Investing in real estate has a number of advantages over other types of investing. For instance, if you buy $100,000 worth of stock in a company and the company goes under you may end up losing your entire investment. While you may end up in a situation where you need to sell an investment property at a loss, you will rarely ever lose your entire investment. Conversely, however, real estate investments also incur ongoing expenses that you have to factor in before making the investment. Unlike a stock or a bond that has a value set by the market, the true value of real estate investments can be much harder to assess. To determine the true value of an investment property the following three key components need to be considered
1. Income potential
Unless you are just purchasing land, most types of real estate investments will have some type of income potential that has to be factored in when considering the value of a property. There are a number of ways to determine income potential depending on the type of property it is. To determine income, you need to determine the capitalization rate. Put simply, the capitalization rate is the projected annual income from the gross rent multiplier divided by the current value of the property.
One of the most common methods of evaluating real estate investments is to compare the property you are considering investing in with other comparable properties in the area. While there are a number of variables that will affect both the price and income potential of the property you are considering versus other properties, finding properties that are legitimately comparable and accounting for differences can give you a fairly accurate estimate of what you can expect from your property.
3. Capital Asset Pricing Model (CAPM)
A CAPM is a comprehensive evaluation tool that considers a number of intangible variables such as the safety of the neighborhood and the age of the property and compares it to the expected ROI of other types of investments. For instance, you can expect an older rental property to need more major repairs and you can expect high tenant turnover in less desirable neighborhoods. These will all have an impact on your rental income. If a real estate investment is likely to have a smaller ROI than another investment tool, then it doesn’t make sense to invest in real estate.
Real estate investment is among the most successful field of investment in the world today. The investment is projected no to go down anytime soon as investors are flooding in each day. Just like any other form of investment, an investor needs to have some financial zeal to engage in this business. But most investors don’t always have bundles of cash on hand. Most of the top real estate investors borrow money from real estate fund lenders. Below are some of the most popular lenders for real estate credit and investment property loan lenders.
1. Hard money lenders
For many years now, Hard Money lending has been a crucial resource for almost all types of investments. It involves offering funds in the form of short-term credits of between 6 to 60 months. Hard Money may charge high interests and in most cases, may not have forestallment penalties. Traditionally, Hard Money lenders have been processing funding very fast and few requirements.
2. Transitional Funding
Transitional Funding is arguably the easiest and speediest lending method for most investors in real estate assets, especially in house flips and wholesale deals. More so, this type of lending is among the least popular forms of real asset financing. Transitional Funding works best for the investors who wish to be in, on, out and receive their real estate payments quickly. The terms of this funding method are too good that some people think it is a scam until when it works for them. Transitional Funding is solely for investors who do wholesale real estate deals. In Transitional Funding, an investor gets 100% funding, and their creditworthiness, income proof, and assets do not have to be checked. Besides, these types of lenders do not have to require the production of full title reports, appraisals, or insurance.
3. Private Lending
As the name suggests, Private Money Lenders are people with money and wish to loan it on real estate. These individuals consist of all kind of people with savings and investment or surplus cash intending to receive passive income. Private Money lenders are flexible and allow investors to negotiate their terms of lending. Their terms vary from one investor to another. The popularity of Private Lending has marked a significant rise due to more awareness of the opportunities they provide.
Hard money lenders, transitional funding, and private lending are all great ways that real estate investors can receive a loan and not miss out on a potential real estate investment.
Investing in the real estate industry is one of the lucrative options available in our time. Before making a move to actualize your ambitions, due diligence should be exercised, especially since the sector can be quite volatile and risky. Here’s an outline of 4 important questions that you should ask yourself before delving further with your ambitions in real estate investments.
1. Why do you want to invest there?
The first question revolves questioning the actual ambition that drives you to think of investing in the real estate industry. It is meant to get you back to the drawing board and evaluate the precise reasons as to why investing in the real estate industry may be beneficial to you. As a beginner, you may need to focus more on the various benefits of investing in the real estate industry. Comprehensively understanding your purpose for the investment gets you moving on the right track.
2. How financially stable are you?
This question revolves around the broad concept of how to finance your real estate ambitions to ensure that you meet the goals you have set. You may need to look at your credit score and whether it qualifies you to obtain financing for your real estate projects or not. In case you have decided to pursue alternative financing options, such as partnerships, self-financing, and equity financing, you will need to exercise due diligence before investing in real estate.
3. How much of risk can you take?
The real estate industry is a risky business. Before taking a step further, you should understand the various risks in the real estate industry and whether you are willing and capable of taking them without jeopardizing your capital. Your risk tolerance levels will advise you on the kind of properties to invest in.
4. Are you self-motivated enough?
Profits in the real estate industry may be hard to come by, just like in any other business startup. You may, therefore, find yourself going for months without having made a single sale. Determination during such a tough time is crucial as it keeps you going. Being self-motivated is, therefore, a crucial quality that you should endeavor to propagate in your career as a real estate investor.
Traditional real estate investing requires a tremendous commitment of time, money and resources. As a result, most investors shy away from considering real estate as a investment option. Recently, real estate crowdfunding has emerged as a viable alternative for the average investor. Real estate crowdfunding allows investors to buy shares in single-family homes, multi-family apartment buildings, and commercial properties.
Crowdfunding in real estate offers two primary advantages.
- Investors are not required to make a large capital investment. The minimum investment for some deals is $500.
- Investors are not responsible for property management. The crowdfunding platform’s management team handles the upkeep and management of the property.
There are over 100 real estate crowdfunding platforms to choose from. Here are six crowdfunding platforms that cater to the average investor.
