Editor’s Note: This article for first-time real estate investors is based on extensive research into the real estate market, including quotes from property investment specialists published in widely read publications.
The information herein is presented as a suggestion based on experts’ findings in the investment field. Still, this article does not urge anyone to invest without thoroughly consulting with real estate attorneys, investment consultants, and knowledgeable individuals in the real estate industry. Senior Newsblaze Business Reporter Clarence Walker has written extensively about the real estate industry for Newsblaze and other news media websites.
Ready to break into the real estate investment industry?
If so, don’t look any further than read this entire article, so prepare yourself this new year to put some skin into the game. Assuming that a person has the motivation, but without a clear-cut idea of getting started in real estate, they shouldn’t feel bad or left behind because others are in the same position. Yet there are those wanting to leap, but they’re afraid of failing. That makes sense because we must always weigh the risks versus rewards when we aim for a business venture.
President Theodore Roosevelt once eloquently wrote these inspiring words of taking risks. “If you fail, Roosevelt said, at least you failed ‘while daring greatly.” Roosevelt concluded with this poignant remark; “If you don’t take a risk, you’ll never know victory or defeat.”
Real estate investing has created unlimited wealth for the rich and the richest.
During the last two centuries, approximately 90 percent of the world’s millionaires and billionaires made their wealth by investing in real estate.
Indeed, there are risks in the business world, and unfortunately for some property investors, they lost everything except the shirt on their back. However, real estate is a time-tested strategy for making money in several ways.
Earning profitable returns from the investment perspective is highly possible in 2022 - if an investor learns the tricks-of-the trade of the business.
What makes real estate so beneficial is the value appreciation and the rental income, among other related property gains. Investing in the real estate market has the potential to double and triple the money belonging to investors because there’s a wide range of options to choose from based on the capital and time put into the risk of investing.
Newcomers entering the real estate investment industry will probably question the best approach involving property investments and strategies for the new players on the block. Of course, the goal of investors is to earn plenty of money and perhaps leave their day job, but aspiring investors aren’t always sure which direction they should go.
Although there’s no perfect way to dive into the real estate investment business - there are essential factors most first-time investors lack, such as:
. Access to capital
. Understanding terminology in the industry
But don’t fret. What you need to know can be taught.
Colorado-based realtor Mor Zucker and a member of Forbes Real Estate Council, wrote on Forbes.com - “Your first step as a real estate investor is usually the most difficult. I often talk to new investors who feel overwhelmed by everything they don’t know about real estate (such as) the terminology, the market, capital, and the risks and rewards.”
Zucker further explains the dynamics of real estate investing for first timers.
“Real estate investing is not rocket science. Anyone can be a real estate investor. All you need to take the plunge is a little savings and a little know-how.”
“The $40,000 or $60,000 you save for a 20% down payment will become the foundation for long-term real estate investing and wealth building. So, start saving your real estate investment income from Day 1, grow it into a separate account, and soon be ready to buy your second, third, or tenth property,” Zucker said.
Effective marketing strategies in the real estate investment business can bring money for an investor without upfront capital.
Let’s examine the six properties listed below for first-time investors to determine whether these strategies are worth the time and effort to earn profits in real estate.
. Multi-Family Homes with Separate Entrances
Multi-family homes can increase cash flow for a first-time investor, then build your property portfolio quicker, making these units easier to finance. As a result, multi-family homes are a solid choice for new investors starting in the real estate investment business. The same formula can work for experienced property investment owners eager to “sniff” out better deals for less risk.
Real estate experts say investing in a multi-family home is to rake in steady cash flow. Another benefit of this market is that the appreciation in the market value is slow and consistent. Additional investment benefits in multi-family homes include more cash flow, less vacancy risk, flexible financing, and easier to increase value while faster-growing your property portfolio.
What is a Multi-family Home?
