The Basics of Real Estate Investing

June 10, 2022

Real estate investing can be a great way to create long-term wealth, but it is important to understand the risks and rewards before making any investment. There are a few different types of real estate investments, such as new construction, fix-and-flip single-family homes and multifamily properties, rental properties and commercial properties. Each type of investment has its own set of risks and rewards, and for this post I will focus on residential opportunities.

There a several key things to consider if you plan to get involved in real estate, the first of which is the determining the type of investing. Are you thinking of buying rental properties? If so, will they be commercial or residential? Maybe you are going to get into fix-and-flip or new construction. Each of these real estate investment strategies has different levels of risk and potential return, so it's important to understand the basics before you get started. The key for fix-and-flip projects  is to move quickly, buy low and sell high, and be decisive when you find the right property, while new construction is all about timing the market correctly.

Next, you'll need to determine your expected cash flows and profit. This will help you know how much money you need to invest and what kind of return you can expect. You can make a profit from real estate through appreciation, rental income, or both. Real estate appreciation is the increase in the value of a property over time. This can happen for a number of reasons, such as inflation, market trends, or even improvements you make to the property. Rental income is the money you earn from renting out your commercial or residential properties.

When valuing an investment property, there are a few different modeling approaches to creating valuations, the sales comparison approach, cost approach and income approach. The Sales Comparison Approach is just what it sounds like, comparing the location and features of the subject property to other similar properties in the area. The Cost Approach is the cost of the land and construction, minus depreciation, which is a good approach for new construction. The Income Approach is commonly used for rental properties and uses expected cash flows to value a property.

The overall real estate market can have the largest impact on the success of your real estate investments. Today's current market, for example, is a very tough market to get into. Because prices have skyrocketed around the country, its hard to find properties that are financially viable. Fix-and-flip or rental properties in many areas have gotten so expensive that they are virtually impossible to make money on. If you have your own labor and can avoid sub-contracting out work and can complete the job quickly, there might be some opportunities. Its best to avoid construction loans if you can, the interest payments from a construction loan can eat away your profits. Many investors have decided to sit out of the market while things cool off a bit, but if you act quickly you can still find some gems.

The biggest risks of real estate investing are generally market risks. These include things like recession, high unemployment, excess vacant inventory, inflation, interest rate hikes, and political instability. Most of these can be mitigated by doing your homework and being picky about the properties you invest in. Real estate investing is not for the faint of heart. It takes a lot of hard work, dedications and time to be successful. However, if done right it can be very rewarding both financially and emotionally.



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