Real estate investment seems like a sure-fire way to get rich — after all, land will always be valuable. However, real estate is a dangerous game, and you stand to lose a great deal by jumping in without experience or education.
Real estate investment is more than buying and selling properties: It is buying and selling the right properties at the right time. To get a sense for the rights and wrongs of real estate, you need to take baby steps into this investment opportunity. Fortunately, this guide will show you how to put one foot in front of the other, and soon you’ll be walking into a successful real estate investment career.
Understand How Real Estate Makes Money
Real estate properties don’t magically provide you with bundles of cash. Rather, there are four discrete ways you can increase your wealth through real estate:
- Cash flow income. You can buy real estate properties and use them to generate a steady stream of incoming cash. For example, you might buy or build apartment or office buildings to collect rent. As long as your tenants are trustworthy, you can usually enjoy a healthy income from this method.
- Appreciation. Unlike most other items you own, your real estate properties will likely increase in value for a variety of reasons. Real estate appreciation is a risky game that requires experience with specific markets. Generally, it is riskier than buying properties for cash flow income.
- Related income. “Specialists” in the real estate industry, such as brokers or management companies, make money by buying, selling, and managing properties. Typically, they make a commission of the total, meaning their income is less than investors and owners, but their risk is also lower.
- Ancillary income. Ancillary investments include sources of revenue like vending machines or laundry facilities strategically placed around real estate properties. For some investors, these mini-businesses can generate significant profits.
Know About Different Types of Real Estate
Not all real estate operates on the same market, and not all properties offer identical rewards. There are five primary types of real estate as well as one investing option that is closely tied to real estate:
- Residential. Houses, apartment buildings, townhouses, vacation houses — anywhere someone can live is considered residential. You determine the length of the tenant’s lease, but most residential rental properties operate on a 12-month basis.
- Commercial. Office buildings and skyscrapers are leased to companies and small business owners for several years at a time. This offers you more stability in your cash flow, but might prevent you from capitalizing on a hot market.
- Industrial. Warehouses, distribution centers, storage units, and other special-purpose properties can be leased by tenants for short periods.
- Retail. Shopping and strip malls as well as other retail storefronts can be lucrative, especially if you request a percentage of your tenants’ sales in addition to base rent.
- Mixed-use. Properties that combine any of the above two (or more) real estate types into a single project. These are becoming incredibly common in urban areas, where retail or office space combined with residential space provides higher quality of living and greater income potential.
- REIT. You invest in real estate investment trusts (REITs) the way you would a stock or mutual fund. However, unlike stocks and mutual funds, REITs are composed entirely of real estate properties There are different types of REITs that work with specific types of real estate. In fact, investing with REITs before you buy your own properties is a safe way to become more familiar with different markets.
Find Someone Who Provides Targeted Advice
If you are attempting to begin investing in real estate with no experience whatsoever, you absolutely must find a mentor. Because real estate is so risky — and because it deals with such significant amounts of money — it is easy to make mistakes that financially cripple you for life. It isn’t difficult to find information on how to invest in real estate, but if you couple your research with advice from an ally or guide, you are sure to build a real estate investment foundation you can trust.
Determine How Much You Can Invest
Finally, it’s unlikely that you have unlimited cash to spend on your new real estate investment career. You don’t need to buy multi-million-dollar apartment complexes at the outset; if you are a successful investor, that will come in time. To begin, you should feel safe and sensible with a modest flip.
In fact, a smart way to begin investing is to assume you will lose everything you invest. If that occurs, you should still have enough money left to keep a roof over your head and food in your mouth. A smart investor knows their financial and emotional limits.