Entering the world of real estate is often captivating but it requires a lot of effort, paperwork, and plans nonetheless to execute. Owning real estate is a great way to generate either active or passive income, depending on how much you want to invest your time into the industry. But what does investing in real estate entail exactly? Is there a clear-cut path or several options? What about financing those investments? If you are seriously considering investing in real estate anytime soon, here’s everything you need to know to get started.
Different Types of Real Estate Profit
Real estate isn’t a one-way street where you have to do what everyone else in the market is doing in order to make your investment pay off. There are a variety of ways you can generate income from real estate. That means you can find the path that aligns best with your interests, needs, and opportunities at the moment. Let’s take a look at some of the most notable ways.
1. Renting Out
You can purchase a property (either a single apartment or a multi-unit complex) and exclusively rent it out to either short-term or long-term tenants without living in it yourself. Renting it out as an Airbnb is a great option if you don’t want long-term tenants. With this, keep in mind that depending on the type of mortgage you opt for, you may be required to live in one of the units yourself in order to qualify (but more on that in a minute). Renting out is a great way to gain regular income that will not only be a flow of income but also help you cover mortgage repayments (if you secure the property with a mortgage). Then, you can decide to invest the income into another venture if you want.
2. Holding
Believe it or not, properties increase in value year after year, especially if it isn’t in use (running the risk of devaluing the property) because of inflation. That’s why you’ll see properties that were bought in the last decade selling for double the price now. This is also why homes are seen as major assets to people who don’t even want to enter the real estate industry officially and simply want to own a property instead of spending thousands of dollars on constantly renting. With the same logic, you can decide to buy a property and hold it to sell later at a higher price, whether that’s through living in it yourself, renting it out for a certain amount of time, or leaving it be until you want to sell it years down the line.
3. House Flipping
House flipping is the process of attaining a property that isn’t in optimal condition and increasing its value to the point that you get a significant return on investment when you sell it. This requires careful calculation though in order to ensure that the costs of the renovations won’t break the bank to the point that you won’t be able to resell the property at a price that covers those costs. You also need to take advantage of the risk of running into unprecedented conditions where the costs of the flipping will increase. Other than that, it’s a great first step to take if you want to invest in real estate.
Financing Real Estate Investments
Whether as a form of passive income or regular primary income, you need an initial push to put you into a consistent cycle of return on investment. It doesn’t matter if you’re only in the market to buy an empty plot of land or a multi-unit complex, purchasing property is costly. How can you get initial financing for your real estate investments? Here are a few options you have as a beginner:
- Mortgages for real estate investors — Just as mortgages are a great opportunity for individuals to own their first home, they are just as helpful for financing your real estate investments. If you specifically want an investment property, you can opt for an investment property mortgage where the lender will know that you will be generating profit from the property instead of simply living in it. Typically, these types of mortgages are high-risk loans since the lender doesn’t have any guarantee that you will generate income from the property. You may need to shop around for a mortgage that offers better terms. Some types of mortgages may only grant you an investment property at a good rate if you will reside in one of the units on the property.
- Utilizing home equity — If you already own a property and have enough equity in it, then you can consider home equity loans to finance a second property (or at the very least, a chunk of the cost). This is a great financing option even if you simply want a single investment property and do not recurringly buy/sell homes. Utilizing home equity is essentially another type of mortgage, but essentially it’s a reverse mortgage where the bank pays you a lump sum and the repayments are more flexible than with standard mortgages.
- Investing your own money — Last, but not least, you can always use your own saved up assets to finance your investment properties. This is a high-risk option, but if you want to refrain from the world of interest rates and loans along with having the means to finance the property you want, then it’s always an option!
Hopefully this helped to give you a better idea of how to get into the world of investing in real estate.
