Real estate can be a highly lucrative investment, producing many of the world's wealthiest people. It's one of the five basic asset classes that every investor should seriously consider adding to their portfolio (fixed income, equity, commodities, cash, and real estate comprise the list) for the unique cash flow, liquidity, profitability, tax, and diversification benefits it offers.
Considering a leap into the realm of investment properties? Arming oneself with information is crucial to help beginners make the right decisions and find the right properties.
What is Real Estate Investing?
The four main ways to generate income through real estate include:
1. Real Estate Appreciation
This is when the property increases in value. May take years or even decades to see a return.
2. Cash Flow Income or Rent
Purchasing a property and operating it so that you may generate cash from rent on a monthly basis.
3. Real Estate Related Income
Money made from those involved in the buying and selling of real estate (commissions to brokers, property management fees, etc.)
4. Ancillary Real Estate Investment Income
Things such as vending machines in office buildings or laundry facilities in low-rent apartments.
Set Realistic Goals and Understand your Strengths
In order to maximize profits, many property owners (with one or two homes) complete their own repairs and renovations. For those not well-versed in drywall, plumbing, or the array of other home related projects a landlord may undertake, perhaps this type of investment isn't the right choice. While some jobs can be hired out, an investor needs to weigh these costs against the gains they hope to make from the property,
Also, while a fixer-upper may seem like the perfect bargain, flipping a property is extremely time consuming and labor intensive. Know your area of expertise before diving into a huge project.
Pay down debt, save for the down payment, and beware of high interest rates. The requirements for an investment property differ from those of an owner-occupied property. More stringent requirements mean a larger down payment, at least 20% for a rental property, for example.