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Do you want to invest in real estate? You’re not alone. Real estate is one of the most popular areas of investment, and there are many reasons why.
First, you can get started with relatively little investment capital. Also, you can also invest in real estate in any state or city starting with just a computer and internet connection. Finally, you can claim awesome returns if you invest correctly.
Investing correctly can be a real challenge, however. Until you’ve learned more, it can be hard to maximize your returns—or even know where to begin. This guide may be able to help.
In the following sections, you’re going to learn 10 ways you can break into real estate investing. For each one, you’ll learn what it is, how it works, and what type of resources you’ll need to get started.
- Buying Rental Properties
- Flipping a Home
- Wholesaling
- Mortgage Notes
- Real Estate Crowdfunding
1. Buying Rental Properties
One of the common ways to break into real estate investing is buying properties to rent them back out again. This isn’t one of the most lucrative forms of property investing, but it’s relatively easy for people who are just getting started.
How does it work?
There are many ways to make rental properties pay. Here are some common plans:
- Buy a single home or condo unit and rent it out: This is the simplest plan. You purchase a single property and then rent it out for a sum that’s in excess of what it costs you to maintain it.
- Buy a multi-family unit and use one of the units as a primary residence: This is a popular plan where you buy a residence that’s large enough that you can live in it while you’re renting it. This plan involves either starting with a multi-unit property or converting a single property into multiple units. Living in one unit can save you on living costs and make property management simple.
Most rental property investors aspire to own a portfolio of properties. As long as the properties can be rented out for a greater amount than the mortgage, all of them can be profit drivers.
What do you need to get started?
- A downpayment: You need to qualify for a mortgage or buy the property outright. You’ll need at least a downpayment to begin.
- Tenant management tools: If you’re going to manage tenants (a necessity if you’re renting) you need some way to do it. You can use apps, property management companies, or develop your own system.
- A good understanding of the law: Managing tenants is a legally thorny area. Unless you understand what you’re doing—or are willing to work with a lawyer—it can be more difficult than other forms of investing.
2. Flipping a Home
Flipping a home is one of the most common types of real estate investment. Flipping is when you purchase property with the intention of selling it at a profit. How much of a profit you can make may depend on your opportunities.
How does it work?
There are several plans that you can use to make home flipping profitable.
- Purchase based on the opportunity: You can flip a home for a good price if you can get it cheaper than it’s value for any reason. Emergency sales, auctions, foreclosures, and other events may present an opportunity you can exploit.
- Purchase and repair: One of the best ways to get an amazing return is to buy a property that’s undervalued by damage, and then repair it back to top condition. By doing this, you can double the original price, or even more.
What do you need to get started?
- A downpayment: You’ll need to be able to purchase a property in order to flip it. That will take at least a downpayment if you can’t purchase the property outright.
- Renovation funds: To increase the property value, you may need additional funds to cover the costs of renovations. Depending on the state of the property, this may amount to more than the downpayment.
- Home improvement expertise, or a contracting team: Many home flippers like to save money by handling their own home repairs. You’ll need those skills, or contracting contacts that you trust to handle the work.
3. Wholesaling
Real estate wholesaling is a plan where you find a buyer on behalf of a home seller, and collect profits based on your role. Unlike many other property investment plans, you don’t need any funds to work as a wholesaler.
How does it work?
Most simple wholesaling plans work in three steps. You…
- Contract with the seller to establish a price for the property.
- Research and approach buyers, pitching the property at a higher price than the one that was contracted.
- When the sale is completed, you collect the difference between the two prices as profit.
This plan often involves properties that are distressed. For example, if a homeowner has a derelict property, and is unwilling to pay any repairs, they may be willing to place the house under contract for a low price.
The job of the wholesaler is to find a buyer who doesn’t care about the condition of the home but is attracted by other factors. These factors may include the location of the property, it’s potential as a future investment.
What do you need to get started?
- A real estate license: Wholesaling can require you to have a real estate license in many jurisdictions. You are acting partially as an agent of the home seller, and that means that you have some legal obligations.
- Excellent research skills: This form of property investing depends heavily on research. If you want to get the best price for your efforts.
4. Mortgage Notes
‘Mortgage notes’ is another name for the agreements that homeowners make when they take out loans for a home. These notes may be sold by the lender that originally signed them. When this happens, you may be able to collect a profit by investing the cost of the note.
How does it work?
When you buy a mortgage note, you’re purchasing the mortgage from a bank and taking it over for yourself. Lending institutions often sell these notes for less than they’re worth for several possible reasons:
- The loan is non-performing: When a loan isn’t being paid on-time, the lender may sell it at a significant discount. Investors may be able to profit from these loans by renegotiating terms with the borrower or going through the process to claim the property (in the case of secured loans).
- The lender wants to convert the loan into cash fast: Some notes are sold because the lender needs to make some fast cash. These notes are still sold at a discount, but often less of one because they are likely to still be performing.
Naturally, there is a fair amount of risk when you’re buying loans that have spotty payments or default status.
What do you need to get started?
- Funds to cover the cost of the note: While notes are often less expensive than buying the properties outright, you will still need to have funds to cover the cost of the note.
- A good understanding of the law: Taking over a loan is not a simple process. You need to understand what it means, and what laws govern your rights to collect loans.
5. Real Estate Crowdfunding
Real estate crowdfunding is a means of raising money for real estate investments. When you use crowdfunding, you bypass traditional lending institutions and investment vehicles in favor of direct relationships with the other party.
Only certified investors with $100,000 were allowed to participate in this process before 2012. Now, however, the laws have changed, and you can invest with as little as $500.
It’s not only traditional lenders that you bypass. When you invest through crowdfunding in either direction, you also bypass fee-collecting middlemen such as mortgage brokers or real estate agents.
How does it work?
Real estate crowdfunding works by giving each small investor a share of the profits equal to the share of their contribution.
Most crowdfunding investments are managed through Real Estate Investment Trusts (REITs) that handle the work of collecting and distributing payments to each of the investors.
As a result of this management, you can often invest in either property of choice, or a fund that manages many different property investments. These types of investments can have an impressively high dividend.
What do you need to get started?
- A method of outreach: If you want to successfully draw in micro-investors, you’ll need some way to reach them. If you don’t have popular media pages that you can use to advertise your efforts, you may have to use real estate crowdfunding platforms.
- An understanding of crowdfunding law: Crowdfunding investments don’t have all the protections of certain investments. Additionally, you need to be aware of the limits that may determine how much you’re allowed to invest.