A Layman's Guide to Real Estate Investing

What is real estate?

If you are very beginner to real estate and don't know what real estate actually is, let me first make it clear to you. Real estate can be defined as the land along with other permanent structures or materials that's present on it. The other structures or materials can be anything ranging from trees, buildings, bridges, water etc. that can be man made or natural. Real estate differs from the personal property like furniture, vehicles, jewelry or other things that is not permanently attached with the land. Real estate can be categorized in five major categories:

  1. Residential - Used for residential purpose
  2. Industrial - Used for factories, R&D, warehouses, power plants
  3. Commercial - Used for business such as hotels and restaurants, apartments, shopping centers
  4. Raw Land - Vacant land used for agriculture, timberlands 
  5. Special Use - Used for public or government use such as libraries, parks, schools

You can invest in real estate in two ways:

  • Directly - by purchasing a home or rental property 
  • Indirectly - Real Estate Investment Trust (REIT)

How can you make money from real estate?

Talking about direct investment in real estate, you can generate revenue from the rent or leases from the physical property you have bought. Another method is you can earn by selling the property you bought when the real estate's value is appreciated. But keep in mind that, location is a very important factor in real estate business. Facilities and quality of life, employment rates, property taxes, crime rates, hospitals, schools can influence the price of real estate.

On the other hand, the indirect method of investing in real estate through REIT can also make you money. Portfolio of REITs can make you income depending on it's type. Some REITs can be publicly traded in stock exchange, some can be public but are not traded and some can be private. You can earn income with the regular dividends and appreciation of their shares. Investing in real estate mutual funds and real estate exchange traded funds (ETFs) can also make you money.

How to start investing?

Let's dive deep into the direct method of investing in real estate, especially owning a property. You invest your money and own a property, then you put it on the lease and with the money from the rentals, you pay for your loan or mortgage (if you have any). The appreciation of real estate as well as money from the rentals can make you huge sum of money in the long term. Let's get started into the real state step by step:

Be Authorized or Build Credit History

Without a good credit history, it's difficult to get a loan. To establish a responsible repayment history, you can start with a secured credit card or co-signed credit card or try to become an authorized user on another person's card (from your circle having high trust on you). You can also try credit-builder loan or co-signed loan or you can try credit builder services such as rental payments and utility bill payments. Keep practicing a good credit habits and build your credit scores. This can be very useful for you to get loan or payments required to purchase the real estate you foresee to make money.

Increase Your Reserve

Investing is making money out of the money, so you obviously need money in order to invest. So you have to save your money and increase your reserve. You may need to cut-off some luxury, spend in accordance with the needs, not with the wants, increase income and so on. The more reserve you have, the more better you can target.

Maintain Income, Expenditure and TAX

When you expect money from your lenders, you need to prove you have a stable economy. The more consistent and positive your statements are, high the chances to get surplus in the sum you get.

Become Prequalified

After you build a good credit score, ask your bank for your financial reports and statements. You can consider asking for a pre-approval of reasonable amount based on your reports. With the pre-approval in your hand, you have high chances to get handsome amount you seek.

Do Homework

Before investing in the real estate, choosing where to invest is another important decision you'll have to make. You need to look for the place that is being undervalued or has great potential in future. This may include proposal/plans of government or locals of that area, environment, services and facilities. Roam around and do a research upon all these things, get information from the locals, watch their lifestyle, expenses to live, and other major aspects that can save your money or get better in the same price.

Make Offers and Negotiate

After you find a great area and it's worth, offer your best deal. Don't hesitate to negotiate for the price and try to reduce the repair or cost.

Channelize the Money

Now you've found your best deal, it's time to get the money from your lender and your reserve. Speak with your lender and provide the information they need to make sure the money they are lending is worth. After the appraisal is complete and approved, you get the money.

Own the Property

With the handsome money you have in your hand, it's time to make the property yours. Make it yours and do the post homework, i.e. go on with the repair or some renovations.

Rent it Out

Finally, it's time to make money out of your investment. Keep in mind that you should not go with the first come first service or hire whoever comes in. Get the bids and pick up the best deal you get. Make sure to timely revise it's worth and what you are getting.

That's it, you are now a real estate investor who makes handsome amount of money. If you have any queries or want to share your thoughts or experience on real estate, leave a comment down below and I'll get back to you.

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