Table of Contents
Real Estate 101: A Beginner’s Guide to Investing: Real estate investing can be an exciting and profitable venture. However, for beginners, the process can seem daunting. This comprehensive guide aims to demystify the world of real estate investing, providing practical advice and insights for new investors and those with a few years of experience.
☛ Understanding Different Types of Real Estate Investments
The first step in your real estate investing journey is understanding the different types of investments available. These include residential properties, commercial properties, industrial properties, and raw land. Each type has its own set of advantages and challenges, and the best choice depends on your financial goals, risk tolerance, and time commitment.
1. Residential Properties
Description: Residential properties are dwellings that are designed for people to live in. They can range from single-family homes to multi-family properties like duplexes, triplexes, and apartment buildings.
Pros:
- High demand: People always need a place to live, so there’s a constant demand for residential properties.
- Easier financing: It’s often easier to get a mortgage for a residential property than for other types of real estate.
- Lower entry point: Residential properties, particularly single-family homes, often have a lower price point than commercial or industrial properties, making them more accessible to new investors.
Cons:
- Management intensive: If you’re renting out the property, dealing with tenants can be time-consuming and stressful.
- Lower returns: Residential properties often have lower returns on investment compared to commercial properties.
2. Commercial Properties
Description: Commercial properties are buildings that are used for residential and business purposes. They can include office buildings, retail spaces, restaurants, and more.
Pros:
- Higher income potential: Commercial properties often generate higher rental income than residential properties.
- Longer leases: Commercial leases are typically longer (10+ years) than residential leases, providing more stable income.
Cons:
- Higher investment: Commercial properties typically cost more than residential properties, which can be a barrier for new investors.
- More complex: Managing commercial properties can be more complex due to factors like commercial lease agreements and property maintenance.
3. Industrial Properties
Description: Industrial properties are used for industrial activities such as manufacturing, warehousing, and distribution. They can range from factories to warehouses to industrial parks.
Pros:
- Long-term leases: Industrial leases are often signed for many years, providing stable income.
- Lower maintenance: Industrial tenants typically maintain the property themselves, reducing the landlord’s responsibilities.
Cons:
- High investment: Industrial properties can be expensive to purchase and maintain.
- Limited market: The pool of potential tenants for industrial properties is smaller than for residential or commercial properties.
4. Raw Land
Description: Raw land is undeveloped land with no buildings or improvements. It can be used for various purposes, including residential, commercial, or agricultural development.
Pros:
- Flexibility: With raw land, you have the flexibility to use the land for various purposes, depending on zoning regulations.
- Low maintenance: Raw land requires little to no maintenance.
Cons:
- No immediate income: Raw land doesn’t generate any income until it’s developed or sold.
- Risky: The value of raw land can fluctuate significantly, and there’s no guarantee that it will appreciate in value.
In each case their are opportunities. In some cases, being creative is king. Consider these four cases with raw land that would be considered “out of the box thinking.”
☛ Bonus: Out of the Box Thinking Raw Land Scenarios
Raw Land: buying highly discounted properties in common retirement states like Florida and providing owner financing to northern states customers.
Gary from Ohio vigilantly researches properties in Florida that are being liquidated (tax liens, estate sales, distressed, etc.)
He buys 2 properties at $10,000 each.
– They are both worth $28,000 each.
- Property A: paid $10,000
Sells it to Mary (47 years old) in NYC for $32,000
– Buyer pays $10,000 down payment
– Gary offers Mary financing:
– $22,000 loan at 12% interest for 15 years. - Property B: Gary paid $10,000
Sells it to Anthony (49 years old) in Chicago for $36,000
– Anthony provides $16,000 down payment
– Gary offers Anthony financing: $20,000 loan at 12% interest for 15 years.
In both cases, Gary is enjoying positive cashflow on both properties. FYI…Gary has 48 deals like this in Arizona and Florida that he has develped in the past 7 years.
Raw Land: Dietrich enjoys looking for farm land near big cities and rezoning the property to residential multi family.
- Property: He finds 12 acres of distressed farm land at 48% below market outside of Atlanta near a main highway.
- He performs the following actions:
– Performs extensive research and Property Survey
Rezoning: He learns that with the current population density rules from the local county laws he is able to rezone for a 58 unit structure.
Rezoning Submission: He submits and gets approval for the rezoning.
Builds His Dream Team: Finds a team of investors to finance and a local builder to build the project. - NOTE: because of his track record, his dream team helped him with a few other projects.
