Investment real estate is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence.
Buying real estate is a popular way to invest, and if you do it right you can make some real money! Real estate investing comes in different shapes and sizes. Here are the most common ways people invest in real estate.
The term "buy and hold real estate" refers to a specific strategy investors use when they purchase property and retain it for a certain period of time.
Ultimately, it's a long-term approach to investing. While you hold onto the property it will go up in value building equity. You can use this equity while in the home with a home equity line of credit. If rates drop you might want to refinance your current loan for a lower monthly payments. At some point you might want to sell and use the funds for another purchase.
Note: Always consider a 1031 Exchange when selling your home to avoid capital gains tax.
To buy and rent a property can be a temporary or long term investment. The idea is to rent the property for and amount that will cover the bills with a little left over for additional income. While you hold onto the property it will go up in value building equity you can later use with a HELOC, refinance or selling the property.
When you purchase a rental property, you’re in charge finding tenants and maintaining the property while collecting monthly rent and paying the operating expenses.
Mortgage, Taxes, Insurance, Landlord Insurance (H06), Home Warranty Insurance, Property Manager
A “fix and flip”, also known as house flipping, consists in purchasing a property in need of repairs for a discount, renovating it, and selling it for a profit within a short time.
To avoid additional costs investors need to resell the building as quickly as possible. In most ideal cases, the house is bought, fixed, and sold within 4-6 months.
Step 1: Research
Step 2: Find Property
Step 3: Obtain Financing
Step 4: Scope Of Work
Step 5: Find A Contractor
Step 6: Renovate The Property
Step 7: Market & Sell
The rehabbing definition is when an investor renovates a property to improve it. Rehabbing can be approached several ways but is most often purchased at a discounted price and renovated intending to resell.
What is the difference between a fixer upper and a rehab? Perhaps the best way to understand it is this: if you can live in the home safely and comfortably while you're doing work, chances are it's a little fixer job, not a full scale rehab also know as a gut job.
Publicly traded REIT's, or real estate investment trusts, are companies that own commercial real estate (think hotels, offices and malls). You can invest in shares of these companies on a stock exchange. By investing in REITs, you are investing in the real estate these companies own, without as many of the risks associated with owning real estate directly.
REITs are required to return at least 90% of their taxable income to shareholders every year. This means investors can receive attractive dividends in addition to diversifying their portfolios with real estate.
A hard money loan is a short-term loan that often requires the borrower to use an asset, like a home, as collateral to secure the loan. Hard money loans are also referred to as a bridge loan and can be used to help finance one house while preparing to sell another.
Traditional lenders don’t issue hard money loans. You get them from individual investors or private companies.
If you’re looking to earn rental income through your investment property, you will need to determine the property’s ROI. Return on investment (ROI) is a way to understand the value of your investment. ROI is how much money you made divided by how much money you spent, expressed as a percentage. There are many ways to calculate ROI, but the cash-on-cash return approach might make the most sense if you’re using a mortgage to buy your rental home.
Calculating your ROI involves the following steps:
With so many variables to consider, there’s no single overall average ROI in real estate. It’s important to note that this average would depend on what part of the real estate market is being discussed, so while metrics are useful for predicting results, they are by no means a guarantee.
ROI depends on the amount of risk that’s inherent in an investment, and some risks like the pandemic and its effects on the commercial real estate market simply cannot be anticipated. Although these varying factors mean there’s no average to base your investment on, most investors aim for returns that match or exceed 10%.
A rental property’s expenses generally include:
Keep in mind, while you’ll need to report all of your rental income to the IRS, you can typically deduct most or all of your expenses, along with depreciation and mortgage interest.
The kind of property you buy is equally important. The three main types are:
Before anything else, you'll need to decide how much you can spend on your flip which includes the price of the property.
If you're using sweat equity and doing the work yourself, you may want to consider the value of your time. How many nights and weekends are you willing to give up for your flip?
But when you're trying to make a profit buying and selling real estate, location could make the difference between a tidy sum and a big regret.
A real estate agent who has experience working with investors can be helpful and may come in handy as a listing agent when it's time to sell. They'll know what's considered standard in a neighborhood, have the latest info on comparable sales.
You don't necessarily need to start hiring; just be sure you've got the number of a trustworthy electrician, plumber, HVAC technician and so on that you can call if needed.
To maximize the profits on a house flip, you need to own the property for as short a time as possible. The sooner renovations can start, the closer you are to selling that home. If you need a general contractor schedule an appointment right away since they book jobs weeks, if not months, out.
Making a cash offer for your home flip can save you some money since you won't have as many closing costs and you won't pay interest while you're working on the property. Nearly 60% of home flippers paid cash for their properties in the first quarter of 2021, but not everyone has the ability to pay with cash, especially if it's their first flip.
If you have substantial home equity in your primary residence, a cash-out-refinance could give you the money to buy an investment property. A home equity loan could potentially serve the same purpose. These are risky, but if done right can save time and money.
You can also get an investment property mortgage. This type of home loan generally has strict requirements.
Investment property mortgage rates also tend to be higher than those for primary residences. Comparing rates and fees from more than one lender can help you find the most favorable terms.
Many house flippers use the 70% rule to determine the maximum they'll pay for a property. The idea is that you should pay no more than 70% of the value of the home after repairs, minus the cost of the work.
Sweat equity can help you get more cash out of the project, it's important to stay within the scope of your expertise. Shoddy repairs may get flagged in a home inspection or, worse, could trigger a lawsuit from your eventual buyers.
Calling in professionals as needed and getting necessary permits throughout the process. As the home owner you can save quite a bit by getting the permit yourself instead of through your contractor.
Some house flippers choose for sale by owner, forgoing a listing agent (and their commission) in order to maximize profits. As with renovations, whether to go FSBO or work with a listing agent comes down to your priorities while selling without an agent will save you that 2.5%, it can also be time-consuming and you can miss out of buyers willing to pay more. It's better to have more options.
Depreciation is the process used to deduct the costs of buying and improving a rental property. Rather than taking one large deduction in the year you buy (or improve) the property, depreciation distributes the deduction across the useful life of the property.
Real estate depreciation refers to the deductions in the value of a real estate asset to account for the depreciation in its value owing to its use during its lifetime. It can be used to claim tax deductions over the income generated from the asset and recover the cost of improvements.
Real estate depreciation is a method used to deduct market value loss and the costs of buying and improving a property over its useful life from your taxes. The IRS allows you to deduct a specific amount (typically 3.636%) from your taxable income every full year you own and rent a property.
When you buy a property to use as a rental (an investment property) you'll inherit all the costs of maintaining, improving, and managing it. Owning and renting property is considered a business endeavor because you're generating income from it. You'll also have to include any income you generate in your taxes.
Over years of use, the value of your rental property depreciates. So, the IRS gives you a break by assuming that your investment property will lose value over time as you rent and maintain it. It allows you to deduct those costs and loss of value by spreading it out over a period of years.
You can continue to depreciate the property until you have deducted your entire cost or other basis in the property or you retire the property from service. This applies even if you have not fully recovered its cost or other basis. A property is retired from service when you no longer use it as an income-producing property or decide to sell or exchange it, converting it to personal use.