As almost any successful entrepreneur will tell you, true wealth lies in owning capital. Even if you’re on a top wage, there are few better ways to secure your financial life and that of your family and future generations than by building a real estate portfolio. Forget about so-called get-rich-quick schemes and hugely risky investments – the real money lies in owning property and making an income from it.
According to financial services giant Morgan Stanley, around 77% of millionaires owned assets in real estate at the time of report. Additionally, some 90% of millionaires around the world have made their fortunes from real estate in the last 200 years. Even in the case of modest investors with minimal savings to begin with, real estate presents the opportunity to accrue significant wealth over the years.
For most people who ultimately succeed in real estate investment, the path to wealth and financial freedom starts with nothing more than owning your own home, even if there’s still a significant mortgage debt on it. At this point, the journey to real estate success begins, whereby you gradually build up your assets over time and make money from reselling or renting out property.
Investing in real estate is not nearly as complicated or risky as many people make it out to be, but that’s not to say it’s easy money right from the outset. As is the case with any form of investing, you’ll need to familiarize yourself with the marketplace and learn how to spot the most promising opportunities. You’ll also need to be financially prepared and have an exit strategy in place.
#1. Frequently Asked Questions
There are countless places to keep your money, and they all come with varying degrees of risk. Every type of investment comes with its own set of pros and cons, and some risk is inevitable. Nonetheless, real estate presents a world of opportunity when it comes to property appreciation, cash flow, financial leverage and even tax benefits in some cases. If you’re still uncertain, the following frequently asked questions should help you to see the value in real estate and address your concerns:
Can I Invest in Real Estate without Any Starting Funds?
Perhaps the most common of all concerns among would-be investors, a lack of funding to begin with can present some problems, although it is indeed possible in certain cases to start building your property portfolio from next to nothing. However, to take advantage of the best mortgage rates and enjoy a far greater degree of financial freedom, it will help enormously if you have a reasonable deposit to pay towards your first property. A good credit rating will also help to widen your borrowing opportunities, lending to greater financial flexibility.
Investing in real estate without any starting funds comes with a high degree of risk, so it’s generally best to start once you’ve saved up a substantial enough deposit to obtain a mortgage at a satisfactory rate. There are 100% and 95% mortgages available in some countries to help first-time homebuyers, but they are generally not ideal for investment purposes, since you could end up in negative equity whereby the mortgage debt is greater than the value of the property itself should property prices fall. For those starting with little or nothing, there may be opportunities available, such as private money lenders, help from friends and family or by going into a partnership.
Can I Get Rich Quickly from Real Estate Investment?
Everyone wants to get rich quickly in return for very little effort and minimal up-front investment, and you don’t have to look too far to find advertisements claiming impressive results almost overnight from real estate investment projects. However, if any kind of investment opportunity sounds too good to be true, then it almost certainly is. Making money from property means building up capital over a long period. In fact, real estate is the exact opposite to a so-called get-rich-quick scheme and, while there are people who have succeeded in building up their capital remarkably quickly, true wealth will usually take quite some years to reach you. As such, you should approach real estate with careful planning and persistence by building your business and watching the profits steadily increase over the years. There are no shortcuts in this business!
Do I Need to Pay a Professional to Help Me?
Those advertisements you might have seen promising enormous wealth in return of little effort are nothing more than scams. There are no products, services or shortcuts that will do the work for you, and hiring a professional is likely to be nothing more than a costly disaster. A lot of these so-called real estate investment gurus are after your money by peddling expensive courses and mentoring, but none of them can guarantee success. While there are indeed some extremely knowledgeable professionals out there who might be able to help you get started, it is crucial that you don’t cave into the hype and promises of exposure to so-called real estate secrets that really don’t exist anyway. In other words, you need to educate yourself to truly increase your chances of succeeding in the real estate market.
That being said, using a real estate agent who specializes in investments (call 1-800-805-8354 to find one in your area) to represent you in a transaction is advised. Allow your agent to help find properties potentially ideal for investments. They can help negotiate, handle inspections, and all of that tedious paperwork that goes along with your purchase. The best news is that in most cases the seller pays the buyer’s agents commissions. Be sure to check first!
What Are the Risks Involved?
Every investment opportunity comes with a degree of risk, and it is up to you to determine whether the risk involved is acceptable or not. However, real estate is far less risky than many other investments, such as the stock market. After all, there’s no substitute for owning actual bricks and mortar and the land it sits on than owning a share in a company that could collapse at any time. People will always need a roof over their heads, and there will always be a need for land. Unless you’re expecting a Bolshevik revolution in your country, you can be pretty sure that the real estate you buy will always retain some inherent value, both to you and to the market. However, that is not to say that there aren’t still significant risks involved. You’ll need to be able to pay your monthly mortgage fees, budget carefully for factors such as problem tenants, unforeseen repairs and any renovations that might be necessary. We’ll look more into the risks involved later on in this guide.
