Want to get into real estate investing but don’t know where to start?
Heard people claiming that they made a small fortune with their property investments and want to know more?
Seen the seminar companies’ ads promising to make you a property millionaire, but have heard bad things about them?
You’ve come to the right place.
With the information you find on this page, you will soon be on the inside track of property investing, without the excessive fees some seminar companies charge. We want to help you become a success in real estate investing, because making you successful adds to our success. In this article you will find the “bread and butter” ways of making money from property. You’ll learn how to determine a property investment opportunity and how to make the most of it.
You’ll see how to make money from your home, how to renovate and redecorate a property for sale or letting, and how to avoid purchasing mistakes. You will find out how to raise money, deal with real estate agents, find good builders and how to minimize your tax bill. We’ll also explain the more risky strategies that involve “No Money Down” tactics and how you could lose your shirt using them. In addition we will address the more advanced creative financing techniques available, and we’ll show you the different avenues of real estate investing you may not have considered.
Some of the benefits include:
- Capital Appreciation
- Income Potential
- Buying Below Market
- Adding Value
- Borrowing to buy
- The Power of Leverage
- Refinancing Possibilities
- The Benefits of Depreciation
So, where do we start? The best place is with the most obvious question:
Why Invest in Property?
When addressing the question, Why Invest in Property? you have to consider real estate investing in relation to other forms of investment vehicle, whether they be stocks, commodities, commercial paper, or whatever else takes your fancy. The following list of benefits should convey the fact that property is an excellent long-term investment and if you buy well, a good short-term one also.
Like many investments, real estate investing offers the opportunity for capital appreciation. The value of your property can go up (and invariably does). Property prices tend to be indexed to inflation, so unless your property is in an area that is suffering extreme deflationary pressures or is allowed to fall into disrepair, over the long-term the value should go up.
Real estate investing can provide an income. If you rent out your property investment you will gain an income from it. If the property has a mortgage on it and you bought well, then the rental income should easily cover the mortgage payments. Even if you live in the property in question you can still take in a lodger to supplement your income. Commodities will rarely provide an income unless you sell part or all of your holding. Some stocks will pay a dividend, but many, particularly technology stocks, will not.
Buying Below Market
When real estate investing, you can buy property at a price below its valuation in the market. Due to the illiquid nature of the real estate market (ie it takes time to buy or sell), there is the opportunity to buy property from motivated sellers who are desperate to sell quickly at a bargain. You can also buy property cheaply from vendors who have not had their property appraised, or valued, and who have an incorrect idea of what their real estate is worth.
Auctions can also yield real estate investing bargains. If you buy a property at a bargain price you could resell it shortly afterwards for its true value for significant profit without much effort. If you want more information on property auctions, then a truly outstanding guide on property auctions is Property Auction Secrets.
When it comes to the shares market, most stocks have good liquidity, with a large number of buyers and sellers for each stock at any one time. The price you pay is the true market price at that time. If you wished to sell a stock shortly after you bought it, then it’s most likely that you would only be able to resell it for the same amount (minus brokerage fees) that you bought it for (assuming no significant market movements).
When you buy a share of a company, can you do anything to make the value of your share go up? Apart from trying to elect a better board of directors, there isn’t a lot you can do.
If you buy a holding of silver, can you do anything to increase its value? No. You can’t make it any more silver than it already is. Granted, if you had a particle accelerator you might be able to turn it into something more valuable like gold or platinum. However, you don’t have one. Even if you did, the cost of doing so would far outweigh the increase in value of your newly created substance.
With real estate investing you can increase the value of your investment. A lick of paint here, a spot of landscaping there, new carpets, a garage – all these will add value to a property. There are very many things that you can do to increase the value. It’s truly amazing how much you can make by turning around a property “in need of attention”. Real estate investing is one of the few areas where you can significantly increase the value of your holdings for minimal outlay.
For more information on adding value to your property, a first class guide is Renovation Secrets. An excellent way of maximising the bang for your buck.
Borrowing to Buy
You can borrow money to invest in real estate. Most banks are more than happy to lend money to purchase property, be it your own home or as a rental property investment.
This means that as well as being able to gain ownership of a property with you only putting down a fraction of the purchase price from your own funds. Real estate investing is one of the few areas of investment where this is possible.
Under normal circumstances you will not be able to borrow money to finance your share dealing.