– in 12 months he has a 58 unit apartment complex $1,600 rent per unit a short distance from Atlanta and near a main highway. - Currently in the past 10 years he has built 4 structures totaling 269 doors. In addition, he sold two rezoned projects with plans to 2 other investors and paid off the first project. He now owns his first 58 unit project free and clear.
- He intends to repeat the process.
Investing in Tiny Homes:
John, a real estate investor from California, sees a growing trend in the popularity of tiny homes and decides to capitalize on it. He purchases a large plot of raw land in a scenic location in Oregon, where zoning laws are favorable to tiny homes.
- Area Research: Prior to buying John performs extensive research and realizes that the property is in the center of two larger towns with ample work, shopping, and other favorable amenities.
- Creates a Subdivision: He subdivides the land into 27 smaller plots and installs basic infrastructure like roads and utilities. He then sells these plots to people who are interested in building their own tiny homes.
- Buyer Incentives: To make the deal more attractive, John offers owner financing to buyers who can’t secure a traditional mortgage due to the unconventional nature of tiny homes.
- He also makes a deal with two local builders and offers two tiny home models at an affordable price as an option. He sells 14 units and after cost he makes $8777.00 per unit.
- Model A = $48.000
- Model B = $42,000
- He sells each plot for $37,000 with a $10,000 down payment and carries a note for the remaining $20,000 at 10% interest for 10 years.
In this way, John is able to create a steady stream of income from the interest payments, while also capitalizing on the growing tiny home trend.
Creating a Nature Retreat:
Sarah, an investor from Colorado, purchases a large plot of raw land in the Rocky Mountains. The land is remote and not suitable for traditional residential or commercial development, but it’s in a beautiful location with stunning views.
- Creative Approach: Instead of trying to develop the land in a traditional way, Sarah decides to create a nature retreat.
- Eco-friendly Project: She builds a few eco-friendly rustic cabins and markets the property as a vacation rental for people who want to get away from the city and enjoy nature.
- Financing Plan: To finance the project, Sarah uses a combination of her own savings, a small business loan, and a crowdfunding campaign. She also offers a pre-booking discount to raise funds.
- Instant Money Stream: Once the retreat is up and running, Sarah enjoys a steady stream of income from the vacation rentals.
- Open Options: She also retains the option to sell the property in the future, potentially at a significant profit due to the unique nature of the development.
☛ Financing Your Investment
Real estate investing requires capital, and there are several ways to finance your investment. These include traditional mortgages, hard money loans, private money loans, and real estate crowdfunding. Understanding the pros and cons of each financing method can help you make an informed decision and choose the best option for your situation.
1. Traditional Mortgages
Description: Traditional mortgages are loans provided by banks or other financial institutions. They are typically used to purchase a property, with the property itself serving as collateral for the loan.
Pros:
Lower interest rates: Traditional mortgages often have lower interest rates compared to other financing options.
Long-term repayment: Mortgages typically have a repayment period of 15 to 30 years, which can make the monthly payments more affordable.
Cons:
Strict requirements: Banks have strict requirements for mortgage approval, including a good credit score, stable income, and a certain debt-to-income ratio.
Slow process: Getting a mortgage can be a slow process, which might not be ideal if you need to move quickly on a property.
2. Hard Money Loans
Description: Hard money loans are short-term loans provided by private investors or companies. They are typically used for investment properties and are based on the value of the property, not the borrower’s creditworthiness.
Pros:
Fast approval: Hard money loans can be approved and funded quickly, which is beneficial for investors who need to move fast.
Less strict requirements: Hard money lenders are primarily concerned with the value of the property, so they may be less strict about credit scores and income.
Cons:
High interest rates: Hard money loans typically have higher interest rates than traditional mortgages.
Short-term: Hard money loans are usually short-term (1-3 years), so you’ll need to have a plan for refinancing or selling the property.
3. Private Money Loans
Description: Private money loans are similar to hard money loans, but they come from individual investors or personal connections. The terms and conditions are typically negotiated between the borrower and the lender.
Pros:
Flexible terms: Private money lenders may be more flexible in terms of loan terms and repayment schedules.
Relationship-based: If you have a good relationship with the lender, you may be able to secure better terms.
Cons:
Limited availability: Private money loans depend on your personal network, so they may not be an option for everyone.
Potential relationship strain: If the deal goes bad, it could strain your personal relationship with the lender. If you are a property flipper, cultivate this relationship at all times. This relationship will help build your investment momentum. “Remember an investor in motion stays in motion.“
4. Real Estate Crowdfunding
Description: Real estate crowdfunding involves pooling money from multiple investors to invest in a property. It’s typically done through an online platform.
Pros:
Accessibility: Crowdfunding allows you to invest in real estate with a smaller amount of money.
