Real estate refers to property and includes land as well as buildings. It could be residential property or commercial property. A home where you reside is real estate and you have invested in it because you want to stay in it. You can also buy real estate as an investment. Just like you invest money to buy stocks, bonds, and other assets hoping that it would appreciate in value, you can also invest money in real estate as an asset. When you buy a piece of land or a building, you can look forward to its market value increasing over time. You can sell it to earn a profit on it. Real estate is thus an option for you to invest money and get returns on your investment.
To understand how real estate can be an asset to help you earn returns, let us look at the different ways you can earn money from real estate.
- You can buy property and hold it for a few years and wait for its market value to increase. Once the value of the property has increased and reaches a price that you find satisfactory, you can sell it for a profit.
- Property can earn you regular income and this is an important reason why you should consider investing in real estate. When you buy a home or an office building, you can give it on rental and earn rental income. This would be a regular income that you get every month.
- There is ancillary income you can earn from real estate apart from the monthly rental. This can include providing housekeeping and maintenance service, installing vending machines, providing laundry facilities and providing furniture on rent. This would be income other than your regular rental income.
Having understood what real estate is and how you could earn from it, the next thing is to understand how to invest. The following are ten tips that can help you plan your investments in real estate in a proper way and ensure you buy property that would give you good returns on investment.
1) Understand the market
Never invest in something you know nothing about. Understand what real estate is and know the real estate market. Do your own research to understand how the real estate market works. Understand the trends in the real estate market to find out if the market is doing well or not. Also, find out what are the chances of the market prices going up in the future. You can base your research on reports available in public domain or you could even purchase reports prepared by professional organizations. The money you spend would be worth it.
2) Decide your goals
When you invest money, you need to have your investment goals worked out in advance. The goals would be the answers to the question of why you are investing in real estate. You need to decide if you are investing for value, which means you would hold the property for a long term and then when its value appreciates you would sell it. You could also be investing to earn regular income, in which case you need to invest in properties that would yield monthly rental. You could also decide if you want to invest all your money in one property or instead consider investing in multiple properties of lesser value.
Above all, you need to decide if you want to invest to earn money for your retirement or to fund your children’s education or any other reason. This will help you work out the time-frame of your investment. If you are investing to earn money for retirement, then you can hold on to the property for 30 years or more. If it is for a short-term goal like sending your children to college, you may need to sell the property in 10 or 15 years. You need to plan your investment keeping these goals in mind.
3) Location is the key
The most important aspect you need to keep in mind when you buy property is the location. It is the location of the property that determines its sale price. It is the location that will decide whether the property would appreciate or not. If you do not buy a property in the right location, you can end up with a dud. Since you would be investing a lot of money in real estate, make sure you research the location to find out if it is in a good neighborhood. This would ensure the property would earn you good returns.
4) Plan your purchase and use the 1% rule
Once you decide where to buy a property, you need to plan your purchase. You need to decide if you would be buying the property by paying the entire amount or whether you would buy it on a mortgage. In fact, it may be advantageous to go for a mortgage. You would need to have a down payment for the property, which would usually be 15-20% of the overall price. You then can make monthly payments for the mortgage for a period of anywhere from 10-30 years. You can then rent out the property and allow your tenant to pay the mortgage. You need to ensure that the rental would be more than the mortgage amount.
A rule that would be of help for you here is the 1% rule. The rent that you get from a property every month should be at least 1% of the overall value of the property. In such a situation, the rental amount will be more than or at least equal to the mortgage. You can thus use the rent income to pay off the mortgage. Once the mortgage is paid off, the property will be yours and you can sell it when its value appreciates.
5) Use the services of an attorney
Real estate sale is not as easy as it looks. There are a number of issues that could crop up at the time of closing the deal. Primarily, you need to ensure that the title of the property is with the seller. If you do not check this properly, then you could end up in serious trouble and litigation once the deal is closed. You also need to understand if there are any liabilities in the name of the property or there is a lien on the property. You can find this out yourself, but it involves a lot of work. If you do not have the time to do such due diligence or don’t want to take the risk, you can hire a real estate attorney to do it for you.
The attorney who specializes in real estate work will protect your interests and ensure that all legal formalities for the sale are taken care of. He will advise you on the legal aspects related to the sale and can even help in negotiating the deal. If you were dealing with commercial property, you would be well advised to use the services of an attorney. The attorney would also vet the contract and ensure the terms are clear. The attorney would also ensure all documentation for the transaction is done in the right way.
6) Consider flipping
A strategy that is used to make money in the real estate sector is flipping. This involves buying old buildings for a discounted rate and then renovating or refurbishing it. You then sell the renovated house for a higher price and make money. This is a good way to earn profits. However, to do this you need to find the right property that you can buy at a low rate and sell at a high rate after refurbishing. You also need to invest money on renovation. A risk here is that if the market value of the property drops, then you are stuck with it.
7) Start small
Before you get into investing money into buying properties to give out on rental, you can consider starting in a small way. You can start out by renting a room in your house. You can even consider renting a room to tourists by signing up with Airbnb or other such portals. This would help you earn money and you get an idea of how the business works. Once you are comfortable with this, you can then think of buying a house to rent out.
8) Consider REITs
There is an interesting option for those who want to invest in real estate, but do not want the hassles of owning a property and going through the process of the transaction. This is also suitable for those who do not have sufficient money to buy property but are still interested to be a part of the real estate investment success story. REITs or Real Estate Investment Trusts are an investment option available for such people. A REIT is a trust owned by a company. You can invest money in the REIT just as you would invest in mutual funds. You can invest any amount of your choice and in return are allotted shares/units.
The REIT would be listed on the stock market and its shares are traded. You can sell the shares when its value appreciates. REITs also share their profits in the form of dividends. The money collected from investors is used to invest in properties. Investing in a REIT allows you the opportunity of earning regular dividend income. Like any stock market investment, it involves risk. The main downside is that you have no control over how your investment is being used by the REIT.
9) Work with a real estate agent
If you are not comfortable with the idea of doing research on properties, identifying a property, and then purchasing it; you can take the help of a real estate agent. The job of a real estate agent is to help people buy or sell properties. A real estate agent would help you identify a property that meets your requirements. They would have contacts in the industry and would have an extensive database of properties available for sale. They can help you find a property in the location of your choice and to suit your budget. They can also help you negotiate with the owner. They provide their services until the deal is closed. In exchange for their services, they charge a commission of the sale value. When you sell a property, you can claim the real estate commission paid as a deduction on your taxes.
10) Know the tax implications
There are tax implications when you invest in real estate. When you buy real estate, you are investing capital or money in it. When you sell it and make a profit or gains, it is considered as capital gains. You would need to pay tax on it. Tax laws encourage long-term investments and hence there are two types of taxes, short-term capital gains tax and long term capital gains tax. Short-term capital gains tax would be applicable if you sell your property in a short period (within a year usually). The gains you make are treated as income and clubbed with your income from other sources and you need to pay tax on it. Short-term capital gains would result in having to pay more taxes. If you are planning to use flipping as a strategy, you need to keep this in mind.
Long term capital gains, on the other hand, is when you hold the property for a long duration. The gains you make from it would be taxable. The tax slabs for this would differ from your regular income tax brackets. In some places, it is charged as a straight percentage of your profits. You need to know the current tax laws applicable. When you invest in real estate, an advantage is that you can write off the depreciation on the property and claim it as a deduction from your income. You can thus earn tax benefits. Understand the laws or consult a tax expert to know how it works.
You can follow these tips to invest wisely in real estate and earn money on your investment.