It is true that you can buy stocks on margin if you were a good client of a brokerage firm. You would have to put up a percentage of the cost of the shares (say 30%) which would go to cover any drop in the share price. However, should the market move greatly against you, then you would have to make a “margin call” and come up with additional funds to cover the shortfall in the value of the shares, the initial funds you put up and the money you borrowed to buy the stocks.
The Power of Leverage
The fact that you can borrow money for your real estate investing means that you can apply leverage, or gearing, to your property investment. What leverage does is apply a multiplying effect on your investment.
Assume you buy a property using a 20% deposit, one fifth of the purchase price, and borrowed the other 80%. Imagine that the property rises in value by 10% in the time between your purchase and eventual sale. Ignoring transaction costs for the moment, the money that you would have remaining once you repaid the loan would have increased by 50%. That is 5 times what you would have had if you just got a 10% increase on your deposit without the benefit of leverage.
Let us run through the same example with some actual figures. You buy a house for $100,000 (or pounds sterling, Euros or whatever currency you prefer). As part of the transaction you put down a 20% deposit of $20,000 and borrow the remaining $80,000 from the bank. You rent the property out for a couple of years which covers the mortgage repayments, maintenance and other incidentals as well as the costs associated with the eventual sale. You sell the property for $110,000 – a rise of 10%. You repay the $80,000 to the bank and you are left with $30,000. Your money has increased by 50% when the property only increased by 10%.
In this example we didn’t take into consideration inflation or any tax that might be payable on the sale of the property. These aspects will be considered elsewhere on this site.
It’s worth noting that leverage can also work against you. If the value of the property goes down (it does happen) then your leverage will magnify the amount you lose, as you will still have to repay the bank the amount you borrowed from them. However, if you have a long-term approach to your real estate investing and you can cover your mortgage payments, you don’t have to sell if the price goes down. You wait until the price recovers before you sell, if at all.
Why do banks lend money to buy property?
Because they see real estate investing as a safe investment. Usually the bank will insist on some form of deposit, whether it be cash or some other form of collateral. This will cover the bank in the event of you being unable to make your mortgage payments.
They can repossess, or foreclose, on the property should you fall into arrears with the payments and you will lose your deposit or collateral in the process. Fortunately if you have done your analysis of the investment opportunity correctly then this isn’t something you will need to worry too much about in your real estate investing.
As a result of the favorable view the banks have of real estate investing, the interest rates on the loans they offer are usually lower than the rates they charge for loans used to purchase items such as cars, or the rates they charge on credit cards.
Another overlooked benefit of borrowing money for your real estate investing is that the bank will insist on appraising the house to determine its value before they will lend you the money. This is actually very beneficial as they will prevent you from paying way over the odds for a property. If the valuation comes back lower than your intended purchasing price, then you have something with which to knock the price down. If the vendor doesn’t want to budge then it is normally in your best interests to walk away. There are plenty of real estate investing opportunities – you don’t have to pay over the market price for one.
So far we’ve talked about selling an investment property to realise any increase in its value. That isn’t the only method available to you in your real estate investing. What if you want to gain access to the money you have made from the rise in a property’s value without selling it? Easy. Refinance.
When a property has increased in value, you have the opportunity to re-mortgage the property based upon a new appraisal of the property’s worth. In recent years this has become popular due to the dramatic rise in real estate values. This is a perfectly acceptable thing to do in real estate investing when you are looking to reinvest the money into another property or income-producing asset. It’s not such a great idea if you are looking to buy depreciating assets such as cars, computer equipment and the like as this could have a negative effect on your cashflow.
Another benefit of refinancing as part of your real estate investing strategy is that you can gain access to your capital gain without paying capital gains tax. After all, you do not pay tax on a loan. In some countries you may even get tax relief on the increased interest payments produced by the increase in borrowings. However, you shouldn’t count on this sort of tax relief. Governments do change their taxation policies. You don’t want to jeopardise your real estate investing by relying on tax relief that may vanish.
One thing to remember when you release the equity in a property through re-mortgaging. You are borrowing more money and you should do all the calculations necessary to calculate the affordability of your increased loan that you would when buying a new property. If you can’t keep up with your payments you risk repossession and that would have a very adverse effect on your future real estate investing options.
A final benefit of refinancing as part of a real estate investing strategy is that you maintain ownership of the property and you will still be able to derive income and future capital appreciation from it.
The Benefits of Depreciation
One final benefit of real estate investing is that you are able to write off depreciation of your property against tax. Even though the property may have gone up in value, there are aspects of the property that you can still depreciate and gain further tax relief.
Note: Our advice is for educational and information purpose only and does not replace any professional service you might wish to obtain before investing.