#2. Preparing for Success
While you don’t need to be an experienced guru to get started in the lucrative world of real estate investment, it is crucial that you educate yourself first to prepare for both success and failure alike. Most importantly, you’ll need to overcome your fear before familiarizing yourself with the various terms and financial factors involved in investing in property. With a great foundation in place and a reasonably substantial knowledge in what makes the real estate market tick, you’ll be much better equipped to experience long-term success. Before you put down any money, you should conduct extensive research both online and offline. A mentor can also help you, although it is important to remember that you don’t necessarily need to pay for professional advice, even if you are a complete novice.
Understanding Financial Mathematics in Real Estate
The mathematics involved in real estate investments really isn’t as hard as you might think it is. Most importantly, you’ll need to weigh up the likely expenses against the income you expect to make. Many people make money in real estate by buying a property and renting it out, in which case they’ll need to compare the rental income to the monthly fees, such as mortgage payments, insurance, maintenance costs and any taxes concerned. In this case, you’ll be able to work out your return on investment simply by adding up the expenses and subtracting them from the total income from the tenant.
Other investors aim to increase their capital in the form of a single lump sum rather than an income boost by flipping properties. For example, a property in a currently poor state, reflected by a heavily discounted price, may allow buyers to profit substantially by renovating for the purposes of reselling at a higher value. However, such an investment is by far the riskiest of the two options, since it’s easy to lose control over the cost of the renovations required. Nonetheless, flipping properties in such a manner is the most effective way to build up your investment portfolio in less time. For example, you might buy a property in desperate need of renovation for $100K, spend $50K, on repairs and then be able to sell it for $200K,. However, to increase your profit margin, you’ll need to have as accurate an idea as possible of how much you need to spend on it.
Understanding the Risks
Overcoming your fears of real estate investing requires garnering a thorough understanding of the risks and opportunities involved. Following are some of the most common concerns and how to address them:
- Rising interest rates can significantly increase your monthly outgoings if you’re borrowing money to fund your investment. To combat this factor, many investors and homebuyers opt for a fixed-rate mortgage when interest rates are low, locking them into a low rate, typically for a period of five years or more.
- High interest rates can greatly reduce the opportunities available to real estate investors, particularly if typical rental prices in your area are lower than monthly mortgage payments are likely to be. As such, it’s generally better to invest when interest rates are low, unless you can fund your investment from your own pocket, provided property prices aren’t at a peak.
- Depreciating property values present significant risks to those borrowing more money, particularly those with 95% or even 100% mortgages. If the value of the property drops, you could end up in negative equity. To minimize the risk of landing in negative equity, you should find alternative funding wherever possible and avoid selling until property values increase.
Knowing the Market
Success in real estate and minimizing the risk involved comes largely from knowing the market. You will need to thoroughly familiarize yourself with the local market in the region or country you want to invest in, including its history for the last 10 or more years. Following are some key factors to consider:
- The best time to borrow money is when interest rates are at a historic low, as they have been for some years in many countries, particularly if you can lock yourself into a fixed-rate deal. For example, the average annual repayment rate for a 30-year fixed-rate mortgage in the US was an enormous 8.21% in January, 2000, but in January, 2016 saw the average rate decrease to 3.92%.
- The best time to buy property is when market values are historically low, but there are exceptions even when they are high. For example, properties that are in poor condition or have been repossessed by the bank from the previous owner for being unable to pay the mortgage or properties brought at auction are often significantly cheaper.
- Historic properties and listed buildings, particular those in need of restoration, tend to hold inherent value, and will likely only increase in value in the longer term. By contrast, a modern apartment or property in a housing estate is not likely to offer a great return on investment in the long term unless it’s in a highly sought-after area.
- Off-plan developments present the highest degree of risk, since they sometimes end up not getting built at all. As such, it’s generally wise to avoid off-plan property unless there is a cast-iron guarantee in place protecting your investment. One only has to look at the property boom and subsequent crash in Spain in the early 2000s to see how disastrous such a situation can be.
#3. Creating an Investment Strategy
Although educating yourself in the world of real estate investing by getting to know your market is crucial for success, there’s no substitute for putting a plan in place. You’ll first need to find your investment niche, whether it’s buying land for property development, buying houses or apartments to rent out, commercial property or property for renovation and resale. The best option to get started with will vary depending on your requirements, experience, location and the money you’re prepared to invest upfront. However, you might be pleasantly surprised by the number of opportunities available to you. In this section, we’ll take a look at the main types of property investment and the strategies required to see them through to success.
