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So, You Want to Invest in Real Estate…


Despite the extreme ups and downs of the last decade, savvy investors know that real estate can be one of the best ways to put your money to work for you. Investors were the first buyers to return in force to the housing market after the big crash. Seeing the opportunity to make a profit, real estate investors were willing to jump into the market when others were still afraid. Even though home values have gone up substantially over the last two years, those same opportunities still exist. However, if you plan to invest in real estate now, you need to be savvy and do ample research prior to buying.

There are two ways in which you can count on profiting from your investment in real estate: Renovating the home and then reselling, or earning rental income.

Flipping Property after Renovation

Buying homes in need of some work, then selling after improvements, has been a very profitable strategy for many real estate investors. There is still a large inventory of foreclosed, or otherwise distressed homes on the market. Typically home renovation costs pale in comparison to equity gained from such a project. In the case of a distressed home sale, you can usually get the property for below true market value since the seller (often a bank) is motivated to sell quickly. Therefore, when you go to re-sell the property, you should be able to make a handsome profit.

That said, this can be a risky project for someone who has no experience in home renovations, or for someone who is tight on available cash. Renovations often have unforeseen cost overruns. Additionally, these projects are hard to finance with a mortgage, so you will be tying up your own funds until you sell the home. If you plan to use a contractor to do the work, make sure it is someone you know and trust.

Buying a Rental Property

The most traditional way to make money as a real estate investor is by buying a property and renting it out to a tenant. With a down payment of at least 20 percent, it is easy to get a mortgage for this type of property, as long as your income and credit qualifies you. If the amount you collect in rent exceeds the mortgage payment, along with taxes, insurance and reasonable maintenance costs, then your investment is cash flow positive and can be a good long term source of income.

The Danger of Counting on Appreciation

It would be foolish to get into real estate investing thinking that simple market appreciation will produce a profit for you. This behavior helped inflate the housing bubble which burst so catastrophically in 2008. Although some investors did make handsome profits in the run up to the crash, just as many lost their life savings.

If you believe that home values will continue to appreciate, the best way to profit from it would be to invest in a real estate fund, called a REIT. This way your money remains liquid and you can get out of your investment if you see the market beginning to turn. If, on the other hand, you actually buy a property hoping for appreciation, you may not be able to sell if the market takes a sudden turn.

Despite all the negative headlines surrounding housing in the last few years, real estate is still a very good investment. Although housing did enter an investment bubble, unlike bubbles in things like stocks or even gold, real estate will always have tangible value. Now is a great time to put your money to work in real estate.

Photo Credit: flickr