Real Estate Investing Guide

Late-night TV advertisements often show real estate investing programs promising "no money down!" and easy riches. Although it is occasionally possible to find investors or banks willing to loan cash to start your real estate empire, it is much more difficult these days. This is a beginners guide to real estate investing. In this guide we will mostly cover residential real estate, but most of the concepts apply to commercial, retail, and other types of investment properties.

Why invest in a down market?

Simply put, the market won't be down forever and real estate is being sold at bargain prices. It is a buyer's market and banks are unloading foreclosed homes. Opportunities like these do not come along often.

Where to find the best deals on investment properties

There are several sources for discounted properties in today's market:

  • REOs are bank-owned properties. When a bank forecloses on a homeowner, they sell the home on the open market. Many times these properties are sold below market value with hopes of a quick sale.
  • Pre-foreclosures. Some sites list properties in which the owner is facing foreclosure. Investors can attempt to contact the homeowner and purchase the property before the bank forecloses. Although the investor generally pays less than market value for the home and takes some of the owner's equity, the owner can save their credit rating and sometimes take cash out of a deal that otherwise would have paid nothing.
  • Auctions. Sometimes a bank decides the best way to liquidate some properties is to hold auctions. The highest bidder wins the property, but be forewarned... many auction properties need significant repair work.

Flipping real estate

Flipping homes generally means buying a property with the intent to resell it within a short time frame. Usually flippers buy distressed homes at a discount. Often the property needs repair or remodeling work. After the repairs are completed, the flipper markets the home for sale at a profit.

Flipping homes is still difficult in most US markets. While easy to purchase properties, reselling for a profit can be a slow process. The investor's property has lots of competition from REO's (bank owned properties), distressed sellers and an overall abundance of choices for the buyer. This hurts the investor's chance to sell for top dollar.

Rentals

A longer-term investing option is to purchase properties which you intend to rent. Many news sources note that real estate has not appreciated as much as stocks over the past 100 years. Most of these sources only consider appreciation of the asset. In addition to the properties appreciating over several years, real estate investors benefit significantly from rental income. Rentals can be a great source of income, but do require work. Investors should take care to research local market trends.

  • Are people moving to the area the property is located?
  • What type of renter would the property appeal to?
  • What are the advertised rental rates for nearby properties?
  • Do the local rents justify the purchase price?

Property management

Now that you own a rental, you will need to find tenants. Some investors will put in the hours to advertise, screen applications, and write leases. Many other investors will look for a quality property management company who will manage all of these tasks, for a fee. Fees for these services are generally 5%-10% but can be higher. If you decide to hire a property manager, make sure to interview several, review their contracts, and ask for references. How quickly did the manager find renters for their other customers? Do they manage properties full time? Are they experts in the area your properties are located? Where will they advertise the property? Finally, make sure you understand any obligations you have if you decide to cancel their services.

REITs

REIT's are Real Estate Investment Trusts. In short, they function much like mutual funds for real estate investors. REIT's may be listed on public stock exchanges. REITs generally purchase and hold income-producing real estate. In the United States, a REIT must distribute at least 90% of its taxable income to shareholders. REITs share values have been hit by the housing crisis, but if you are optimistic about recovery, current share prices may appear to be bargains.

Where to learn more

There are many great resources for learning about real estate investing. HomesIndex.com recommends the following: