Everyone is looking for some extra income these days. The steaming mess that we got from the recession has necessitated the gig economy and finding passive sources of income just to stay afloat and achieve financial goals. Investing in real estate can be a fantastic way to earn more on the side. If you know what you are doing it can be profitable, safe and reliable. If you know what you are doing.
If you don’t, you can make mistakes that have the potential to ruin you financially, so no pressure. But if you take the time to carefully research, get info on all the options and avoid common mistakes, you can turn your finances around and finally “make it.” Here are tips for real estate investing for beginners, as well as some things you definitely should avoid when starting out.
Things to Do When Starting Out
Don’t get in over your head too far out of the gate. Real estate investing for beginners is not about going all in too soon. There are many avenues to start investing in real estate that is lower risk to help you ease into it. There are also tasks that you can perform to prepare you for your investing process. Here are some things you can try that are good first steps.
Real Estate Crowdfunding
One of the newest forms of investing out there right now is real estate crowdfunding. Crowdfunding is like Indiegogo, Kickstarter or Gofundme. Many people pay small amounts to get up the major funding for a project instead of begging rich investors for capital. This way, the “crowd” can invest just a little amount and get a return on investment. It is not huge, but it’s still something, and more than worth the original investment cost.
Real estate crowdfunding is very similar. Instead of shopping around to wealthy investors, real estate developers can harness the power of social media to get their investments through volume rather than lump sums. These crowd investors can risk as much or as little as they want and still expect returns. It is a great place to start in the world of real estate investment.
Some restrictions apply, however, as the government has not caught up to regulate this new form of investing yet. It is not as easy as investing in a new album on Kickstarter but is still possible. Keep an eye out for further developments in this field.
Know Your Investing Power
Before you can start investing, you have to know just how much you can invest. Borrowing to invest is great if you have the credit. Check your credit score to make sure that you can get approved for any loans you might need to take out. You can find out what your credit score is by using a credit check service online which are usually free but sometimes come with strings attached.
You should also work out your personal debt to equity ratio. This is a ratio of all of your debt divided by your total assets minus your total personal debt. The higher your debt-equity ratio, the more risk you appear to be to a lender. A lower personal debt to equity ratio will make you more attractive to lenders and allow you to borrow and therefore invest more.
Finding out these two numbers will allow you to predict how much you can borrow and invest. If these numbers are a bit lacking, you may want to consider shoring them up first by paying down some debt or refinancing. You probably shouldn’t be looking to invest too heavily if you are struggling with debt already.
Decide What form of Income You Want
Real estate investing for beginners usually results in income from one of two sources. The first is real estate appreciation. This is the “long game” of real estate investment. It is arguably less work, but also somewhat riskier.
Real estate appreciation is when you purchase a property and wait for the value to rise before selling it off. It is possible to strike it rich doing real investment this way if the area gets developed and people wish to move or do business there. On the other hand, the area may plummet in value, and you are left paying off a property that is worth less than what you paid for it.
This method requires a lot of research and patience. You also might want to get some professional advice on what properties will appreciate in value and which ones will depreciate. It is largely at the whim of fate.
If you want a more controllable income with a more hands-on role, you could consider cash flow income from your real estate investments. This is more of a typical setup, where you are the landlord collecting rent from tenants or business operating on your property. This cash flow is not as huge as a big investment pay off, but the steady income can be a boon for shoring up other investments.
However, unlike with real estate appreciation, you’ll likely have to put work into these properties. Keeping them maintained and developed is your responsibility. Slack on this, and you won’t get any renters. With no renters, you get no income, and you lose money every day it is not occupied. You’ll need to either put the hours in yourself, or hire a property manager, but do it right, and you can significantly increase your monthly income.
What Not To Do
We’ve talked here before about the right way to invest in property, but it’s just important to know about the pitfalls you should avoid. Many investors consider real estate to be more stable than stocks, but that doesn’t mean there aren’t any risks involved. Like with other forms of investment, mistakes can cost you a great deal and ground your finance dreams before they take off. Here are five of the most common mistakes you should avoid at all costs.
Not Doing Your Homework
When it comes to your money, your decisions should always be as informed as possible, and property finance is no different. There is no one location, size or type of property that’s a sure-fire win. What works varies greatly from area to area, and the only way to know what will be successful for you is to do your research.
Find your niche and learn all you can about its ins and outs. You can get this information from local banks, brokers or investment groups. You’re here, so you already know how to use the internet to increase your understanding, so don’t stop here!
Too Big, Too Fast
You wouldn’t go all in on your first poker hand, and you shouldn’t do it in investment either. There are plenty of first-time investors out there who wanted to get rich quick and dumped every cent into a big property only to watch the investment fall through. Patience is a virtue.
It’s prudent to build up a portfolio slowly, starting with small, low-risk properties and working your way up to bigger fish. You could even partner up with other investors before taking the big leaps. A nest egg is nurtured, not cracked open for a quick omelet.
Underestimating Costs and Work
Properties aren’t cash cows that just make money after being acquired. You have to put the time into maintaining properties if you decide not to hire a property manager. Vacancy periods, taxes, maintenance and management fees add up to quite a bit. Understanding your cash flow and being aware of any shortfalls will ensure that you stay in the black. It’s never a bad idea to seek professional help if you need it.
Leaving Yourself Vulnerable
Everyone makes mistakes, and chances are you might pick up a bad investment or two. It happens. Sometimes you can’t control it but what you can control is how much you stand to lose should the worst happen.
If you purchase or invest in a property under your personal name, you and your personal finances could be at risk if someone hits you with a lawsuit. Instead, make your investments through a legal entity like a Limited Liability Company (LLC) if you can. Once again, do your homework and talk to a lawyer who specializes in real estate to learn about the options available to you.
Not Getting Back on the Horse
Just because you fail once, it doesn’t mean you’re a bad investor. Investment takes time and perseverance, and the best learn from their mistakes and come back working twice as hard. Giving up early will leave you with a bunch of debt and nothing to show for it. But, if you learn from your mistakes, you will have a much better shot at winning big the next time around.