It is described as a property with at least two separate units for tenants to reside in, and each section has a kitchen and bathroom. There are different types of multi-family homes, depending on how many rental units there are or “doors” attached to each property:
. Duplex: These units are beside each other, or the dwelling has a “first and second” floor. Each unit has its separate entrance and usually comes with a shared porch for tenants and a “front and back yard,” including a parking area.
. Townhouses: A townhouse is attached to another house side-by-side with private entrances. Townhouses are also known as “row houses” in some markets. One of the significant benefits of investing in a townhouse is that it is inexpensive and doesn’t require extensive maintenance while holding the investment. Keep in mind that properties in the suburbs are more expensive than properties in the inner cities.
. Triplex: A triplex consists of three units next to each other or a three-story configuration, commonly known as “three flats” in some markets.
. Fourplex dwellings are units arranged together with two first-floor units, including two second-floor units.
Melanie Patterson, a property investment manager and certified business advisor for the New Hampshire Small Business Development, writes on fitsmallbusiness.com that “buying a duplex, triplex, or fourplex can be a good investment for investors and residential homebuyers.”
Patterson explains that purchasing small multi-unit properties requires a basic understanding of locating, financing, and managing multiple units.
David Reiss, Professor of Law and Director of The Center for Urban Business Entrepreneurship at Brooklyn Law School, said, “There are significant benefits you can get from buying and living in a duplex, triplex, or fourplex. instead; of a single-family home.”
“For instance, Reiss added, you may be able to use the rental income from the additional units to increase the amount that you can borrow, and that rental income can offset a big part of your monthly mortgage payment.”
Reiss further said the extra benefits of owning a duplex, triplex, or fourplex provide leeway to deduct more expenses, such as part of your insurance premium and business expenses.
Melanie Patterson said although there are advantages to buying a duplex, triplex, or fourplex, still, an investor must prepare for the downsides such as tenant turnover and that tenant care is lower in multi-unit buildings than with single-family properties.
Investing in Property Near Universities/Colleges
Owning a rental property near a university/college can grow into a goldmine of money if you have an attractive place inlaid with extra space and excellent amenities. The college season attracts thousands of young students. Therefore, students need in-demand accommodations like restaurants, gyms, stores, shopping malls, entertainment, etc.
The appealing amenities in the area help attract renters, and it helps keep property value stable. Since universities, particularly larger ones, attract thousands of new students annually, several potential students need to find a suitable place to rent, specifically if rental properties are closer to the college they attend.
An additional source of income can be made from renting a house, apartment, or townhouse to professors and university staff.
The turnover rate may be high at various times due to the off-season, but a constant flow of students will be ready to rent when school resumes.
So, suppose a property owner decides to sell their rental property near a university. In that case, you will discover that the value has increased, and there is a big demand for your property.
Single-family Homes Near Elementary Schools
Families often hunt to buy or rent a home near prominent school districts. This strategy can produce long-term passive income if an investor or property owner owns housing properties for “rent or sell” near a good suburban school district. In addition, the turnover rate for tenants is lower than other rental properties since families with school children prefer to stay longer.
Realtor Mor Zucker recommends that first-time investors invest in property near a good school.
“Buy a single-family home in a suburban neighborhood with a highly rated public elementary school,” she said. Zucker said investors need to search on a website like greatschools.org for schools with at least 7 out of 10 scores, “and base your property search within those neighborhoods,” Zucker said.
According to Biggerpockets.com, houses located near better schools are in demand by homebuyers. Many home shoppers are likely to pay a premium to live near a decent school for their children.
The Bigger pockets.com article also noted that a survey of potential homebuyers discovered that 20% of the buyers would pay up to 10% more than their budget to purchase a home near a school. In addition, up to 10% were willing to increase their budget by 20%.
Properties located near a school carry the potential to increase the value of a home, thus providing higher returns for an investor considering to sell a house to a person already renting the property.
. REIT Investments
A real estate investment trust (REIT) is a good option for first-time investors. First, a little history on the subject. REIT investing originated during the 1960s when Congress opted to allow individual investors to participate in returns on large-scale, income-producing real estate projects. The U.S. government’s objective was to stimulate the economy. REIT investing is similar to trading on the stock market.
