When it comes to real estate investing, the options are probably more plentiful than you think. Many people hold the misconception that to be a real estate investor, you need to buy a rental property and manage it yourself. In other words, you need to become a landlord.
The truth is, the best ways to invest in real estate don't require being a landlord at all. In fact, you don't even need to own property to invest in real estate. Here, we will cover the how and why of real estate investing. This will include a step by step process to get you on your way as well as a few types of real estate investing you can jump into immediately.
Do You Have What It Takes To Be A Landlord?
First, determine if you really want to be a landlord. Essential duties of the job include collecting rent, managing finances, and handling maintenance issues for the properties you own. If you like dealing with people and are pretty handy with a hammer, you might make a great landlord.
If you have no interest in interacting with tenants to collect rent and fix broken toilets, being a landlord might not be a good fit for you.
How To Be A Real Estate Investor Without Being A Landlord
If the landlord route is prohibitive for you, fear not! Here, we will show you how to invest in real estate, focusing on the many options available that don't require you to become a landlord.
There are a plethora of options for you to consider (more on those later), and there are a few steps to take before jumping into any of them. Let’s get right into these steps.
Pay Down Your Debt
Investing in real estate costs money, but you probably already know that. How much money depends on several factors, but you will usually need to incur some debt. It’s better to start the process with as little debt as possible, so you are not piling it on.
Take a long look at your outstanding loans. Start with the big ones like home loans, car loans, student loans, and high-balance credit cards. Pay them down as much as you can, focusing on the ones with the highest interest rates first.
Save For A Downpayment
A down payment is necessary for almost any real estate investment property purchase. Make sure your savings are robust enough before starting so you have the necessary funds.
For rental properties, budget about 20 to 30 percent of the total purchase price for a downpayment. This may seem higher than the downpayment needed for purchasing a primary residence because it is. Private mortgage insurance (PMI) covers the lender if you don’t pay the mortgage on your primary home. Investment properties don't have PMI, so lenders require a larger down payment to help mitigate their risk.
Cash Or Mortgage?
You have probably heard the phrase “cash is king”.. Sellers certainly love cash offers, as it eliminates many of the steps lenders require that slow down the sale process. Understanding how to buy a house with cash is an important part of real estate investing, but don’t assume it’s always the best route to take.
Paying with cash or securing financing from a lender can both be good options for acquiring an investment property, depending on your financial goals. Cash will provide you with a larger monthly income since there will be no monthly mortgage payment. If you are more concerned with overall return on investment (ROI), a loan is usually a better option because you can invest less upfront to purchase the property.
Getting A Mortgage-Backed Loan For A Rental Property
If you own a home, start with the knowledge base you have regarding traditional loans for primary residences and then learn how rental property loans differ. The most glaring difference is interest rates, which are considerably higher than primary residence mortgages. This is because lenders incur more risk. When a borrower is faced with choosing between paying their income property loan and their primary residence loan, they almost always choose to pay the mortgage on the home they live in.
Other factors that affect mortgage approval for a rental property like credit score, down payment amount, and debt-to-income ratio are similarly more restrictive when compared to a mortgage for a traditional single-family home. Basically, be ready to pay more and show a higher degree of financial health when you are purchasing an investment property.
Keep An Eye On Interest Rates
You may have noticed that interest rates were relatively low in 2021. This made it a great year to invest in real estate with a loan. Rates are widely expected to rise in 2022, so keep an eye on them and talk to your lender about the best time to take out a loan.
Measure The Margins
With any investment, you will want to know how much money you can expect to make. Use a rental property calculator to determine your rental property ROI before making a purchase.
Once the calculations are complete, you will have a good idea of your expected ROI. 6 percent RIO for your first year is considered a good benchmark to shoot for. That number should rise over time, making the investment worth more and more the longer you hold on to it.
Insure Your Investment
You are probably familiar with homeowners insurance, but if you are going to own rental properties, you should purchase landlord insurance. Homeowners insurance only protects properties you live in, but landlord insurance protects properties you own and lease out to tenants.
