Real estate has proven to be one of the most reliable investments over the last 50 years. Historically, real estate has always appreciated in value over long periods of time. That is what makes it so lucrative. However, making money in real estate is not always easy. Investors have to make good decisions on a consistent basis to keep strong returns rolling in.
New investors are at greater risk of losing because they lack the experience that facilitates good decisions. For purposes of illustration, three early-stage decisions new property investors have to make are described below. The results of these decisions set the stage for how well investors do in both the short and long terms.
Decision #1: Residential or Commercial
Investment properties are divided into two main categories: residential and commercial. Your typical real estate investor chooses one or the other. However, doing so is not mandatory. Plenty of investors deal in both types of properties as market conditions warrant.
Residential properties are typically single-family homes or duplexes. Anything bigger than a duplex would be considered commercial property. This includes apartment buildings with a minimum of four units. Beyond multi-family apartment buildings, other commercial properties include office buildings, strip malls, single stores, etc.
Decision #2: Flip or Rent
Along with the two fundamental property categories, there are two basic ways to make money in real estate: flipping and renting. A flipper buys a property, improves it, then turns around and sells it – hopefully at a profit. Understand that properties do not have to be flipped right away. Rehabbing a property and holding onto it for a year or two before selling is still considered flipping.
Renting is self-explanatory. The primary benefit of renting is that there will always be a market for space. As long as people need houses and businesses need facilities to operate from, rental demand will exist.
It is possible to employ a hybrid model whereby an investor rents a newly acquired property long enough to pay off any outstanding loans. At that point, a sale could generate enough cash to acquire a more valuable piece of property with the potential for even greater returns.
Decision #3: Funding Sources
This third decision may be the most important of all. Why? Because an investor’s ability to fund acquisitions determines the pace at which their portfolio can grow. A hard money loan is a common funding source in real estate investing, according to Actium Partners out of Salt Lake City, Utah. Hard money can be structured as either a straight loan or a bridge loan.
Traditional bank funding is also an option, though it is difficult to come by. Banks and credit unions are normally hesitant to pony up for investment property for the simple fact that they consider the transactions pretty risky. However, there is a way around bank hesitancy. Banks tend to be more willing to provide traditional funding after a borrower has secured an asset with hard money. In such cases, the bank loan goes to repay the hard money loan.
Funding sources change throughout a real estate investor’s career. So it’s not important for a new investor to look for sources that will continue for 20 or 30 years. The new investor needs enough funding to make the first few acquisitions. After that, funding options become more flexible. Equity has a lot to do with it.
Making money in real estate starts with making wise decisions. New investors do not always do so well in that department. But with time and practice, wise decisions get easier. And with wiser decisions come greater returns.