Real estate investment can be very profitable for the right individual. To make real estate investment a worthwhile endeavor, investors do a lot of research, maintain operating cash to weather hard times, maintain their properties and cultivate a good instinct for their properties. This guide will help a beginner real estate investor to get started in the process.
How Real Estate Investment Makes Money
Real estate investments can make money for investors in a variety of ways. Understanding the different ways that real estate investment brings in income can help investors decide which type of real estate is right for them.
Cash Flow From Rental Income
Rent provides an ongoing source of income for most real estate investors. Properties that have space for only one tenant (like single family homes) only create cash flow if the property is rented out. Properties that have space for multiple tenants (like apartment and office buildings) will have cash flow as long as at least one tenant occupies the building. Real estate investors who rely on rent from their property should always have at least three months of operating cash on hand in case tenants leave and the property stops generating income.
Ideally, a property will appreciate in value over time, so the investor will make a profit after selling the property. Often real estate investors improve the value of their property through regular maintenance and renovations. For investors who do not intend to rent their property before selling (such as a flip), it's important to negotiate a good price for the property and make the right improvements to increase the property's value.
Location of investment property often affects appreciation as well. Be sure a choose a location that will compliment the type of property being considered. In other words, a real estate investor shouldn't consider buying a long-term rental property in an area that is becoming more industrial.
Ancillary Cash Flow
Some properties will bring in money through sources not related to rent. Vending machines in office buildings are a typical example of ancillary cash flow sources. In some office buildings, ancillary cash flow is a good source of income.
Different Types of Real Estate Investment
There are many different types of real estate investment. Investors who are new to real estate can pick the type of real estate investment that is suitable for their personality and the resources available to them.
- Residential rental properties. Residential rental properties (including apartment complexes and single family residences) are probably the easiest for beginning investors because they're relatively affordable and abundantly available.
- Fix and flip properties. Fix and flip properties are a type of short term investment that don't produce rental income, but a profit when sold.
- Commercial real estate. Commercial real estate (like office buildings) provide a source of ongoing source of lease revenue.
- Retail real estate. Retail real estate (including restaurants and retail stores) can bring in a steady cash flow through rental or lease income from the business tenant.
- Industrial real estate. Industrial real estate (like warehouses and factories) can often be lucrative as they cater to a very specialized clientele that will often pay extra for the right industrial site.
- Mixed-use properties. Mixed-use properties are properties that combine two different types of tenants into one building (like residential and commercial).
When trying to choose the right type of real estate investment, many investors must consider what they can afford. They also look at what property is most likely to succeed in the area where they plan to buy and how much potential that area has for the future.
Loans and Lenders
Anyone who has ever had a personal mortgage before is likely to know what is involved in the borrowing process. However, loans for real estate investors are usually far different from personal mortgages. Borrowers may be required to put down a larger down payment (sometimes up to 40%). Loan interest rates are also usually higher than personal mortgages. As with personal mortgages, borrowers can save money by shopping around.
Anyone who is interested in taking out a loan to buy an investment property in the future should first contact a lender to find out what will be required of them in order to get their loan. This way, if the loan they request requires more money down than they may have, they may need to save more for the down payment or look at other real estate investment opportunities.
Work With a Real Estate Agent
Working with an experienced Blue Springs real estate agent is important, especially for beginning real estate investors. People who have never purchased property for a real estate investment in the past may not know which questions to ask, what factors to consider and which properties are most viable in their area. A good real estate agent can help with this.
If you're a new investor who would like to purchase your first investment property, contact an agent in your area who has frequently worked with real estate investors. Finding someone with experience can ensure that you'll have help when you need it.