Real estate investing is one of the best strategies for building long-term wealth. However, before investing in real estate, you need to do some research. You want to learn as much as you can before you start to make moves in the housing market. To help you start your journey on the right foot, here is everything you need to know about real estate:
The Different Types of Real Estate
There are four main categories of real estate:
- Residential real estate – This includes income property such as condos, apartments, single family homes, vacation rentals, and multi family homes. These properties are rented out as living spaces
- Commercial real estate – These are places of business such as offices, hotels, colleges, hospitals, strip malls, and retail shops
- Industrial real estate – Industrial use real estate can be anything from warehouses, manufacturing buildings, and car washes
- Mixed-use real estate – These are properties that combine two or more of the above categories in a single project. For instance, someone could build an apartment complex surrounded by retail shops
The Pros and Cons of Real Estate Investing
Part of everything you need to know about real estate is the pros and cons of real estate investing.
Pros of Real Estate Investing
- Passive income – Passive income refers to earnings that don’t require direct involvement. Real estate investors can earn passive income from rental property and other non-ownership investment options
- Tax benefits – Owners of investment properties enjoy specific tax breaks from the government
- Real estate appreciation – Real estate investments typically appreciate in value over time, making them a relatively safe store of wealth
- Hedge against inflation – Real estate values usually increase in the same proportion with inflation, if not at a faster rate
Cons of Real Estate Investing
- High transaction costs – Buying investment property requires substantial financing usually in the form of investment loans that come with a down payment of at least 20%
- Low liquidity – Unlike other investments such as stocks, an investment property cannot be sold quickly
- Maintenance and management – Managing and maintaining investment property can be a very costly and time-consuming exercise
- Increased liability – In case an accident or injury happens on your rental properties, you will be held liable
Learn More: The Pros and Cons of Real Estate Investing
17 Essential Real Estate Terms
Real estate is full of jargon, which can be very confusing especially for first-time investors. Here are some of the basic terms you need to get familiar with:
- Appraisal – Mortgage lenders usually conduct an appraisal to evaluate the value of a house at the time of purchase or sale. This value of the property determines the amount of mortgage offered
- Buyer’s agent – This is a real estate agent that represents the buyer’s interests during home sales. On the other hand, the agent representing the seller is referred to as a listing agent
- Buyer’s market – This is a situation where supply exceeds demand in the housing market, thus giving buyers an advantage over sellers in negotiations
- Closing – This is the stage where the sale of a property is finalized. Here, the seller and buyer sign the final paperwork, and the buyer becomes the new owner
- Closing costs – These costs usually make up 2-5% of the purchase price. Closing costs include excise tax, title insurance, and loan processing costs
- Comparative market analysis – CMA is a report on similar homes in a neighborhood that is used to establish the value of the property in question
- Equity – Equity is the difference between the balance of your mortgage and the market value of the home. For example, if you owe $200,000 on a home that is valued at $350,000, then you have $150,000 in equity
- Foreclosures – A foreclosure is a property that has been seized by a bank when a homeowner fails to make mortgage payments
- Home warranty – This kind of warranty safeguards your rental property from future problems such as heating and plumbing which can be costly to fix
- Inspection – Buyers conduct home inspections before making an offer. Problems detected during the inspection can influence the negotiation on the final price
- Investment property analysis: Also known as a return on investment analysis, it is the process of performing different calculations to find out if a specific investment property for sale will make you money
- Pre-approval letter – Before purchasing property, buyers need to get a pre-approval letter from the lender indicating how much money the buyer is eligible to borrow
- Real estate market analysis: While sometimes used as a synonym for comparative market analysis, a real estate market analysis can also refer to the general research conducted on a market to find out if it is profitable. This will help you find the best places to invest in real estate
- Realtor – A realtor is basically a real estate agent that is a member of the National Association of Realtors (NAR). This body has a code of ethics and standards that members must abide by
- Refinancing – This refers to replacing an old home loan with a new loan that comes with different payment structures and rates. Real estate investors usually refinance their mortgage in order to get a lower interest rate
- Seller’s market – This is a situation where there is a shortage of property for sale in the housing market, thus giving sellers an advantage over buyers
- Title insurance – This is a document that is usually required at the closing stage. It involves research into public records to ascertain that the title is free from any liens or encumbrances
See the Complete List Here: 25 Real Estate Investing Terms Beginners Should Know
Real Estate Investment Strategies
When it comes to everything you need to know about real estate, having the right investment strategy is very vital. As a real estate investor, you need to choose a strategy that fits your goals, needs, personality, skills, and budget. Here are some real estate investment options to consider:
Rental properties
Investing in rental properties involves buying a house for sale, making it livable and attractive to potential tenants, and then renting it out. You need to conduct a real estate market analysis and an investment property analysis first to determine the rate of return on a rental property. Using metrics such as Airbnb occupancy rate, cap rate, and cash on cash return, you can identify the best rental property in the market of your choice. Tools such as Mashvisor’s investment property calculator will help you find it.
There are two types of rental strategies to choose from:
Traditional rental property
This involves renting out to tenants anywhere between 3 months to years at a time.
Airbnb rental property
With the rising demand for short-term rentals, investing in Airbnb rental property can be a very lucrative venture. This involves renting out to guests anywhere from 1 night to up to 30 days.
Buy and hold real estate
This real estate investment strategy involves buying an investment property, holding onto it (usually for several years), and then selling it at a higher price. Since property appreciation takes time, buy and hold is suitable for anyone looking for a long-term, active investment. Most real estate investors combine this strategy with a rental strategy so they can benefit from cash flow month to month and appreciation upon selling.
Fix and flip real estate
With the fix and flip real estate investment strategy, you buy income property under market value, renovate it, and then sell it as soon as possible for a profit. To avoid losing money with fix and flip, be sure to consult an appraiser, contractor, and inspector.
REITs
A real estate investment trust (REIT) is the most passive real estate investment strategy. Investing in REITs is almost the same as investing in shares and stocks. Investors pool their money together to purchase properties such as health care facilities, apartment complexes, data centers, and hotels. Shareholders will then receive a portion of the profits generated as a dividend.
Learn More: What Is a Real Estate Investment Trust (REIT)?
Is That Everything You Need to Know About Real Estate?
Investors should also understand:
- How supply and demand in real estate work
- What positive cash flow is
- How to use return on investment metrics like cash on cash return and cap rate
- The different real estate investment tools available today
- And more general things to know before renting out a house so there are no surpirses
While we cannot outline all of that for you in 1 article, as you can see from the links above, Mashvisor has an article for everything you’d ever want to know about real estate.