Real estate income investing has been around for ages. Why? Because having a piece of land has been one of the most steadfast ways to increase your cash flow. From ancient history (when it was profitable to have a place to grow crops and raise livestock for income) to present day rentals, leases, and even modern farming, real estate has remained constant for income investing.
Are your wheels turning yet? Good. You should work smarter, not harder. Let’s continue with a quick guide to how to start investing.
1. What Is Real Estate Income Investing?
There are numerous ways to increase your cash flow when delving into income investing. Knowing what options are available to you as well as having a good working definition of how to start investing will be your first key to success. Consider the three main ways to make money in real estate:
- Real Estate Appreciation: This means that the property you purchase increases in value. It can be a bit tricky, though, and you will have to do your research. Is there a high demand for property in the chosen area? Will the property be attractive to potential buyers or renters? How much will it cost you to upgrade the property, if needed?
- Real Estate Related Income: This is a method of investing by making commissions from buying, selling, or managing properties. Brokers, agents, and rental management companies utilize this form of income investing.
- Rental Properties: Rental properties will generate a monthly income for you. Whether houses, apartments, condominiums, office buildings or retail properties, if you can keep them occupied, you can collect monthly income. Rental properties are the easiest way to get steady cash flow.
2. Investing In Rental Property
When it comes to owning passive income property, there are a few different options to choose from:
- Residential: People need homes.If you’re considering investing, this is a good place to start. First, buy a property in a desirable location, then rent the house at a rate which will bring in more than your monthly payment for the property. As long as you have tenants, you have a monthly passive income flow. Houses, apartments, and condominiums are great properties to start with when considering income investing.
- Commercial Real Estate: This method relates mostly to office buildings. You should consider the pros and cons. The good: You get long-term renters and steady cash flow, especially if you are collecting rents that are greater than the market value of the property. The bad: You are locked into the lease as well, and may miss the return that would come if the market value of your property went up.
- Retail Real Estate: These are your standard shopping areas, strip malls, shopping centers, and malls. With this type of income investing, you can charge not only monthly rent, but a percentage of the store sales, which would be a great incentive for the lessor to make the property attractive to buyers.
- Multi-use Real Estate: This is for the income investor who wants to do it all with one property. A multi-use property could have retail spaces, office space, and residential spaces. The beauty of such a location is that you have the potential for built-in customers on all levels.
You may not be interested in just straight passive income. You may think of income investing as investing and buying trusts in properties. Well, guess what? There is something for you too.
3. Real Estate Investment Trusts (aka REIT’s)
For the business and tax structure minded investor, REIT’s are a good option. You can buy these trusts through custody accounts, brokerage accounts, and Roth IRAs. Many people choose this manner of investing because of the potential tax incentives and the ability to invest in larger projects. REIT’s also help corporations get the funding needed, via investors, to afford sizeable real estate projects, such as luxury hotels and shopping centers.
For more information about REIT’s, visit Investopedia.
4. Investing Through Home Ownership
Homeownership is the first way that most people start their income investing journey. It’s one property, easy to manage, provides a home for your family, and has good income earning potential. A home is not the same kind of real estate investment as a commercial property or apartment building. You live in it, enjoy it, and use it for your personal life. You put money into it and at its best, it increases in equity.
There are many practical and money-saving reasons for owning a home. When you own your own home, you are not putting rent in someone else’s pocket. A home mortgage is often lower than rent because the owner will price the rental to make a profit. If you have a mortgage, you are saving the extra income that you would have been paying in rent.
Pay off your home before retirement, and you have options to get equity loans against your home for other things you want to do. Home ownership is a viable income investing opportunity, as it is a gift that keeps on giving.
I’m sure you are just about ready to make the call. Let’s look at one more very popular way to get into income investing.
5. Investing In Real Estate By “Flipping”
Flipping properties (or real estate trading) seems to be the rage right now. The property trader does the exact opposite of buy-and-hold investors. They look for undervalued properties that can be fixed up and sold in a few months for a profit.
The problem with using real estate trading as an income investment option comes when the property doesn’t sell quickly, and the investor doesn’t have the money set aside to continue to pay the mortgage on the property. So be smart if you choose to invest by flipping.
The information above is just a small bit of what the starting income investor needs to now to be successful. It’s easy to get started. If you would like more information on how to start investing, contact us.