In theory, real estate investing is simple. First, you buy a property. Then, you generate rental income so you can buy more property. And last, you do your best to avoid bankruptcy. It’s like playing a game of Monopoly, really.
That said, simple doesn’t always mean easy. With every real estate investment, there are risks. If you make a mistake, the consequences could be anything from a minor inconvenience to a major financial disaster.
To help you avoid making mistakes with your real estate investments, here are a few pointers.
Real estate appreciation is tricky as it’s unpredictable, but if you play your cards right, it’s a good way to increase your profits with investing. Appreciation happens when the area around your property becomes more popular, thus increasing the appeal of your property to potential buyers and renters. Another way a property appreciates is if you make improvements that increase its value.
With this type of real estate investment, you purchase a property and then rent it out for a monthly fee. The rental fee must be more than the cost of owning and maintaining the property to make a profit. Besides apartments, you can get positive cash flow income from renting out storage units, office buildings, retail stores, and houses.
This is income earned by real estate professionals in the industry. For example, real estate brokers make commissions on properties they help a client buy or sell. Property management companies, on the other hand, get to keep a percentage of the rents they collect in exchange for running a rental property for the owner.
For many real estate investors, ancillary income generates a large profit. Ancillary income includes things like vending machines in office buildings or laundry facilities in apartment buildings. In essence, this is a mini-business within a larger real estate investment.
It’s a good idea to hold your investment in a special legal entity such as a Limited Liability Company (LLC) or a Limited Partnership rather than in your own name. Doing so will protect your personal assets should your investment tank or a lawsuit threaten the future of your investment. Under these entities, the worst that can happen is that you’d lose the money you invested should something happen rather than losing your personal assets as well.
Investing in real estate is a great way to increase your wealth or prepare for retirement. That said, you will only be successful at it if you understand how the process works. Hopefully, the real estate basics above give you a good starting point on your road to success.