Property are unlike other investments and are not suitable for everybody. This is due to the fact that properties need to be actively managed. They are not a passive investment like stocks. On the other hand they are one of the few investment types where you can use sweat equity to improve your return on investment. Sweat equity and money is to a certain degree interchangeable when you invest in property. This makes property ideal investment for investor that have more time than money. If you have more money then time you can hire someone to do what you otherwise could do yourself. Investing in property can be both low risk and high yield if done skillfully. It is however important to avoid leveraging yourself to high if you want to keep the risk low.
Investing in real estate can be very expensive and it can be very hard to do without outside financing. Most property deals are financed by a bank. Even if you do have money to invest in property without outside financing it might be worth talking to a bank to leverage your investment. By leveraging your invest you are able to do more and earn a higher return on your investment.
Financing your property purchases can be a complex matter and we will therefore look at the topic in a separate article that you can find here.
Commercial or residential
If you want to start investing in property you have to decide if you want to invest in commercial or residential real estate. Most people start out by buying residential real estate. There are many reasons for this. Most people are more familiar with residential property. Your first property purchase is usually a house for yourself. It is also easier to know what people expect to find in a residential property. This makes you feel more comfortable with investing in residential property. Another reason that many choose residential property is that it usually is cheaper.
Both residential and commercial real estate can be very profitable. Commercial real estate can be more work but this depends on which type of commercial property you are investing in. It is important that you know a lot about the type of commercial real estate that you invest in. You need to know how much competition there is and what potential customers will be looking for. It is best to invest in a property type you know. If you do not really know about commercial real estate but want to start investing in it you should learn as much as you can about a a profitable type of commercial real estate. Show rooms for car dealers is an example of a usually very profitable type of commercial real estate.
Until you have studied commercial real estate in your area and learned the business you are better of sticking to residential real estate. Residential real estate is in many ways more straight forward.
It is very likely that you should choose to invest in residential real estate if you need to ask yourself whether commercial or residential real estate is the right choice for you. When in doubt, go residential. People always need a place to live.
Flipping or Income properties
It is important that you know what your goal is when you start investing in real estate. Do you want to build a portfolio of income properties that give you an income stream or do you want to purchase, renovate and sell properties for a one time windfall. Both strategies have their benefits. You can read more about the two strategies below. Only you can decide which is right for you.
Income property is property that gives you a income stream from rent. This type of property can be very profitable over time. Especially if you can find a cheap property that you can renovate and turn into an income property. In the short run it will be more profitable to flip the property once renovated to realize the increase in equity. Over time you can often earn more by using the property as a income property.
You can still use the increased equity you created by renovating the house by using it as security to when applying for financing for additional purchases.
Income properties are great for long term investors. They will keep increasing in value while they provide you with an income that allow you to buy more property. If you hold on to them for an extended time you will earn you a lot more money than flipping property ever will. It is a little like investing in blue chip dividend stocks.
A special type of income property is the type you live in yourself. By converting a part of your house into a separate apartment you can earn money from an otherwise unused space. A basement or attict can often be a good choice for an income suit. Sometimes if you have more space than you need it might be worth considering turning an entire floor of your house into an apartment. An income suit can often pay a large part or even all of your mortgage allowing you to use that money for new investments.
A special type of income property is student housing. Student housing can be very profitable but will also be associated with higher costs. Student housing allows you to rent out smaller units and to get more tenants into each house. This allows you to get a better overall return. Student housing also have the benefit that students usually accepts a lower standard of living than other tenants. A draw back is that student often cause more damage than regular tenants and that you might have to give the units a face lift between each renter.
Student housing is an excellent choice in areas near universities where the demand for this type of housing is high. It can be hard for students to find student housing in many areas and you can therefor expect to have no trouble renting out your unit during the school year. You will most likely have several applications to choose from for each unit.
Flipping properties are a more short term strategy than investing in income properties. Flipping will allow you to get big pay days in a limited amount of time and can be a very good option if you need to raise money for other investments. They can give very good short time return on investment. Flipping property is an excellent way to start of your career in real estate investments. It can allow you to earn the money needed to finance your first few income properties. They can of course also finance other types of investments.
When you are looking for a property to flip you will be looking for a property that needs some renovations. Renovations that will increase the value of the property more than they will cost. Ideally you want to find a property that looks to be in very poor conditions but where most of the needed renovations are of a cosmetic nature. This will allow you to renovate the house without spending to much money. If you find a property like that you will be able to get a very good return on investment.
If you want to flip a property you will need to either spend money on professionals or do the renovations yourself. If you need to hire people to do the work you will need a larger margin to be able to make a profit. If you can do the work yourself you can work with smaller margins since you do not need to pay yourself. Your payday is the profit you get from selling the property.
Regardless of whether you do the work yourself or hire people it is important to finish the renovations quickly and put the property back on the market as soon as possible. Every day you own the property it is going to cost you money. By flipping the property as quickly as possible you can avoid paying a lot of interest on bank loans, utility cost and other expenses. All this helps you to maximize your profit.
If you want to flip real estate you are going to find a lot of help online. Use these resources to learn where you will get the best return on investment when you renovate your properties. Always renovate your houses to a standard chosen to fit the neighborhood the property is located in. It is not worth spending extra money to raise the standard of a property above that which is expected in the area.
Foreclosures are property that are being sold by the bank after the former owner was unable to pay for their bank loans. Foreclosure often present investors with good investment opportunities and chances to buy properties for below market value. Similar opportunities can also be found at government auctions and police auctions. It is sometimes hard to do proper due diligence before these auction so there is a certain level of risk involved. I do not recommend buying property this way until you are a little more experienced in the market and have a cash reserve to cover unexpected renovation.