Investing in real estate offers a lot of benefits including an opportunity to create short-term and long-term income, and build wealth. Real estate also has diversification potential and inflation-hedging capability, enhances the risk-and-return of an investor’s portfolio, and provides the investors with the power to leverage, unlike the stock market.
But despite the countless opportunities investing in real estate offers, there are also many inadequacies that can limit your earnings as an investor. The best way to avoid falling into the ditch or making grave mistakes, is to carry out detailed research and learn all the nitty-gritty of real estate investments, including the legal aspects as concerned the local market you are trying to enter before going into it.
How Real Estate Investment Works
Real estate investment is a financial strategy that guarantees profits through the ownership, management, purchase, rental and/or sale of property. Profit-making in real estate is dependent on certain economic factors: the property must increase in value; the cost of owning and maintaining the property must not be greater than the increase in the value of the property.
To invest the right way, experienced investors choose carefully among the arrays of several forms of investment properties available in the market based on their investment strategy – immediate or long-term profits. For immediate profits, they buy property and sell it quickly while for long-term profits, they buy property and rent or lease it out for a long period of time, gaining both the rent and the increasing value of the property over time.
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Trusted Ways to Invest in Real Estate
There are many ways or methods of investing in real estate in any market. The good thing is that you can get returns on your investments no matter the state of the economy in the local market if you invest the right way. The following are the most common methods. Remember, however, that each of these methods has its pros and cons.
Rental Properties: Investing in rental properties means building or purchasing a property, and then renting it out. The direct implication of this is that you will become a landlord through direct or indirect ownership.
Direct ownership means you are directly involved in the management of the property, and are responsible for paying the mortgage, property taxes, and insurance (if applicable), maintaining and repairing the property, and dealing with any challenges that arise such as finding reliable tenants as well as maintenance hassles and headaches. The major work here is taking care of the property and managing the tenants which can be a real time occupation.
In indirect ownership, you hire a property manager to perform all the tasks on your behalf and pay them.
As a landlord, you will make money majorly by collecting rents which is dependent on the location of the rental. But you must neither charge too much nor too little; if you charge too much, it will be difficult for intending tenants to afford it, and you will chase them way; if you charge too little, on the other hand, you will be short-changing yourself and will not be able to keep up with the cost of maintenance. The most common strategy is to charge enough rent that will cover maintenance costs and other expenses until you pay off your mortgage after which the majority of the rent will become your profits.
Another way of making money on rental properties is through property appreciation. You can decide to sell off your property at a profit if it appreciates or borrow against the equity to make your next investment. If you a good manager, especially of people, rental properties might turn out to be a lucrative business for you.
Real Estate Investment Trusts (REITs): REITs are distinctive investment schemes that allow investors to pool their money to invest in real estate assets. As companies, they own, operate, or finance properties and real estate ventures.
These schemes are managed by a local regulatory body, for instance the Securities and Exchange Commission (SEC) in Nigeria. They either buy properties and rent them to tenants, develop properties from the ground up, or just focus on the mortgage and financial side of real estate without owning any property. In the case of REIT that deals in rental properties, the bulk of those earnings is returned to the investors as dividends. Basically, a REIT focuses on a specific type of real estate, such as apartment complexes, hotels, malls, or hospitals.
You can invest in REITs in the public market or the private market. If your desire is to keep your investment liquid, the publicly traded REITS are your best bet.
Investing in REITs gives you exposure to the market without having to devote your time and commitment to the rigors of buying and managing your own property. Another benefit of investing in REITs is that you can own one or more units of living space while the investment group manages all the units on your behalf, and takes a percentage of the rent. REITs offer regular returns and high dividends.
Flipping Houses/Land: House flipping as a form of real estate investment means buying property, renovating it and reselling it for a profit. It is time-consuming and costly too as it comes with unexpected problems such as time-inducing mistakes, budget increases, longer renovation timeline, and so on. But it is one of the smartest methods of investing in real estate as it has the potential to produce a great gain.
