How Does Real Estate Investing Work?: A Complete Guide

So, How Does Real Estate Investing Work?

By the very nature of the word investing, you’re putting your money someplace to see a return on investment. There are a number of ways you can invest in real estate and generate an income for yourself.

Here are the most common ways investors make money from real estate.

Rental Income

With rental income, you purchase a property and rent it out. It’s pretty simple, right? If you rent out the property, you need to make sure that you abide by landlord-tenant laws that govern your area.

You can’t rely on printing off one-size-fits-all contracts off of Google. As the owner of the property, you’re the one who’s responsible for maintenance and repairs.

You want to make sure that you purchase a property where you’re sure to make money. You need to account for your time to manage the property, advertise to find tenants, screen tenants, and repairs.

Flipping Distressed Properties

Another way people make money from real estate is by flipping homes. Investors buy a distressed property that needs some TLC. They fix the property up and sell it for much more money than they bought it for.

This is a good route for people that have a construction or contracting background because they can do the work themselves.

Sit on the Property

Some investors bank on the appreciation of real estate. They won’t do anything with the property except for some minor work and maintenance.

They’ll wait for the values to go up and put the property back on the market for more than they bought it for.

This strategy doesn’t work all of the time. You have to time your purchase right and buy in the perfect neighborhood where the property values are sure to go up in the next 6-9 months. This way, you’re not paying too much in property taxes and you see a return on investment.

Commercial Real Estate

Commercial real estate is another type of real estate investment. This is when you invest in or purchase properties such as office buildings or retail spaces.

You can then rent those spaces out or open up your own business on the property. For example, you own a retail complex and open a boutique gym while renting out the other properties.

Investing in commercial real estate can help you make a lot of money. At the same time, it costs a lot more money to get started. You may consider starting with residential real estate and then expanding into commercial real estate.

Crowdfunding

This has become a more popular way for investors to dip a toe in the water. You can use websites like Fundrise to invest as little as $500 in various projects.

The idea is the there are multiple investors who pool their money to have a piece of a larger development or investment opportunity.

How to Get Started in Real Estate Investing

You have the answer to “how does real estate investing work?” It’s time to start investing. Here’s how you can get started as a bonafide real estate investor.

Your first step is to decide how you want to get started in real estate investing. Maybe you are drawn to flipping or renting your home.

No matter what you decide, you need to get a good team of people around you. You’ll want a real estate agent that knows the local market. You may need a property manager to handle your property for rentals.

You’ll also need an attorney, accountant, inspector, and banker who can help you facilitate your deals.

Tax Advantages of Real Estate Investing

One of the best things about investing in real estate is that there are tax advantages. One such tax advantage is using a 1031 exchange to sell a property without having to pay capital gains taxes.

With a 1031, there are complex mechanisms to make the deal work. You have to make sure that you invest your earnings in a new property and do so within the IRS timelines.

What Happens When Things Go Wrong?

Investing in real estate carries a lot of risk, just like any other investment. It may carry even more risk because you took out a loan to pay for that second property.

You want to make sure that you do your due diligence before making the investment. For example, you may have a rental property where you’re losing money month after month because the rental market isn’t as strong as you thought it would be.

You may have a tenant that wasn’t screened properly. Now you’re stuck with them while they’re damaging the property. There are countless scenarios where mistakes are made and you have to decide if you should hold the property or fold.

Sometimes, your best bet is to sell the property to a cash house buyer and cut your losses. It’s not an ideal scenario for your investment, but it can be the best way to recoup cash quickly.

Are You Ready to Invest in Real Estate?

People are looking to real estate to make a sound investment that’s much less volatile than the stock market.

Real estate can give you a way to diversify your investment portfolio and reap tax benefits in the process.

How does real estate investing work? It works when you do your homework and you surround yourself with the right team of people who can help you maximize your investment.

Do you want more real estate news? Come back to this site often for the latest real estate news for residential and commercial properties.