Expect The Unexpected
Even if you crunch the numbers, learn about all the steps it takes, and do everything else you can to prepare for real estate investing, unexpected things could happen. All investing comes with some risk, so don’t invest more than you can afford to lose.
Interest rates, job growth, and a slew of other national financial indicators can significantly affect the value of your investment over time. Be ready to wait out a tough market and consider selling when the market value of your properties skyrockets.
Location, Location, Location
One of the most critical aspects of a property’s value is its location. Look for areas with population growth and rising home values. That way, if you want to sell the property in the future, it will be worth more than you paid for it, and you won’t have trouble finding tenants.
Purchasing a property in a location with declining population numbers might leave you finding it hard to find people to rent it to. If it’s an area where the average property value is declining, you might end up underwater (owing more on a mortgage than the property is worth).
Understanding the best way to assess property value is the first step. The next step is getting the real estate at a discounted price.
Getting a property for the lowest price possible is a great way to make a profit when you sell it down the line.
One of the best ways to do this is to offer cash. Sellers love cash offers because they can close on them quickly and don't have to worry about the hoops and hurdles lenders make their borrowers go through. This means they will often accept a lower purchase price if the offer is made with cash instead of a mortgage.
Find A Good Real Estate Agent
The best way to understand the value of a property is to have an expert investigate it for you. Find a good real estate agent that knows your local market and has experience with investment properties. They will provide a complete analysis of each property you are considering and tell you if it’s a good investment.
Hire A Property Manager
Hiring a property management company is a good idea if you buy your first rental property and don’t want to be a landlord. They will take care of everything from collecting rent to unclogging toilets - everything it takes to keep your rental property running smoothly. To hire a property manager, you will likely need to pay them between 5 and 10 percent of your gross rental income.
Ways To Invest In Real Estate Without Being A Landlord
Now that you know how to get started, let’s look at what real estate investing options you might consider. As we mentioned earlier, you don't need to be a landlord to invest in real estate. In some cases, you actually don’t need to buy property at all.
Real Estate Mutual Funds
Real estate mutual funds (REMFs) allow you to become a real estate investor simply by investing in stocks. Like regular mutual funds, REMFs pool the money from many different companies. The only difference is that REMFs only invest in companies related to real estate.
Real Estate Investment Trusts (REITs)
REITs are a way for many investors to pool their money to buy properties. Once a property is purchased, they rent to tenants to provide the investors with income and then sell at a profit to generate more ROI. REITs offer some assurances to investors because they are required to pay 90 percent of the income they receive to their investors.
Real Estate Crowdfunding
Real estate crowdfunding has opened up investing in commercial real estate to the masses. Previously commercial real estate deals were reserved for large companies and high net worth individuals. Now, anyone can get in the game.
Through several crowdfunding websites, anyone can find a property they would like to invest in and spend as little or as much money as they are comfortable with. Some real estate crowdfunding ventures offer an investment level as low as a couple of hundred dollars.
Wholesalers make an offer on a property and, once it is accepted, find a different buyer before the closing happens. They make a profit by finding a buyer who will pay more than the wholesaler has agreed upon with the seller and then keeping the difference.
When you operate as a wholesaler, not only do you get to avoid being a landlord, you also don't even need to purchase a property. The risk is that if you don't find anyone to buy the property before closing, you are stuck with completing the deal and purchasing the real estate.
Buying a home, fixing it up, and then selling it at a profit is called house flipping. Since you are not renting the property for income, you don't need to be a landlord to make money.
The trick is finding a property that needs work, fixing it up, and then selling it for much more than you bought it. House flippers often like to make cash offers to purchase properties for under-market value. That means more profit when they sell.
Real estate investing is something everyone can be a part of. Regardless of your age, income, or expertise, there are real estate investment opportunities out there to explore. If the thought of being a landlord and managing properties and tenants is keeping you from investing in real estate, don't let it. There are many different ways you can become a successful real estate investor without being a landlord or even owning physical real estate.