Learning to Invest in Real Estate
Learning to invest in real estate means understanding 4 basic ways how to invest in real estate industry and find the way which is the most suitable to you.
It is going to be never ending learning process but exciting one.
Real estate investing is pretty complicated but it can be the way you would like to build your future on.
Renting properties has the longest history in real estate investing. The basic explanation is that the owner buys the property and is responsible for paying the mortgage, property taxes and other expenses associated with the maintenance of the building. The goal is to charge the rent high enough to a tenant that it will cover all of the expenses or even make a monthly profit.
Like with everything there are pros and cons. You can receive nice monthly income and build the equity but on the other side you can spent a fortune on the maintenance or if the property is vacant you will end up with the negative cash flow.
The majority of landlords expect that the mortgage will be paid off over the years and that the value of the property will increase. This way the owner builds equity (if the property value increases) which can be cashed out by selling the property, used in landlord’s portfolio if he/she wants to buy another house, refinance ...
Real Estate Investment Groups
These groups are investing in commercial buildings, apartment
buildings, shopping malls…. It is similar as investing in mutual funds or stocks. The advantage is that you just buy your share and you don’t work for it anymore just waiting for the dividends to come.
If they come :).
Real Estate Flipping
It is called also Real Estate Trading. The investor buys a property for a short period of time and then sells.
You can see 2 groups of investors.
The first group buys undervalued properties and sells them with a profit.
The second group also buys a property with a lower value but makes renovations (adding value to a property) and then sells it.
Start the SEARCH for your investment property HERE.
Leveraging is the biggest advantage in real estate investing! What does it mean?
Let’s compare: If you buy stocks or invest in REITs you have to pay full price for the share. BUT buying actual
properties you can buy them with as little as 5% down. You (as an owner of the property) have a control over yourasset even though you paid only a small part of the total value.
With a small amount of money needed for the down payment and closing costs you can own moreproperties andhave a great ROI (return on the investment).
How to calculate ROI – Return on the investment
ROI = Net profit/Investment x 100
NET PROFIT = Gross profit – expenses
Calculating ROI can is very complex because it can have many variables and you can include or exclude (even
forget) in your calculation.
Here are just 2 basic examples how to calculate it:
1. You buy a property for $100,000 cash. Your closing costs are $2,500 and you spent $5,000 on the
improvements. Your total investment is 107,500. You rent the property for $800 per month for one year but
you pay $100 monthly property insurance. It will be than ($800 x 12 months) – ($100 x 12 months). Your Net
profit is $9600 – $1200 =$8,400. Your ROI is 8,400/107,500 x 100 = 7.81%.
2. The second example is when you need a financing. Let’s say you need to pay 20% down which is $20,000.
Your closing costs are higher because of the financing and it is $4,000. You spent same money on
improvements $5,000. Your total investment is $29.000. You rent the property same way as in the first
example so your profit is $8,400 but you still have to deduct your monthly mortgage payments and they are $400/ month. Your net profit is than $8,400 – $400 x 12 = $3600. Your ROI in this case is 3600/29000 x 100 =12.4%