Published on Saturday, February 04, 2017 by Land Century
But there are three major ways to invest in real estate:
1. Rental Properties
The idea of owning a rental property is a romantic one. Youll be paying off your mortgage, earning a monthly income and will be able to sell the home in the future for a big profit. Youll be responsible for paying:
- Mortgage loans
- Property tax
- Maintenance costs
- Association fees (where applicable)
And all of these expenses ought to be covered by the rental income of the property. What many real estate investors dont realize is that they wont make a ton of money off of rental properties in the short-term.
The money earned from these properties will be minimal at first until the property is paid off. Landlords may charge a small premium that allows them to reap monthly profits from the home, but for the most part, landlords do not make much off of their rental, depending on the location.
For example, a home may have:
* $750 mortgage
* $200 property taxes
* $75 insurance premiums
This leads to a total upkeep cost of $1,025, but then you also need to set aside money for any potential mishaps. Youre responsible for fixing roof issues, broken pipes and a variety of other repairs, so if you charge $1,300 a month, you may have $275 leftover after expenses. But the majority of this will be kept for potential future expenses.
In certain areas, youll be able to charge more and potentially walk away with a profit every month. And with things like Airbnb and the like, short-term rentals have become a hot topic because landlords can make a lot more money in the right markets.
But the real gold mine comes when the mortgage is paid off. This means your $275 a month in profit comes out to over $1,100, in which youll keep at least 70% for yourself. And someone else just paid off your mortgage for you, so you may have a home that has appreciated in price over 30 years and is now worth two or three times its original cost a nice retirement nest egg.
Long-term investors often choose rental properties as the ideal real estate investment, and this is our top pick for 2017, too.
2. Vacant Land
The prospect of owning land is far more realistic than buying rental properties for some people. Why? Land that is undeveloped is far less expensive, and you can buy several acres of land for a severe discount in most cases.
Vacant land in an area where no one is going to build in the next 30 years may not be worthwhile, but strategic plots of land in areas that are becoming popular will be a goldmine.
There are a few considerations when choosing to invest in vacant or raw land:
Funding: Getting funding to buy the land can be nearly impossible, and this is a concern for buyers. This is a cash industry, and if there are no buildings on the property, your chances of getting a traditional lender to fund the purchase are slim. Cash or owner financing are the best options, and since the land is cheaper, its easier to raise the funds for your investment.
Taxes: Raw land, for the most part, is a long-term investment. But this is also an investment that will demand future capital be spent on it to maintain. Youll need to pay property taxes, and this should be considered. The good news is that vacant land has very low property taxes. The bad news is they still need to be paid. If you pay $200 in property tax per year over a 20-year period, thats $4,000. Youll need to sell your plot for at least $4,000 more than you paid to make a profit.
But vacant land doesnt need to be a money sink either. You have the option of working the land to make money. Leasing the land to farmers for grazing may cover property taxes, or you can:
* Grow and sell timber
* Grow and sell crops
* Lease the land to hunters
A lot of people will eventually build a home on the land and rent it, which is another option.
3. Fix and Flip
Rundown homes can be a gold mine. Banks will have a hard time selling these homes. Sellers will do anything to unload them at less than half their market price if theyre in need of major repairs.
The right buyer, who may be a handyman or has the capital to pay for repairs, can fix and flip a home. Bar none, this is the best investment if you want to make large returns on your investment. The best part is you can use house flipping as a short-term investment.
But you really need to do your math when buying a fixer upper they can be a drain on finances when you dont understand the extent of the repairs needed. You need to factor in a lot of expenses:
* Contractor costs
* Permits (possibly)
And inspections may need to be done more than twice (once when buying, and once when selling). You want to have all of the contractors work inspected so that when a buyer comes along, their inspector doesnt note a major issue that could cause you to not be able to sell the home.
When getting an estimate from a contractor, always account for more expenses. Many people recommend accounting for 20% - 30% above the contractor estimate in price. The truth is that there will always be something unexpected that occurs that will take your $20,000 repair up to $25,000 - $30,000. But in the right market, you can make $50,000 or more on your fixer upper.
By and large, this is the most profitable way to make money in real estate over the short-term.
And finally, we've just introduced our new Live Auction section, so what not take a peek and see if you can find the next amazing deal there?