To be a successful flipper, you need to build a team of construction and real estate experts you can rely on like interior designers, attorneys, contractors, and accountants. You should also ensure you have cash reserves if you hope to make enough.
To flip land, you can buy tens of plots and acres and resell them all year round. In all, house flipping requires huge capital, extensive real estate experience and ability to oversee other professionals during renovation or repairs.
Investing in your Own Home: Residential real estate is most likely the first step of many real estate investors to investing in real estate. It means owning your own home. The basic need of man after food is shelter, and it is what many strive to achieve.
You can buy a home outright if you have the money or take out a mortgage and repay over the course of time agreed if you do not have outright payment. Owning your own home is a long-term investment that can protect you against the volatility of the real estate market. It boosts your net worth as it stands as a major asset.
Property Development: Though quite capital intensive, property development is like a goldmine for real estate investors who have the financial wherewithal or know how to source for funds to execute it.
It involves acquiring a land in a nice location, building luxury apartments, offices or other commercial structures on it, and selling each unit or everything at a high profit margin. Developers make at least double of their investment capital on every development. But it also requires extensive experience and knowledge of every aspect of real estate, including finance.
[READ MORE: TOP FREQUENTLY ASKED QUESTIONS FROM HOME BUYERS]
5 Strategies for Successful Real Estate Investing
The large housing deficit in Africa presents a great opportunity for real estate investors. However, you need certain proven strategies to stand out irrespective of the investment method you decide to go with. Consider the following strategies for guaranteed successful real estate investing.
Be Financially Prepared: Real estate investing is as expensive as it is rewarding, and no matter the market or method you choose, you need to be able to raise funds. Before you get started, ensure you have either cash on hand or partnership share for a down payment or to buy a property outright.
Apart from the readily available cash for purchase, you also need to have a reserve that you can dip into if something requires fixing. The reserve should be different from your daily emergency fund that you can use to pay off customer debt.
Understand the Local Market: There is no gainsaying the fact that location is the most important factors in real estate. This is why you must study and have enough understanding about the local market where intend to invest. Start by studying the law guiding the real estate industry in the location. For instance, if you are planning to invest in Nigeria’s real estate market, engage the 1978 Land Use Act to know what obtains in each state so as not to fall prey to ignorance.
If you are entirely new to a market, talk to real estate agents or locals who are more familiar with the area. Analyse the history of property prices, and do your research about those who live there and what can attract people to the place. Build relationships with people of interest to get answers to your questions.
Have a Niche and be Forward-looking: Being a Jack of all trades in real estate is not a bad idea but it is better you decide on the specific property market that aligns with your goals as an investor. You can decide on offices, residential units, and others. Consider the kind of profits you are looking for – immediate or long-term, before choosing a property.
Also, look at the development potential of a location and what development can bring to the area. This will enable you to picture the future real estate needs of the area. For instance, there are areas that will be a good fit for high-rises due to the inflow of the working class when they witness infrastructural developments.
Get the Details Right: Keep your strategy simple and understand your goal. If your goal is to goal is just to generate passive income, you can start small and keep your expenses low. When entering into real estate investing, do not just go into business deals or agreement with ‘anybody’ without affirming their reliability and trustworthiness. Work with experts such as lawyers and real estate agents, and be meticulous about all necessary approvals you need to get.
Develop a Good Marketing Strategy: No matter how great your business idea or product is, if you do not know how to get it to the target market, you will not achieve your goals. Define your target market, identify their needs, and how you can get to them.
The internet is one of the media you can use to take your products to the consumers. Build a website and a social media presence through which you will get traffic to your venture, and attract buyers.
[READ FURTHER: 10 THINGS TO EXPECT FROM YOUR REAL ESTATE AGENT WHEN BUYING A HOME]
Closing
Real estate investing is accessible and has made many people billionaires. In fact, many of the World’s wealthy made their wealth through real estate. But to get to that level, you need to be strategic and position yourself aright. The strategies discussed above will help you to get started. So, what are you waiting for?