Fundrise offers investment in real estate projects ranging from single-family rental homes to commercial property renovations. Investors can invest for as little as $500 with Fundrise’s Starter Portfolio. For a minimum investment of $1,000, you can upgrade to one of three Core Plans — Supplemental Income, Balanced Investing, or Long-Term Growth.
RealtyMogul allows investors to invest in multi-family properties and debt securities through their two Real Estate Investment Trusts (REITs) — MOGULREIT I and MOGULREIT II. MOGULREIT I requires a $1,000 minimum investment. MOGULREIT II requires a $5,000 minimum investment.
Investors can invest in multi-family properties and student housing through Rich Uncles’ BRIX REIT. The NNN REIT gives investors the opportunity to invest in commercial, industrial, and retail properties leased to corporate tenants. Both REITs only require a $500 minimum investment.
The 1stREIT Office REIT provides investors the option to invest in commercial office properties for a minimum investment of $1,000. Since its inception, the fund has returned a dividend of 10%.
The Upside Avenue REIT gives investors the chance to invest in multi-family apartment buildings, senior living facilities, and student housing for a minimum investment of $2,000. The REIT has been in existence since 2002 and has averaged a 15 percent return on investment since inception.
Unlike the other crowdfunding platforms mentioned, Groundfloor uses crowdfunded investments to provide real estate investment loans to borrowers. The rate of return on these loans ranges from 5.5 percent to 26 percent, based on the risk level.
These are 6 of the best crowdfunding platforms for main street investors, but there are so many more out there. Before committing to one, make sure you do your research. Feel free to consult your colleagues on which one is their favorite. Hopefully, you will have a better sense of what crowdfunding are available and can make an informed decision on which one is the best for you!
Unfortunately, no one knows when the next recession is coming. This can be daunting for real estate investors and the well being of their career. Smart real investors prepare to take advantage of the discounted real estate deals that become available during an economic downturn.
Purchase Well Now
Buying the right properties today will put real estate investors in a good position during a recession. Not overpaying for properties is important. An appropriate purchase price keeps more funds available for the future. Also, properties must provide a positive cash flow.While the location of properties is always an important factor in real estate, owning properties in the wrong location could mean financial disaster in an economic downturn. Investors should select properties in communities that aren’t dependent on one industry or employer. A recession increases the probability of a single industry or employer to fail, and as residents leave the community in search of economic opportunity, investors’ rental units become vacant and unprofitable.
The other location consideration is the neighborhood. Like school teachers, real estate investors classify neighborhoods with the letters A, B, C, or D. For many investors, properties in A-class neighborhoods are too expensive for positive cash flow. During a recession, properties in B-class and C-class neighborhoods should continue to provide positive cash flow because these communities tend to attract employed, long-term renters. Landlords who want to get ready for a recession should avoid D-class neighborhoods, which will likely see an increase in evictions during an economic downturn.
Get Access to Funds
Purchase prices usually drop during a recession. Investors need to be ready with access to funds
. Some investors may be able to save up cash. Other investors should start networking now and build relationships with lenders. That way when the recession comes the lenders will already be familiar with the investor and his or her work. However, investors need to be careful that they don’t borrow so much now that they’re overleveraged when the recession hits.
Become a Real Estate Investor Before the Recession
A recession isn’t the time to start a real estate investment business
. It takes time to establish a network, generate leads, learn how to buy the right properties, and find financing. When economic conditions lower prices in the real estate market, newcomers may find that experienced investors were ready and have taken the best deals. The most essential preparation for a recession is having expertise as a real estate investor before the downturn begins.
An economic upswing that began in 2013 has North American baby boomers searching for buried treasure. It comes in the form of an inventory of affordable properties in several tropical regions that are suitable for both retirement and investing. Savvy investors are taking advantage of the opportunity to invest in rentals for snowbirds and furnish themselves with a second home in a Caribbean paradise. Experts in the following locals say now is the time to start digging for investment treasures that will pay off big time in the future.
Belize is located in mid-Cental America and is only an hour and 45-minute flight from Miami. Buyers can rest assured that the economy is stable, and the real estate market has matured. Investors will find no international pitfalls to trap them legally since Belize is a part of the British Commonwealth and there is no capital gain tax. Properties are less expensive than many other places in the Caribbean. Hot spots include the Cayo District and San Pedro.
The Cayman Islands also have a favorable economic forecast along with a popular vacation lifestyle. Their rules for international transactions strict and the British colony’s government is friendly to foreign investors. Titles can go in company or personal names. The Caymans have a housing inventory that is affordably priced. The average price of a two-bedroom condo is $350,000. Rented out at $2,500 net, the return on investment will be seven percent over time. Additionally, there is no income tax, property tax, or capital gain.
A varied natural landscape and a politically and economically stable country make Costa Rica a popular investment choice. A rising GPD is fueling investor interest. Canadian and U.S. tourists and snowbirds keep the rental market strong. Property can be bought easily with a simple tourist visa, and foreigners have the same rights as locals in terms of property ownership. Hot spots include the Southern zone and the northern Pacific coast.
The Turks and Caicos Islands
Located north of the Dominican Republic, the Turks and Caicos Islands have one of the Caribbean region’s fastest growing real estate markets. Depending on size and location, investors will pay between $250,000 and $800,000 for a condo and $250,000 for a home. Most properties come fully furnished because there is no room to store furniture. The Turks and Caicos have relaxed rules for conducting business. There are no taxes, but there is a one-time stamp duty payable at the time of purchase. These islands have a bright future as a vacationer’s paradise.