For over 25 years, Millionacres.com has reported how REITs outpaced the total annual returns of the S&P 500 at 12.6% and 11.9%, respectively.
REIT investments don’t require investors to buy or manage property; instead, a real estate company owns or operates income-producing properties and allows investors to invest in the company.
The way it works is that investors buy shares in a real estate company, and they can earn dividends earned from the assets of a real estate company. Of course, no investments are without risk, and REITs are no different, but they are generally low-risk, high-liquidity investments capable of high returns.
Real estate investment specialists said an investor can invest in a REIT for as low as $1000 and upwards to $5000 or $10,000 or more.
Real estate investment trusts operate many assets such as office buildings, malls, apartment complexes, hotels, self-storage facilities, and warehouses. REITs can also offer tax advantages. For example, qualified REITs that meet IRS requirements can deduct distributions paid to shareholders from corporate taxable income, thus avoiding double taxation.
Getting started is a no-brainer by opening a brokerage account. Still, it is best to obtain the best education and advice from a knowledgeable attorney or financial adviser about REIT investments. Consult with the National Association of Real Estate Investment Trusts to understand how everything works.
. What About Real Estate Wholesaling?
Real estate wholesaling involves the individual wholesaler (the investor) forging a deal with a property owner to assign over to the investor a “contract to sell” to the wholesaler, so the wholesaler can do all the work and sell the owner’s property.
The deal is similar to the investor/wholesaler acting as a broker between the property owner and the potential buyer. Wholesaling is considered one of the best short-term investment strategies. Therefore, it is a great opportunity for people to crack open a door into the real estate investment industry without risking their funds.
Wholesaling doesn’t require a lot of capital to kick-start your way.
“Wholesaling is lower risk because you don’t purchase a house or finance repairs,” says David Lecko, CEO of DealMachine. “As a wholesaler, you invest your time and money to generate leads and send marketing to sellers, which involves much less money than buying and rehabbing a house.”
When operating a wholesaling business, the work can sometimes challenge an individual’s patience and motivation. Therefore, it is of the utmost importance to identify properties liable to sell below market value, negotiate deals with sellers, and then target cash buyers to sell the properties.
. 3 Key Benefits of Wholesaling Real Estate
. Profits earned in a shorter time frame
. Having access to those with limited cash and credit
. Wholesaling provides the beginning investor with valuable industry experience
. 3 Negative Sides of Wholesaling
. Occasionally income can hit a dry spot
. An investor’s buyer’s list must always be organized and up to date
. The wholesaler is dependent on finding the right buyers willing to purchase the property(s)
. Real Estate Prehabbing
Another solid option for beginning real estate investors is prehabbing a property. Prehabbing sounds similar to rehabbing, but the two are slightly different. Prehab is the offspring of a wholesale and rehab deal. Rehabbing a property is when the buyer or seller spends the extra money and puts in excessive physical work to restore a property to sell it. At the same time, a “prehap” project requires fewer upgrades to the property to resell it for more than what the investor paid for it. The upgrade is to entice buyers.
Prehapping the property includes external and internal thorough cleaning and painting the dwelling if needed. Landscaping a property is also required because they may not walk inside if people don’t like the outside.
The focus of making the place look better is to draw attention to the property.
. Additional Tips
. Avoid houses requiring expensive repairs
. Consider the location when searching for prehab houses
. Remember that prehabbing is a simple selling technique for the sizzle and not the steak.
The real estate market may change here and there, but good mentoring, solid planning, and valuable advice is what new investors need. Real estate investing doesn’t come with a road map, and the road to wealth can be long and winding. Or, if fortunate, an investor can quickly earn a good living to stay afloat. With all that said, there are strategies you can implement to clear obstacles to ensure at least a modicum of success.
On a final note, several years ago, New York real estate investor Louis Glickman said, “the best investment on earth is the earth.”
Newsblaze Senior Business Reporter Clarence Walker, Can be Reached At: [email protected]