Real estate has always been a good investment. This is where Will Rogers puts in his two bits’ worth about how they’re not making land anymore. It’s an amusing saying, but very true. Land and buildings are limited resources, so they generally gain value over time.
How Money Is Made in Real Estate
Most land investing makes money one of two ways. One way is the appreciation of real estate values over time. In general, properties become more valuable the longer you own them. Hold them long enough, sell them and there can be a profit. Other variations include financing to extract equity and loans against the parcel for investment cash.
The other way is establishing an income stream, usually rentals to tenants. Storage lots, quick cash purchases, car parking and trailer or RV parks are examples of the same theme.
Investing in Returns
The simplest way to invest in real estate is to pay off your house. If it’s kept pretty and maintained well, its value is likely increasing over time. There’ll be an opportunity in the future to cash out and realize a profit. However, there’s another way that paying off can pay off.
Investment experts recommend paying off your house first, then turning the former monthly payment into savings as a source of investment funds. It mitigates a great deal of risk while increasing the number of financial options available in the future.
The money that used to pay the house payment can be banked, ready to jump on a likely opportunity for investment. With less demand for bills, your household will be on better footing to face unforeseen emergencies. It won’t matter if the economy is good or bad. Your household will be secure.
Probably the most well-known way to make money in land is house flipping. Find a house that’s listed lower than it should be, perform repairs, cleanup and remodeling. Then sell it at market value and turn a profit.
Note: As a homeowner looking to sell your home, it’s important to know which home repairs provide most value and which are best to skip!
Just like any other investment, there can be significant risks. Why is the property listed so low? Is there a reasonably economic way to rehabilitate it that doesn’t require hazmat crews and asbestos removal? Even though the concept is sound, execution can get very tricky. Check with local realtors about the local market potential.
Repairs, materials, permitting and the time it takes to get the house back on the market are all risks that can cause a loss. However, more than 200,000 homes were flipped just in 2017. This popularity goes to show that a careful plan and frugal execution can produce sound profits.
New Leaf Properties makes the home flipping process easy for investors. Contact us today to find out how you can invest in properties that are already cash-flowing!
Increasing Market Value is Key
Although property values can rise and fall dramatically just like the stock market, most real estate continues to increase in value over the long haul in the same way as the stock market. Whether you want to sell your long time residence or just flip a quick acquisition, buy low and sell high.
There are certain givens in this game. The property’s value needs to be maximized by improving curb appeal, repairing, landscaping and remodeling the building. All of these details keep you competitive in the market. They can’t be ignored.
You need to purchase the property for as low as possible. Maintain and improve the house with an eye towards its neighborhood. There’s no point in creating a half-million dollar home where the median price is 130,000 dollars. Pay it off and hang on to it through thick and thin. When prices are high, sell at a profit.
Survive the downturns and hang on for the increase over the years. Selling homes takes two things: time and money. Take the time to solidify your financial footing (pay off your house!) Prepare both yourself and the property to ride out a decade or more if necessary. Put away six months to a year’s worth of paychecks. That money will be available for emergency repairs or just providing patience to wait.
Investing for Income Streams
The primary method for establishing an income stream from a property is to buy a house or small apartment building as a rental. If you buy a fourplex, you could live in one unit and the other units would pay the mortgage.
Ideally, there would also be surplus income to go along with it. Remember, you’re going to be dealing with people, so things can get unpredictable with individual tenants. There might be legal expenses to recover for damage or unpaid rent.
Flipping also comes into play here. A refurbished apartment building with current maintenance and a book full of rentals can pull a hefty profit, but will naturally take a lot of time to position for sale. Maintenance, upkeep and vacancies are going to require a cash reserve to weather the distance. Taxes, insurance, pest control, landscaping and city or state regulations are all factors to plan for in this scenario.
One trend that’s becoming popular for owners of vacation acreage, homesteads and farms or ranches is to list them on booking sites for bed and breakfast stays or for camping. You can set your own rules, many of these brokers carry insurance for you and the fees are paid up front.
Set a low basic overnight rate to encourage bookings. Provide extras like breakfast, trail mix, backpacks, showers, homemade jelly, eggs or tours of the farm or property to increase the amount taken in per stay. Other ideas are swap meets, growing produce, flowers and selling Christmas trees.
Currently the darling pick of late-night cable and online stock market gurus, real estate investment trusts (REIT) offer a way to invest in the market without buying or owning any land. An REIT holds a portfolio of rental properties. These could be apartments, commercial holdings, malls or industrial buildings.
In general, experts like those REITs that hold office buildings and lease out to state and federal governments. The disadvantages are that someone else controls the decisions about the holdings and you can’t “flip” the REIT shares quite the same way you can with real property or stock portfolios. Trading has to be planned carefully.
Also, even REITs that outperform the stock market don’t usually match either the consistency or long-term return history of mutual funds. Some mutual funds consistently match or outperform the Dow Jones Averages and other popular stock indices. Some mutual funds do invest in land and REITs, and your investment in the mutual fund means you still have a play in property without getting your hands dirty.
Trading in stocks from construction companies, mining, oil, forestry and other large land-based enterprises is another way to buy into real estate without having to own land.
Important Considerations When Investing in Real Estate
Taxes will quickly become an important aspect of your life if you own multiple properties. Rental income will increase your personal income tax because it increases your income. If you’re at the borderline of a tax increase already, you might not want to go into rentals just yet. The taxes on the increased income can offset the amount of increase.
The most important thing to remember is that the length of time to make the profit affects the way that profit is taxed. If you own a piece of land for longer than a year, it’s not counted as income tax, it’s taxed as capital gains.
Depending on your existing income, capital gains can be taxed at either a higher or lower rate than standard income tax. If you own a home for less than a year and manage to flip it, that profit is counted as part of your income for that year, and will be taxed according to your adjusted net income tax.
Some of these conditions are different for investment properties than for occupied main residences. It’s always an essential part of this business to consult lawyers, accountants and financial advisers before jumping into any decision.
How to Start Investing in Real Estate Today
Simple rules to keep in mind when you start out include:
* Always pay in cash unless your tax and/or business situation makes it more profitable
* Don’t put all your eggs in one basket. Never rely on real estate to produce wealth. Back it up with something else like a 401(K) or mutual funds.
* Invest locally. You know your town better than anywhere else. You’re going to want to check on your holdings personally.
* Find a real estate agent you trust. They have the contacts and the market knowledge.
* Most importantly, start small! Pick up a cheap, small, easy to work with place first to build your knowledge, experience and expertise. That next big project will always be waiting around the corner.
If you make the commitment to prepare carefully, go slow, do your research and take your time following the simple rules listed above, you’ll be well on your way to building an independent, financially secure future for your household. There are complexities and difficulties, but that’s true of a lot of things in life. Pay off your house and get started investing in real estate for a more secure tomorrow.