Despite the fact it may seem like a daunting market to get to grips with, investing in real estate follows some basic principles. You want to put money toward something that’s going to increase over time. Your profit needs to cover your risks and other costs, for example, taxes, maintenance, and insurance. There’s nearly always money to be made in property, but you need to have a clear strategy in mind. Below, we’ve briefly outlined some of the popular methods investors use:
Perhaps the most hands-off approach (and also quite a risky one) is to rely on the long-term gain in value of a property. If you purchase some real estate, external factors can make the location and the building more or less desirable. New amenities may be built, or the area might receive improvements. All of these can increase the property’s value. However, negative aspects can soon see the price decrease so it can be tricky to determine.
A popular way to make money through real estate is to buy it and operate it. For example, if you buy an apartment or house, you can then rent it out and collect a continuous stream of cash. Again, you’ll need to ensure that the cash flow you receive is enough to cover your expenses and pay back into the value of the property.
The term ‘fixer-upper’ applies here. If you can find some property on the cheap and inexpensively renovate it, you can then sell it for a profit. Again, this can be a risky option as renovation costs can soon spiral. However, if you’re confident in your own abilities to repair and refit a property, you could stand to make quite a lot.
If you’re hoping for a less hands-on type of investing, a real estate investment trust (REIT) can be a good form of investment. They’re similar to mutual funds, so you’re investing your money in a company that owns and trades commercial real estate.
• Adjustable Rate Mortgage - A mortgage on which the interest rate can change over the course of the loan.
• Appraisal (Valuation) - When buying a property, the bank needs to have it appraised to ensure its value matches that which you’re asking to borrow against it.
• Cash reserve - The amount of money you have left after your down payment and closing costs are made.
• Closing - When the final documents and contracts are exchanged and signed, and costs are paid.
• Comparative market analysis - A report that details similar homes in the area. Used to help assess a property’s value.
• Equity - The amount of the property you own. Essentially, it’s the house’s value minus how much you still owe on your mortgage.
• Fixed-rate mortgage - A mortgage on which the interest rate remains constant over the course of the loan.
• Listing - The details of a property that’s for sale. Usually, you will ‘list’ the real estate on a website or with a real estate agent.
• Mortgage Broker - An individual or firm that helps you find a mortgage. They make the deal between you and the lenders.
• Principal - The amount of money you borrowed to purchase the real estate.
• Refinancing - A restructuring of your mortgage, where you swap out your existing loan for a new one. Often this can reduce the monthly payments you make and even lower your debt.
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