Still one of the most popular passive income sources, real estate investing means putting money to work and generate enough returns to cover the risk you take, taxes that need to be paid, costs of owning the real estate investments, and at the end of it, a profit that will pay for the investment you’ve made.
The industry works pretty much like a game of Monopoly when we consider the three basic factors: investment, economics, and risk. In order to win, you have to buy properties, generate rent and avoid bankruptcy, in order to be able to buy more properties. Making mistakes, on the other hand, has negative consequences and could result in you being broke.
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Ways real estate investors generate returns
There are four major ways in which a real estate investor is able to generate returns. The first one is through the appreciation of the real estate value. Property prices could increase in value over time, supported by a series of factors. Economic developments, the potential for growth in a particular area, the interest from other major real estate companies, political stability, and tourism are just a few of the factors that can foster a sustainable appreciation in real estate valuations.
Secondly, we have the cash flow income, which implies buying a property like an apartment of an office and generating cash by renting it. Some of the factors which we’ve mentioned earlier play an important role in this case as well, given that rents, like the property valuations, fluctuate over time.
The third way to generate returns involves real estate brokers or management companies. Brokers make money through commissions resulted from buying and selling a property. Real estate management companies, on the other, generally keep a percentage of rents in exchange for handling the day-to-day operations of a property. Running the front desk, hiring personnel, mowing the lawn, are just a few of the operations these companies take care of.
Serving as a mini-business inside a bigger real estate investment, the fourth way to generate income is through ancillary real estate investments. Vending machines in office buildings and laundry facilities in low-rent apartments are just two of the ways real estate companies are generating this type of return.
Key things to take into account
Like with any other industry, there are several golden rules that must be taken into account, in order to perform like most of the professionals. When it comes to real estate, one of the first dilemmas is how to finance the purchase of properties: with one’s own money, or with credit? The debate is tough on this topic and in order to avoid subjectivity, let’s look at how most of the businesses operate. The reality is that credit is a function of our economy and in certain conditions, it could be useful. Making a mortgage for a property could be the best choice if you can generate enough income with it in order to cover the monthly payments.
Like OfirEyal Bar, real estate investor, active also in the South African market, said:
“The real estate industry has its own way of functioning and all people who want to become successful in this field must obey and follow the rules like a pro.”
In the second place, we have another important mistake which most of the real estate beginners make, which is buying a property on your own name. For risk management reasons, professional real estate investors use special types of legal entities like limited liability companies (LLC) or limited partnerships (LP). Based on the circumstances, a qualified attorney can give you an opinion on which ownership method fits your business the best.
Taking this approach is like an “insurance” against negative and unwanted situations. If the investment goes bust, or if someone has an accident, all that you can lose is the money you’ve put into the business. All your personal assets (401k plan, IRA investment, etc.) will be protected against a potential lawsuit. Keep your real estate business separated from other dealings. Some people don’t fancy the idea of opening a company since this also involved costs, but if you really want to do this long-term, there’s no other way around it.
These are just a few of the things you must know in order to start a real estate investment business. Our guide all covers the most important and basic aspects and does not provide all the details that are required to handle a business. After a few hundred years, real estate continues to be an industry where there’s potential for returns, but that does not mean it can be successful everywhere and at any time. There’s a complex mix of factors that influence how a real estate investment will perform over time and your job will be to monitor them.