplace, you’ll know what you’re getting into before you buy it. Seeing the property’s financial analysis, operating expenses, and expected returns is half the battle.
Sure, you could buy a bad property, and if you don’t manage it right, it could be a difficult situation. But having the right professionals on your side and the accurate reports to review and make a decision, owning a rental property can be worth it.
Knowing who you can lean on to handle the property management, who will give you legal advice, and even help to find the right property is the key to a successful real estate investment.
Increasing Your Chances Of Buying Rental Property
The key to buying a rental property is finding the right financing. Investment property loans can be harder to find because lenders often don’t want to take the risk. Since it’s not your home, you could easily default on the loan.
Here’s how to increase your chances of approval:
- Check your credit – Investors need good credit scores to get an investment property mortgage. While you don’t need perfect credit, the higher your score is, the better your chances of approval at the lowest rate and/or highest loan amount.
- Pay off your debts – Pay off as many consumer debts as possible before applying for an investment loan. Lenders prefer low debt-to-income ratios, which compare your current debt payments to your gross monthly income.
- Have reserves available – Lenders like it when borrowers have reserves on hand (liquid assets). This shows lenders you can manage the mortgage even if you lose your tenants and the home remains vacant.
Diversify Your Portfolio By Investing In Real Estate
Diversifying your portfolio with real estate is one of the best ways to offset the stock market’s risk. With money in different assets, you don’t have to worry about losing everything should one market crash.
Including real estate in your portfolio not only sets you up for a long-term investment but also creates monthly cash flow, helping you build your portfolio even further. Whether you’ve never invested before or you’re an experienced investor, Roofstock Marketplace is a great way to find the perfect investment property today.
Image by Paul Brennan from Pixabay