Buy and Hold
The most common type of real estate investing is one that many people make without even paying much attention to it. Buying and keeping a property until the market sees an increase in value is the easiest one of the least risky ventures in the longer term. After all, many people own homes that have been in the family for years without even knowing that they can sell it for a significant profit even when taking into account inflation. However, when you’re buying a property for the sole purpose of a buy-and-hold investment, there are some important factors to take into account, such as historic real estate values and good opportunities in property niches that are trending or in high demand. In other words, to make a considerable success, you’ll need to understand the market in the area where you want to buy.
From an investment point of view, it often makes sense to buy a property in a sought-after area where you can charge a high enough rent to cover the expenses and still make a healthy profit. However, in many markets, it can sometimes be cheaper to rent than to buy, in which case you’ll only make a loss. Other important considerations to take into account include the legal and taxation obligations you have as a landlord in your country or region, choosing reliable tenants and managing your property correctly.
Understanding the real estate marketing cycle is essential when buying and holding property. The procedure broadly involves the following steps:
- You buy the property at a low price when the market is declining, perhaps due to over-development or a rise in foreclosures. Savvy investors tend to buy when the market hits rock bottom.
- You rent out the property, either to short- or long-term lets as confidence in the real estate market starts to recover, leading to an increase in house prices. Short-term lets usually provide more money and a much greater degree of flexibility, but require more work.
- You wait for the real estate market to peak again to the point that it likely becomes cheaper to rent than to buy. However, while the buyer’s market might be smaller during these peaks, you should still be able to sell for a hefty profit. Nonetheless, you will usually need to have a vacant property first.
Flipping properties involves buying real estate at a cheap price, either due to low market values, foreclosures or properties in need of repair, and selling them for a profit rather than holding them for a long period of time in order to rent them out on short- or long-term tenancies. Flipping properties presents the most effective way to increase your capital quickly to the point that you can expand your investment portfolio in much less time. The process is much the same as the buy-low-sell-high model that retail businesses use. However, to make the most out of your investment, you’ll need to buy the right kind of property, carry out the required work as quickly and cheaply as possible and then sell it to make a profit. After all, while you’re renovating the property, you won’t be renting it out and making any money from it. Until the work is done and you have an offer accepted, the property will only be costing you money.
Buying low and selling high comes with a certain degree of risk as well as an impeccable understanding of the real estate market in your region. To start with, you’ll need as much cash as possible to pay for a mortgage deposit or, better still, be able to buy the place entirely out of your own pocket. You’ll also need to take into account the cost of repairs and improvements, so it makes sense to get some quotes before putting in an offer and committing yourself to a purchase. A good investment for a house-flipping project should take into account the following:
- As is the case with buy-and-hold investments, you’ll need to choose something in a desirable or up-and-coming region to increase your chances of being able to sell it for a good price. If you plan to market it as a family home, you’ll also want to choose something with schools and other important facilities in the area.
- Less experienced investors should always choose a home that is structurally sound, and a professional home inspector should be able to determine this. If major structural work is required, the cost of renovating the property can skyrocket, making it something best left to experienced professionals.
- A home that needs little or no structural work but needs an extensive facelift, such as new floors, a bathroom and a kitchen is usually the sweet spot for less experienced investors. If you’re able to do some of the work yourself, you’ll be able to save a great deal of money leading to higher profits once you’re ready to sell up.
- The most important factor of all is, unsurprisingly, the asking price of the property. Ultimately, it’s best to buy the cheapest house in the best neighborhood rather than a good house in a bad one. Above all, make sure you thoroughly study the local market to determine the discrepancy in asking prices between renovated and dilapidated property.
Other Investment Opportunities
The two methods featured above represent the most popular forms of property investment for beginners. However, there are other ways to make big money with real estate, although these are largely for veteran investors and businesses with large budgets and plenty of experience. For example, many developers profit enormously by buying nothing more than raw land with the planning consent to build houses on it to then go on and sell those houses for a substantial profit.
#4. Understanding the Rules of Real Estate Investment
Although there are few hard and fast rules in the world of property investment, you should take these so-called rules as guidelines to help point you in the right direction and minimize the risks involved. These rules can be flexible, since their validity depends on various factors, such as the current market and any additional overheads you might have.
Many investors use the 2% rule as a guideline to minimize risk. In the case of real estate, this rule dictates that the monthly gross income from a property you want to rent out is at least 2% of the amount you paid for the property. For example, if you purchased a property for $100K, you’d want to get upwards $2K per month in rent from it. Unfortunately, this sort of return is almost impossible to achieve in most markets. On the other hand, if mortgage rates are low, the lower expenses give you some more flexibility. Consider a more realistic real-world example:
• The property costs $100K
• You pay a 10% deposit
• You take out a 30-year fixed-rate mortgage of $90K
Taking the average mortgage repayment rate of 3.92% as an example, the monthly cost of your mortgage would work out at approximately $425 per month. In this case, you would still be earning a healthy monthly amount after paying the mortgage, even if you could only charge $850 per month in rent. However, you will need to take into account other outgoings, such as maintenance and insurance. You may also reduce your monthly mortgage bills by going for a variable interest rate deal or by paying a higher deposit.
