Foundations of real estate investing
Let’s just start out by saying that this article is meant for educational purposes and is not to be confused with actual training. Before you venture into the world of real estate investing you should do much more research than just reading this article; it is a good place to start and get a foundational knowledge of the world of real estate, however.
There are many investment vehicles out there, but there are few as great as real estate. But what makes investing in real estate different from other investments? Well, let’s start by looking at paper assets. Paper assets are things like stocks, bonds, mutual funds, and the sort and they represent the buying of part ownership in a company, debt from a company or the government, or the pooling of funds to buy any combination of the rest. These are all fine and dandy, however, there is nothing physical backing them. They are just promises of value. If the company goes belly-up or they default on their loans, your assets lose all their value.
Then, of course, there are commodities which do have a physical backing. They are a bit more stable than the paper assets, but they are still susceptible to being destroyed completely.
Real estate investing, on the other hand, has a physical backing— the property in question— and, because of its nature, it is more stable than commodities. Let’s break it down. When you buy ‘real estate’ you are buying either a piece of land, a piece of land that has something built on it, or a piece of land that is being cultivated. Baring catastrophic events like floods and sinkholes, no matter what happens on that property the land is still there. So, if the house that is built on the land is burnt to the ground, you still have the land.
Now, when it comes to the barrier to entry into the real estate investment game, it is much lower than you might think. You see, anyone who owns a home is technically a real estate investor. This is because the home can not only hold value in it that you can either borrow against but you can also bank on its expected value later on down the road. Just check out this excerpt from Investopedia.com: “Chances are when you think about investing in real estate the first thing that comes to mind is your home. For many people, their home is the single largest investment they will ever make. But have you ever stopped to consider that once you purchase a home it becomes part of your overall portfolio of investments? In fact, it's one of the most important parts of your portfolio because it serves a dual role as not only an investment but also a centerpiece of your daily life.” (http://www.investopedia.com/university/real_estate/)
Now, let’s think about this for a minute. Like we said earlier, the barrier to entry is not very high. So, what does it take? You need a good credit score, some money for a down payment, and some education— not a formal education, just more information than is listed in this article. With these three things and a licensed real estate agent by your side, you can dive right in and start investing in real estate.
But where can you learn more about real estate investing? Where can you get educated? Well, for starters, websites like this. There are plenty of websites, forums, videos, and so on that outline all the basic strategies, as well as some other strategies. You can also look for books in the library, classes in your area or on the web, and even meeting people who have done this before you.
As you are out there meeting new people, keep an eye out for someone who might be a good mentor. You will want to learn more about business mentors before you start looking for one as there is a certain kind of etiquette that goes along with being mentored. However, after you do learn the proper ways to find and work with a mentor, you will want to start looking. Mentors can help advise you, push you to new heights, and talk you out of bad deals. Having a mentor though does not necessarily mean that you will never make mistakes (or that they won’t) so keep an open mind and, when possible, seek multiple opinions on big deals. Mentors are great for the newcomer especially since they have very little experience in the area.
The next question you must ask now is how to make money through real estate investing. There are many ways to make money with real estate, but we have listed three of the most popular here.
Buy and hold
This is a long term strategy. Essentially you buy a house or piece of property and hold on to it for a long time, several years, until it has gone up in value and then sell it. This is something that a lot of people do to prepare for retirement because they can hold it for a long period of time. However, in the same way, that the value of the house grows, making you a lot of money, the house can just as easily lose value and you will lose money along with it.
Now, this is a big one. There are a lot of people that are after this sort of real estate investment. Essentially, you buy a piece of property and you convert it into something that makes money. This can be a rental home (most popular option), an office building, a farm, you name it. The point being, however, that it makes you money that you can collect at regular intervals instead of at the end like a buy and hold strategy. You could do both a buy and hold strategy and a passive income strategy at the same time. All you would need to do is to keep a good eye on the condition of the property the entire time, making sure not to let it get damaged in a way that would diminish its value.
Short term buyers and sellers
This is another pretty popular option for real estate investors. This is when a person buys a home and then turns right around and sells it again within a year or so. It is used to make quick money for other investments. This is the category that flippers belong to. They buy, fix, and then sell a home, hoping to make a bit of money.
These strategies, like we said earlier, all have pros and cons to them so it is best to do research into them and talk to experts before you decide to do one. Education is key in investing; it is a scenario where the phrase ‘knowledge is power’ has never been truer. After that, you need to find out how much risk you can handle. That will guide you into a more specific category of investments.
To learn more about real estate investing and real estate in the Boise area, call the Hughes Group today. We have a staff of great real estate agents who are licensed and trained in the most current techniques and strategies out there. They would be happy to answer any of your questions so don’t be bashful and give us a call today!