There are many ways to make money in real estate. However, there is a process that a new investor wondering how to invest in real estate can follow. This Mashvisor guide will help explain to a person new to the industry how to build wealth with real estate. Consider this a 35,000-foot view. For a much closer look at how to deal with each step, check out Mashvisor’s tools for help.
Find Your First Investment Property
Building wealth with real estate requires that you take the first step. The first investment property you own is typically a bit different from the subsequent ones. That is because you likely have very little capital with which to buy it. In fact, you may well have zero capital to invest. That’s OK. There is a workaround for that. One common way that new real estate investors acquire their first property is by purchasing an owner-occupied multi-family property. Unlike stand-alone investment properties, an owner-occupied unit has special loan opportunities. By living in the unit, you also satisfy your need for a personal home. Even the first property you own will help you on the way to building wealth with real estate.
Related: How to Buy Your First Rental Property
Add Sweat Equity and Establish Your Network
Once you have your first investment property, be it an owner-occupied unit, or one you purchase in some other fashion, you can start to build wealth from real estate investing. There are two main ways to do this. The first is to simply wait. As time passes, the real estate market will grow around you and your property’s value will likely outpace the rate of interest on your loan. This will generate wealth, but very slowly. You don’t want to wait.
The best way to establish fast equity is with sweat. Preferably yours and your family’s. Don’t buy a newly-renovated unit at the peak of its value. Instead, buy a rental property with some deferred maintenance and some obvious room for renovations. You can begin building wealth with real estate by doing much of the equity-building renovations yourself. If you have a day job, this is now your second job. Do every bit of maintenance yourself that you can. You will be paying that money saved directly to yourself. If you have or can learn the skills needed to do minor renovations, get moving. Make improvements to your property anywhere you can, but be smart. Renters and buyers look at certain things with dollars in their eyes and shrug their shoulders at other improvements. Kitchens, bathrooms, and front entrances are generally the best places for return on investment. If we may add one more bit of advice, stay off ladders. Let the pros with insurance do the risky work.
Related: Property Renovation 101: What Improvements to Make for High ROI
Build Up a Rent Roll and Tap Into Financing
After you have built up some equity in your property, get an appraisal. Take that appraisal to the bank that holds your primary mortgage and ask about a cash-out refinancing. This is one great way to generate cash with which to invest in another property. There are other ways to create a cash pool. You can borrow against your IRA. You can leverage credit cards. The idea is to build up the minimum down payment needed to acquire a second modest rental property.
In addition to cash, you are going to need to show your bank that you have a professional rental business starting and that you have cash flow. Lenders call this cash flow a rent roll. They want to see that your business has income from rent regularly and they will want to see lease copies. It is never too soon to create an LLC or incorporate your rental business and begin transferring assets and debt to the new entity. You want to provide a professional impression on paper. And in person. When you “speak to the bank” about financing, do it in person. Call ahead and make an appointment to speak to the person who lends to real estate investors. Business casual or formal is the attire for that meeting and send a prompt thank you letter, even if the news isn’t ideal. You are courting this lender. Make a good first impression. You lender shares your goal of having you build wealth with real estate.
Related: How to Refinance Investment Property to Buy Another
Buy Your Second Investment Property
Once you have secured financing, it is time to search for the best second property for your needs. Given your newness to the business, you may only have enough for a modest purchase. Make it count. Look for short sales, foreclosures, auctions, and properties that you can improve with your own efforts. Mashvisor has all the tools you need to help find opportunities and analyze rental property. Once you find the right property, pull the trigger quickly and get busy.
Related: How Do You Find the Best Rental Property Loans?
Solidify a Good Relationship with a Lender and Leverage Equity
You may think we will say the next step is simply, “rinse and repeat.” However, with just a small number of rental units, your leverage is still minimal. Make the most of it by keeping your bank up to date on what equity you have and let them know you intend to purchase more properties. Ask what you need to do to prove you are worthy of more loans. Then take the steps the lenders present. When you can safely do so without risking a cash crunch that may damage your credit, you can look to the next step.
Increase Your Holdings
Many real estate investors quit while they are ahead and hold only a couple of properties. If you are serious about being in the business full-time, forge ahead. Using search tools from Mashvisor and your network, always be looking for new investment opportunities. There are many specialized niches aside from the classics to consider. Now that you have a business established and you own multiple units, rent will be more reliable and you can begin to hone your skills. Focus on maximizing occupancy. Learn to balance rent increases with keeping good tenants. Consider getting a real estate license and being your own listing agent. Read every book on real estate you can and learn to use apps and websites like Mashvisor to their full potential. In other words, take your business to the next level and begin building wealth through rental properties.
Begin to Selectively Sell Properties and Re-Invest
Your now established business will begin building wealth with real estate for you through the increasing value of your properties. Of course, rent will also be your primary cash flow generator. As you accumulate assets, which become wealthy, your work may be more interesting. With a portfolio of rent-producing properties, you should begin to educate yourself on the market. Start to monitor what the market will likely do. This is called predictive analytics. Helpful tools for using predictive analytics can be found at Mashvisor. Selling a property to free up assets may well be a good decision. Always consult with your tax attorney to ensure you don’t pay any unnecessary capital gains taxes.
Time the Market
Eventually, you will have succeeded in building wealth with real estate. The time will come when you can begin to reduce financing to cut your costs. With wealth comes opportunity. Despite the commonly held belief to the contrary, real estate values do go down sometimes. In 2006 and early 2007, nobody would have guessed that values of properties would soon crash by 20 to 50% leaving many owners underwater. Nobody except professional real estate investors with a life-long timeline that is. Being prepared to jump in and buy distressed properties during a downturn is a wise long-term strategy. It can mean the difference over one’s career between a comfortable income and a windfall. Watch your time horizon, but always keep in mind that a downturn in the economy can present a prepared investor with a once in a lifetime opportunity. Building wealth with real estate takes time, but the opportunity and the investment tools are at your fingertips.
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