Welcome back! Today we are going to start our journey talking about different types of investments. It should go without saying, but the following is only intended to educate you about the various types of investments and should not be construed as financial advice. If you need or want financial advice, please find a financial planner or advisor in your area.
The first investment medium that I will talk about today is real estate. Real estate can be a great way for someone to accumulate a large amount of wealth. I think that someone once said somewhere that “no other medium has created more millionaires than investing in real estate” or something to that effect. It is always a hot topic for gurus to sell classes online to people that want to get their start in real estate. You probably see it all the time. Real estate investing can help produce significant wealth for someone, but that someone must be willing to do the work. Let’s cover some of the types of real estate and strategies investing in real estate.
Real Estate Investor Defined
A real estate investor is someone that invests in real estate to generate a profit. A real estate investor will invest in real estate by purchasing, owning, managing, renting, and/or selling real estate properties. Real estate investing can become convoluted very quickly when you are learning about it with little to no experience. So today I am going to cover the different asset classes and some common strategies that people follow while they invest in real estate. Tomorrow, I will provide some further definitions and calculations that go into real estate investing and where you can find more tools that can help you better learn this investing method.
What Do Real Estate Investors Invest In?
Real estate investing usually falls into one of three different asset classes, which are Residential Properties, Commercial Properties, and Land. Residential properties are 1 to 4 family properties, which includes single family homes, condos, townhomes, duplexes, triplexes, and quadruplexes. Land would be anything that is vacant land, bare land, land with no buildings on it. Most of the remaining building types will fit the bill of commercial properties, such as office buildings, strip malls, apartment complexes that have five or more separate units, etc.
What Are Some Real Estate Investing Strategies?
Investment can include, but are not limited to, the following:
- House-hacking – purchase a property to live in and then renting out either additional rooms or units of the property.
- Buying and holding – purchasing properties likely at a discount, renovating them, renting them to tenants (a.k.a. holding onto the property to acquire rental income).
- Flipping – purchasing properties likely at a steep discount, renovating them, selling them on the market.
- Live-In Flip – purchasing properties, living in them, updating them, moving out and selling them without living there for a long time.
- Wholesaling – getting a property under contract likely at a steep discount and selling that contract also at a discount to another investor.
These are high level strategies. We will go into detail on these strategies over the coming days. Note: I understand that there are other investment strategies, but they are probably under the umbrella of one of the above categories and we will discuss them when we dive into each strategy above.
Financing Real Estate Investing
This question is probably most typically thought of when someone announces that they are going into real estate. This is a valid question because real estate is often very expensive and accumulating that much cash can be quite a challenge for most people. So, what do these real estate investors do? Leverage. Leverage as much as they can. This is usually a great way for real estate investors to acquire wealth through real estate because it lowers the actual cash they might have in the game.
There are conventional ways, such as mortgages through banks or credit unions. You are limited to ten mortgages under your name. You will not be able to acquire an 11th mortgage and might have to buy the 11th property as a commercial loan under an LLC or other entity type. Another financing method involves working with private lenders. These are individuals or entities that are not banks but might be interested in investing in real-estate. These types of loans might be more flexible and/or might have quicker approval turn-arounds than a typical bank, credit union, or mortgage company. These loans would still be secured by the property; therefore, it is important to pay them off when able to prevent any foreclosure.
Next, we have hard money loans. Hard money loans are short-term loans with typically higher interest rates and/or fees than the mortgage company’s or private lenders. People look to hard money lenders when they need to move quickly on a property or might not be able to acquire the cash to purchase a property for a period. Again, these are also loans that are likely going to be secured by the property and it is important to pay them off if/when able to prevent foreclosure. Additionally, paying these off quickly will likely save some money in interest since they might be at a higher interest rate. How can you pay them off quickly if you did not have any cash before? You might be able to refinance within the first year of purchasing a property. Check with your local bank or credit union to confirm. These rules might vary from state to state, country to country. Some institutions might have a general rule that you have to own the property for six months in order to refi, others might have a rule set to 12 months. It is always worth asking someone.
In that vein, another financing strategy is to partner with other investors. If you have say x% of the purchase price of a property and need another y%, it might be worth partnering up with another investor to acquire the deal. I think one thing that anyone will say when they hear that at first blush is “be careful who you partner with”. Of course that is a valid statement and it is up to you to do the due diligence to best mitigate the risk of partnering with whomever you are going to partner with on a deal.
Lastly, I will mention seller financing. With this financing method, the seller provides the financing to the buyer. It is worth mentioning that in order to do this, the seller has to own the property outright. No bank would let a transfer of ownership on a property with their lien on the property still. Here, the buyer would make payments to seller for the agreed term and then might have to pay a balloon payment after a few years or so, whatever is agreed to between the buyer and seller.
Getting Started In Real Estate Investing
Getting started is always a daunting task. There is often so much information out there that can make this whole process overwhelming. Break it down into baby-steps. For example, we can pick a strategy that fits our lifestyle and desire. Go all in on that strategy, learning the ins and outs. Join biggerpockets.com – a great resource for real estate investors. There might be an overwhelming amount of information on the site, but stay focused on your own strategy.
Pick a market area to start in, probably your city. If you live in a high-cost city, maybe somewhere on the outskirts of that city. Once you have a market area, study it as much as possible. Understanding the market is a great way to get the real estate investing career off the ground. People who know their markets know how much they should be offering on properties, how much they rent for, how much they sell for, etc. Study, study, study.
Look up REIA groups near you. There are likely real estate investors in your area that might have a group on a social media site that you could join and attend any in-person meetings. Books, books, books. You hear a lot from real estate investors that they have read so and so’s book and might recommend it or whatever. Books are an incredible resource. You can take notes in them, read them again and again, and they can be quite inspiring for you to design your own processes. If you want a first book to kind of get you inspired, I recommend reading Robert Kiyosaki’s Rich Dad Poor Dad. Although this book might not be totally applicable in every scenario for everyone, it is probably one of the most inspiring books in real estate. If you polled a ton of real estate investors, I bet most would say this book inspired them to get into real estate investing.
Tomorrow, we will dive into the various real-estate strategies.
Disclaimer: I am not a financial advisor. The content on knowxchange.com or “this site” are for educational purposes only and merely cite my own personal opinions and experiences. In order to make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a licensed financial advisor if necessary. Know and understand that all investments involve some form of risk. There is no guarantee that you will be successful in making, saving, or investing money. Additionally, there is no guarantee that you won’t experience any loss when investing. Please seek the advice of a financial professional and do your own research.