Are you considering real estate investing? Are you searching for the ultimate guide to help you? Well this is it, we’ve got it right here: your expert guide on getting started in real estate investing.
Related: How to Start Investing in Real Estate in Your 20s
What is an investment property?
An investment property is a property that you buy or invest in for the sole purpose of re-selling it or renting it out to receive income and build your wealth.
So how does an investment property generate value?
There are 3 ways an investment property will generate value.
- Cash Flow: a good investment property should generate positive cash flow. Cash flow is generated from rental properties. To achieve positive cash flow, your rental expenses should NOT exceed the rental income you’re asking of your tenants.
- Equity Building: In real estate terms, equity is the difference between your property’s market value (fair market value), and how much you owe your lender on mortgage. So if the fair market value of your property is $300,000 and you owe the bank $200,000, then your equity would equal $100,000. So how can your home equity build? You can build equity using mortgage payments, down payments, property appreciation, among others.
- Appreciation: In real estate, appreciation is the increase of the value of your home over a certain period of time. Appreciation is one of the many advantages of real estate investing. But, before getting started in real estate investing, you should know that investing solely for appreciation may not be the smartest choice. So while a great perk, don’t let appreciation be the main objective of your investment.
Related: Is It OK to Invest in Real Estate Just for Appreciation?
Things to Consider When Choosing a Market
Before getting started in real estate investing, there are a few things you need to know.
- Invest for Profit: and not for convenience. Yes, staying within your 20 mile radius like over 50% of investors is easier, it is more comfortable and convenient, but it may not be the most profitable option. Profit potential may be higher in another city, or even another state, and what other reason that profit are you investing in real estate for?
Related: Real Estate Investing Beyond the 20 Mile Radius
- Market growth and the job market: don’t jump into a market without knowing that there’s growth or room for growth in that market. What is employment like in the area? After all, an area with high employment opportunities will most definitely attract prospect tenants.
- Housing Market: what’s the market like? How are other homes doing in your area? Usually, if you want an indication of how well the property you’re considering will do, check out similar properties in the same area. Also, make sure to evaluate the investment costs required and compare those to analysis of market conditions to see if the property is worth it.
- Income Levels: Try to find a property where people earn a moderate income level. That usually where highest returns are. Low income level areas are too risky, and high income level areas may prevent you from enjoying positive cash flow.
School Districts: college towns and good schools are usually areas with consistent and high demand. Plus, you’ll earn yourself long-term tenants. If you’re getting started in real estate investing, college towns and areas with good schools are a great option. - Amenities: make sure you stay close to amenities. These include but are not limited to schools, hospitals, restaurants, shopping areas, etc. These make the tenant’s life ten times easier and makes your property that many times more appealing.
- Transportation: the existence of easy access to transportation, especially if your property lies in towns near the main city, makes an area very desirable for prospect tenants.
Other considerations: include parking, noise, closeness to airport, crime rates/safety, among others factors, all of which you need to consider when choosing a market if you getting started in real estate investing.
Make sure to use Mashvisor for property search. You’ll receive information on CoC return, estimated rental income, cap and occupancy rates, optimal type of investments, and much more. Simply type in the name of the desired city or neighborhood and view thousands of listings and property comps. If you’re getting started in real estate investing, Mashvisor is your go-to tool.
Math Time – Know the Numbers
Costs
Real estate investing is essentially about managing costs. Some of the costs you will incur include investment costs and monthly costs. Let’s look at each separately.
Investment Costs
These include the home price, closing costs, inspection costs, and rehab costs. These will mainly depend on the area you are investing in.
Monthly costs
Include mortgage payments, property management (a great idea!), maintenance, vacancies, as well as taxes and insurance (which will principally depend on your city and/or state).
You can use Mashisor to calculate your investment and monthly costs, play around with the numbers, and figure out how to make your payments when you’re getting started in real estate investing.
Income
Monthly Income
Your monthly income is the rent you receive from your rental property. If you’re already renting out, then you know what the monthly amount is. But if you’re getting started in real estate investing, you can ask your realtor or property manager on how much they think you could charge tenants for rent.
Now to calculate your ROI, you’ll need to do the following:
- Monthly income – monthly expenses = monthly cash flow
- Monthly cash flow + monthly equity build (principal payment)
- Multiply that by 12 (months in a year)
- Divide by your total investment
Related: Why an Investment Property Calculator Is Better Than Spreadsheets
To sum up…
If you’re getting started in real estate investing, it is very important to have the diligence and to research every aspect of the equation well. You also need to know that you’re going to have to sacrifice time, energy, and money to become a successful real estate investor. We hope this guide’s been helpful. Make sure to check out our Knowledge Center for more blogs like this one that will help you get started in real estate investing.