Diversification: You can invest in multiple properties, which can help diversify your portfolio.
Cons:
Limited control: When you invest through crowdfunding, you don’t have direct control over the property.
Risk of platform failure: If the crowdfunding platform goes under, you could potentially lose your investment.
☛ The Importance of Location
In real estate investing, location is key. The value of a property is significantly influenced by its location, and a good location can lead to higher rental income and property appreciation. When choosing a location, consider factors like job growth, population growth, and local amenities. Here are a few property location resources that will help you build a better understanding of what is going on in your investment location of choice.
Pro Tip: successful investors do their research and crunch their numbers!
PropStream (https://app.propstream.com/): PropStream is a comprehensive real estate data provider that offers information on property values, market trends, neighborhood statistics, and more. It’s a great tool for investors looking to analyze potential investment properties or areas.
Niche.com (https://www.niche.com/): Niche.com provides detailed information about neighborhoods, cities, and schools across the United States. It’s a valuable resource for understanding the quality of life in a particular area, including crime rates, school ratings, and demographic data.
Zillow (https://www.zillow.com/): Zillow is a popular real estate marketplace that provides a wealth of information about properties, neighborhoods, and real estate trends. You can use Zillow to compare home values, view property details, and read local market reports.
City-Data (http://www.city-data.com/): City-Data provides detailed profiles of cities across the United States, including data on demographics, crime, education, and real estate. It’s a useful tool for getting a broad overview of a potential investment area.
U.S. Census Bureau (https://www.census.gov/): The U.S. Census Bureau provides a wealth of demographic data about cities, counties, and states across the country. This data can be useful for understanding population trends, income levels, and other factors that can influence the real estate market.
Realtor.com (https://www.realtor.com/): Realtor.com is a comprehensive real estate website that provides listings for residential, commercial, and rental properties. It also offers market trends, real estate news, and a mortgage calculator. It’s a valuable resource for comparing properties and understanding the current state of the market.
LoopNet (https://www.loopnet.com/): LoopNet is the leading site for finding and marketing commercial real estate. It provides detailed information on commercial properties for sale or lease, including office buildings, retail spaces, industrial properties, and more.
Trulia (https://www.trulia.com/): Trulia is a real estate website that provides detailed property listings, including photos, descriptions, and neighborhood information. It also offers unique features like a commute calculator and crime maps.
Redfin (https://www.redfin.com/): Redfin is a real estate brokerage that provides an online platform for buying and selling homes. It offers real-time data on new listings, price drops, and information about neighborhoods and local market conditions.
County Assessor’s Office Website: Most county assessor’s offices have websites where you can access property records, tax information, and sometimes even property value assessments. The specific website will depend on the county where the property is located. This is a valuable resource for getting accurate and detailed information about a specific property.
Netronline.com (https://publicrecords.netronline.com/) The Public Records Online Directory is a Portal to those Tax Assessors’, Treasurers’ and Recorders’ offices that have developed web sites for the retrieval of available public records over the Internet. Examples of records that can be accessed include deeds, mortgages, assessment data, tax details, and parcel maps.
Not every county, parish, and municipality has data online. However, many have websites with general information, and where neither is available a phone number has been provided.
☛ Property Management
Managing a real estate property involves a range of tasks, from finding and screening tenants to maintaining the property and handling legal issues. While some investors choose to manage their properties themselves, others hire a property management company. Understanding the responsibilities involved in property management can help you decide which option is best for you.
Here are 5 Tips on finding the right investor centric property management company for your real estate investments.
Experience in the Market: Look for a property management company that has extensive experience in the local market where your properties are located. They should be familiar with local rental rates, tenant rights and laws, and have a good network of local contractors for maintenance and repairs.
Investor-Centric Services: Some property management companies are more focused on serving the needs of real estate investors. These companies may offer services like portfolio management, investment analysis, and assistance with buying and selling properties. Make sure the company you choose offers the services that align with your investment strategy.
Transparent Fee Structure: A good property management company will be upfront about their fees and what services are included. Be wary of companies that have a lot of hidden fees or that don’t clearly explain their pricing.
Strong Communication: Communication is key in property management. The company should provide regular updates on your properties and be responsive to your questions and concerns. They should also have a system in place for handling emergencies after hours.
Positive Reviews and References: Check online reviews and ask for references from other real estate investors. A company with a lot of positive feedback from investors is likely to be a good fit. Be sure to ask references about their experiences with the company, including how well the company communicates, how they handle problems, and whether they deliver on their promises.
- Pro Tip: Avoid dual duty property management groups.