The above example uses the much more attainable 50% rule, whereby half of your gross income (from rent) is profit and the other half covers all of your expenses, including your monthly mortgage repayments. Most property investors will want to stick by this rule in order to secure their financial wellbeing. However, there are always other risk factors to take into account, the most significant being the possibilities of having the property empty for a period, any renovation expenses being required and problem tenants that end up costing you money.
The above examples obviously don’t apply if you’re planning to buy property at a low price and sell it for a profit after you’ve carried out repairs and improvements. Investors hoping to flip property typically use the 70% rule as a guideline. In this case, you should pay no more than 70% of the value of the property after renovation and repairs and the property in the first place. Consider the following example:
• The property costs $100K
• The property should be worth $200K after repairs
• You should spend no more than $35K on repairs
• Your total spending is $135K, or 70% of the resale price
• Your profit should be around $65K
In the above example, the amount you spend on buying the property and carrying out repairs and improvements should not exceed 70% of the post-renovation value of the property. Since renovation projects can easily exceed your original budget, it is very important to leave plenty of space left over to still make a healthy profit. The above example does not take into account mortgage repayments, although you should be able to pay the mortgage off in full as soon as you’ve sold the property.
#5. Making Your First Investment
Once you’ve educated yourself on the real estate market and determined whether or not it’s a good time and place to buy and you’ve decided what sort of investment you want to make, it’s time for the most exciting part: finding the perfect property to suit your criteria. You already understand that you need to seek out a great deal in order to almost guarantee your profits, but now it’s time to write down your criteria so you can narrow down your search. However, it’s never a bad idea to look at properties that you don’t actually have any interest in purchasing in order to get a better idea of the market. As an investor, the more flexibility you have, the wider your range of options will be. Once you can call yourself familiar with the market, you’ll be ready to start searching for the real opportunities. Following are some of the criteria you might want to consider:
- The region and neighborhood will likely be somewhere that you can easily get to, although more experienced property investors might want to look into buying property further afield or even abroad to take advantage of more attractive markets. However, as a beginner, it’s always safer to start smaller and closer.
- The size of the property will be one of the defining factors of its value, although there are often diminishing returns with much larger properties. You’ll be looking at properties of a certain floor size (in square feet or metres) or, more importantly, the number of bedrooms. Unless you’re buying an apartment, you’ll need to consider the land size as well.
- The condition of the property is a key consideration, and it rarely makes sense to buy something in perfect condition for investment purposes, even if you’re very much set on a buy and hold-type investment. Even something that needs little more than a quick coat of paint and a new bathroom and/or kitchen might be significantly discounted.
- The appreciation potential is another very important factor, particularly if you’re planning to buy cheap and sell at a higher price later on. There’s always going to be a degree of speculation, but you can usually be fairly sure that quality property in sought-after areas will only increase in value in the longer term.
The criteria you choose for your investment depends largely on personal preference and experience, the degree of risk you’re willing to accept, the current property market and your budget. However, since your goal is to make money, you should avoid prioritizing personal preference unless you actually plan to live in the property yourself.
Financing Your Investment
Few people start out with enough money to invest in property solely out of their own pockets, although your profit margins will be far higher if you invest using entirely your own cash. The vast majority of first-time homebuyers and investors alike take out a conventional mortgage, although you will usually still need to put down a deposit of at least 10%. The higher the amount you’re willing to pay yourself, the better the range of mortgage deals available to you. The best mortgage rates tend to be available to those who can fund 20 to 40% of the value of the property they want to purchase. In the case of flipping properties, you’ll also need to factor in the cost of repairs and improvements when determining how much you need to borrow. It’s always wise to have a substantial amount left over to cover you in the event of any unforeseen expenses arising. For example, in the case of renovating a property, there’s always a high chance of an unforeseen issue arising that needs to be dealt with, and you cannot solely rely on a home inspector or surveyor to discover every potential problem with the property.
You should now have a reasonable idea of how real estate investing works and be better prepared to draw up a plan. Ultimately, you need to begin with the end in mind whereby you either sell the property for a profit in order to invest the funds into something more substantial or you enjoy an almost passive income by way of rentals. As you flip properties and/or increase your monthly income, your opportunities for investing in larger projects and obtaining more substantial mortgages will provide you with a great deal more financial leverage and security later on. It certainly won’t happen overnight, but by starting small, being patient and having realistic expectations, you’ll be able to greatly increase both your income and your capital worth.
Want to look at properties in your market? Give Ballen a call at 1-800-805-8354 to connect with an investment special in your area that can give you immediate access to an entire database of MLS listings that may be just right for you.
Call Ballen at 1-800-805-8354 to be paired with a great real estate agent anywhere in the nation.