The real estate industry has improved in recent years, and investors are pouring money in new and existing projects expecting to reap big. The booming market has room for more new investors who can make significant profits with minimum calculated risks. However, many new investors are unsure of how to get started in real estate investing. Some get cold feet because of the high associated starting capital while others shy away from this lucrative business because they lack the basics of real estate investing.
Fortunately, we are here to help you take your first step in real estate investing by offering you a few tips. These tips will cover the basics of the industry, ways to invest your money without buying real estate property, and how to invest in real estate with little or no money.
How Do You Get Started in Real Estate Investing?
Real estate properties can be broken into 3 major categories; commercial, residential, and industrial.
Commercial real estate properties are premises that are used for business purposes. Commercial properties are further subdivided into retail, office, land, and multi-family. Here are a few examples of commercial properties:
- Business offices
- Ranches or farmland
- Large apartment buildings
Residential properties are living premises. They are also subdivided into single-family homes, multi-family homes, condominiums, and townhouses. However, homes bigger than 4 units fall in the commercial properties category.
Industrial real estate properties are premises occupied by industrial businesses such as factories, storage and shipping warehouses, and power plants, among others.
Besides physical properties, there are other ways to make money in real estate investing. They include:
- Interest from loans
As a real estate investor, you can be an active or passive investor.
Active Real Estate Investing
Active real estate investors not only commit their money, but they also spend a significant share of their time directly in the market with an all-hands-on-deck type of approach. For you to succeed as an active real estate investor, you need to have a deep understanding of the real estate market, financial markets, and general financial literacy. You must also have great negotiation skills to ensure you do not get a raw deal in a transaction. Management and delegation skills are also essential in this kind of approach. Rental properties, house-flipping, and Airbnb all fall under this category.
Passive Real Estate Investing
Passive real estate investors have lesser responsibilities compared to active investors. They do not need solid knowledge of the real estate market, and neither do they need great negotiation skills. For newcomers in the market, this is the best way to start before proceeding to active real estate investing. Passive investors bring the cash and let professionals in the real estate industry deal with nitty-gritty details of the project on their behalf. Passive investing can take the following forms:
- Real estate investment trusts (REITs)
- Private equity fund
- Opportunity funds
Investing in Real Estate Without Buying Property
You can invest in real estate without buying a physical property. We will look at several ways to do this.
In this type of passive investment, you buy equity in a real estate investment trust. The REIT buys and owns assets, and you make money the same way you would if you bought shares in a company. 90% of the income generated by REITs goes towards repaying investors in the form of dividends. You can buy equity in a REIT that has a diverse portfolio across different sectors in the country or a REIT with international real estate properties. REITs invest in property across the following sectors:
- Self-storage facilities
- Commercial properties
- Health care facilities
- Industrial properties
Mortgage REITs invest in income-generating properties by buying the developer’s mortgage or by originating mortgage securities. If you invest in a mortgage REIT, you earn money from the interest accrued from the mortgage. The higher the interest rates, the higher your returns. However, this is a small market since mortgage REITs account for only 10% of all REITs.
The Jobs Act of 2012 opened the door for crowdfunding in real estate investing. Also, a form of passive investment, crowdfunding allows developers to pitch their investment ideas to potential investors with the aim of securing funding for their proposed projects. Investors choose the best and most viable project to invest in from several options.
Debt crowdfunding is another type of passive investment where investors offer loans to developers with the help of financial institutions. As an investor, you earn money when the developer starts repaying the loan.
Other ways of investing in real estate without buying property include;
- Interval funds
- Private placement and limited partnerships
Investing in Real Estate with Little or No Money
The biggest hurdle in real estate investing is probably the starting capital. However, there are several clever ways to overcome this challenge.
Buy a Property for Personal Use Then Rent It
This is a clever way to get into real estate investing, especially if you are a vet or currently serving in the military. You can purchase a residential home through a mortgage loan guaranteed by the United States Department of Veterans Affairs (VA) or the United States Department of Agriculture. These loans do not require a down payment and allow up to 103.3% financing without private mortgage insurance. Once you buy a residential property, you have to live there for at least a year before moving out. After moving out, you can start renting out the property.
Even for civilians, getting a mortgage for a residential home is easier than getting one for an investment property. After buying a home, you can rent it out later.
Buy a Duplex
If you are going to live the duplex, all you need is a 3.5% down payment for a Federal Housing Administration (FHA) mortgage. Once you buy the duplex, you live one unit and rent out the other. Besides benefiting from the low down payment, you can use the rent from the other unit to repay the mortgage.
Other ways of getting into real estate investing with little or no money include:
- Finding a seller who can cover the closing costs
- Finding a lender that can cover the closing costs or one that offers a rebate on the down payment
Real estate investing offers you a chance to build wealth even without large sums of money or extensive knowledge of the market. Using the information we have provided, you can start small and build up.