- In some cases, a real estate agents may double as a property management company.
- Although it may seem ideal setup it is not.
- They will try to lore you in by selling you on the fact that they can get you renters fast because of their connection to the MLS.
- The fact of the matter is that they also serve other property owners and loyalty may not be important to them.
- You wouldn’t go to a doctor that also subs as a janitor would you?
- You need a property management that will do their job regardless. Especially if you are investing out of state.
- Case and Point: One of our partners bought two duplexes that were originally empty and the realtor/property manager claimed she could not rent the property for months. Concerned, the investor did a surprise site visit and it turned out the realtor had a few month by month tenants. She was collecting cash rents directly and pocketing it. She was reported to the authorities and subsequently arrested.
☛ Risk Management
Like any investment, real estate investing involves risks. These include market risks, property damage, and tenant issues. However, with proper risk management strategies, you can mitigate these risks and protect your investment. This includes having a diversified portfolio, obtaining the right insurance, and conducting thorough due diligence.
Here are 5 Tips on managing your real estate investment risk
Thorough Due Diligence: Before purchasing a property, conduct a thorough due diligence process. This includes inspecting the property, reviewing the financials, understanding the market, and checking for any potential legal issues. The more you know about a property before you buy, the less likely you are to encounter unexpected problems down the line.
Maintain Adequate Insurance: Insurance is a crucial tool for managing risk in real estate. Make sure your properties are adequately insured against risks like fire, flood, and liability. It’s also a good idea to consider additional coverage for things like loss of rental income.
Regular Property Maintenance: Regular maintenance can help prevent small issues from becoming big, expensive problems. Keep your properties in good condition and address maintenance issues promptly to protect your investment.
Financial Prudence: Don’t over-leverage yourself. While real estate can be a profitable investment, it’s also associated with significant costs and potential liabilities. Make sure you have a solid financial plan in place, and maintain a reserve fund to cover unexpected expenses.
☛ Building Your Real Estate Team
Successful real estate investing often involves a team of professionals. This can include a real estate agent, a mortgage broker, a lawyer, an accountant, and a property manager. Building a strong team can help you navigate the complexities of real estate investing and ensure your investment is successful.
Here are 5 Tips on finding investor centric real estate team
Experience with Investors: Look for a real estate team that has experience working with investors. They should understand the unique needs and goals of investors, such as cash flow, appreciation, and tax benefits. Ask potential team members about their experience with investors and the types of investment deals they’ve handled.
Local Market Knowledge: Your real estate team should have a deep understanding of the local market where you’re investing. They should be familiar with local property values, rental rates, and market trends. This knowledge can help you make informed decisions and find the best investment opportunities.
Network of Professionals: A good real estate team will have a network of other professionals that they work with, including contractors, property managers, attorneys, and lenders. These connections can be invaluable when it comes to managing your investments.
Strong Communication Skills: Communication is key in real estate. Your team should keep you informed about your properties and the local market, and they should be responsive to your questions and concerns.
Alignment with Your Goals: Different investors have different goals, and it’s important to find a team that aligns with yours. Whether you’re focused on long-term appreciation, cash flow, or flipping properties, your real estate team should understand your strategy and be able to support you in achieving your goals.
☛ Final Thoughts
Real estate investing can be a rewarding venture, offering the potential for passive income and long-term wealth creation. However, it’s important to approach it with knowledge and preparation. By understanding the different types of real estate investments, financing options, the importance of location, property management responsibilities, risk management strategies, and the value of a strong real estate team, you can set yourself up for success in your real estate investing journey.
☛ Bonus: 5 strong tips for an new investor to start investing today.
Start with Education: Before you dive into real estate investing, take the time to educate yourself about the industry. Read books, attend seminars, listen to podcasts, and follow industry experts. The more you know, the better decisions you’ll make.
Set Clear Goals: Define what you want to achieve with your real estate investments. Are you looking for passive income? Long-term capital growth? A combination of both? Having clear goals will guide your investment strategy and help you stay focused.
Start Small: As a beginner, it’s wise to start small. You might consider starting with a single residential property or a small multi-family property. This will allow you to learn the ropes without taking on too much risk.
Research Location: The location of your property is one of the most important factors in real estate investing. Research potential locations thoroughly, considering factors like job growth, population growth, and local amenities. A property in a desirable location is more likely to appreciate in value and attract quality tenants.
Build a Network: Real estate is a people business. Building a strong network of real estate professionals can be invaluable. This might include lenders, property managers, contractors, attorneys, investor friendly real estate agents, and fellow investors. These individuals can provide advice, help you find deals, and assist with various aspects of property management.
