Real Estate Investing for Beginners
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Most homeowners look at their home as an investment. While in some cases you can come out ahead in appreciated value, in most cases your personal residence is not an asset. After considering interest (if you have a mortgage), taxes, insurance, and upkeep it becomes very difficult to make a profit on your personal residence when you go to sell it. There are several options when it comes to choosing an investment and they don’t all involve buying physical property. No matter what method you chose, the most important thing to remember is that all the money made in a real estate transaction, is made on the purchase.
Key Notes
- The most common way for people to invest in real estate is becoming a landlord.
- You can become a Flipper and buy undervalued real estate, fix it up, and sell it for a profit.
- Real Estate Investment Trusts (REITs) allow you to diversify your real estate portfolio at a lower entry cost.
Rental Property
When people talk about investing in real estate the first thing that usually comes to mind is becoming a landlord. There are many different strategies that people take when investing in rental property. There are those that invest for cash flow, others strictly want to build equity in their property and some will intentionally take a loss because they need the tax breaks. There is not just one strategy for investing in rental property.
Residential
When we talk about residential real estate investing we are talking about single family homes. This is probably the most common way for people to get into real estate investing. This fits into the model that the game of monopoly teaches you, four green houses and one red hotel. The idea is to buy multiple small houses, rent them, improve them, wait for them to appreciate and sell them and buy a larger, better cash flowing property.
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Commercial
Commercial real estate investors purchase or develop properties to house businesses for a multitude of uses. These properties are leased to tenants for various lease terms that can be negotiated on a case by case basis. Raw land can fall under this category as well if it is intended to be used for the development of commercial property or leased to a business to build a building to their own specifications. Commercial property can be broken down into five main categories.
The 5 Types Of Commercial Real Estate
- Office Space
- Retail
- Industrial
- Multifamily
- Special Purpose
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Office Space
The most common type of commercial real estate is office space. These types of properties range from single-tenant offices to high rises and are broken down into three classes: Class A, Class B, or Class C.
- Class A commercial real estate properties are typically newly built or extensively renovated buildings located in excellent areas with easy access to major amenities.
- Class B commercial real estate properties often require some type of improvement and are generally older. Most of these properties are well-maintained and managed, but they require minor repairs and upgrades. This makes them a desirable option for investors.
- Class C commercial real estate properties are usually redevelopment or fixer-upper opportunities. They are generally have a poor location, require some type of major improvement, and usually come with high vacancy rates.
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Retail
Retail properties include strip malls, community retail centers, banks, restaurants and are often located in urban areas. These properties can range in size anywhere from 1,000 square feet to 350,000 square feet.
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Industrial
Industrial properties include warehouses, large manufacturing sites, industrial buildings and are typically geared towards manufacturing industries. They usually offer spaces with height specifications and docking sites. In addition, these properties generally lend themselves more to investment opportunities as most business owners don’t own their own spaces to allow for quick growth.
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Multi-Family
Multifamily properties consist of multiple residential dwellings with connecting walls. High-rise condominiums, duplexes, and large apartment complexes are a few examples. Real estate is qualified as multifamily any time it has more than one unit, but can also be considered a commercial property if it has more than four units. These tend to be shorter lease terms than office and retail tenants, usually either 6 or 12 months. With Multifamily properties, vacancy becomes more of a factor than with the other forms of commercial properties.
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Special Purpose
A few examples of Special Purpose properties would be car washes, sports stadiums, hotels, amusement parks, self-storage facilities and schools. They are broken out into this category because it would be difficult to re-purpose the property if the tenant were to leave or go out of business. These types of properties are represented in a classifications of investment properties from residential to retail and even for government use. Mixed-use development projects, which have grown increasingly popular over the years, fall into this category and generally include retail space on the lower levels and residential units on the upper levels.
Flipping Houses
The idea of flipping a house is to find an under valued house, add improvements and either sell it right away or hold on to it for a short period of time and sell it in a quickly appreciating market. When looking for a flip house you want to find the worst house in a good neighborhood that doesn’t need a lot of improvements. You only want to look at properties that need cosmetic updates.
If you watch many tv shows on the subject they will teach you that you need to buy a house that needs to be completely gutted in order to be a good flip house. Those types of deals do exist, but for most markets it is just not reality. Whenever you start to deal with structural issues you can see your profits disappear quickly unless you really know what you are doing. I would not recommend this for your first deal.
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Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is created when a corporation (or trust) is created to use investors’ money to purchase, operate, and sell income-producing properties. You can buy into a REIT on a stock exchange just like an exchange-traded funds (ETFs).
In order to qualify as a REIT, the corporation or trust must pay out ninety percent of its taxable profits as dividends to the shareholders. In doing so the REIT avoids paying income tax on said profits which would eat into the returns it could be paying its shareholders.
Just like most regular dividend-paying stocks, REITs are attractive for investors who want to build a steady passive income, but unlike most individual stock’s REITs are not as easy to get in and out of quickly. Most REITs will require you to keep your investment in the trust for a number of years before you can sell.
Real Estate Investment Trusts invest in a diversified portfolio of properties which gives you the opportunity to diversify your own real estate portfolio without the large upfront cost it would take for you to invest in these properties individually. This diversified group includes properties such as malls, apartment complexes, healthcare facilities, mortgages, and office buildings.
