Breaking into the real estate market -- that is, investing in real estate -- is in many ways like starting any business. The first step is to educate yourself about the industry, think about what assets you can contribute and then decide how big a leap you want to make.
There are multiple approaches to real estate investment ranging from being “the money guy” to doing a deep dive and purchasing a property with the intention of either fixing it and flipping it, or managing it and collecting rents.
No matter which approach a new investor takes, it’s important to remember that investing in real estate is very different from buying a house. The property you invest in is not a home, or even an office, it’s an asset designed to earn income.
Here are some tips on the first steps to break into the real estate market, what to look for, and how to earn income.
The Gig Economy Approach
If you’re not quite sure you want to get into real estate investing, but want to test the waters, there are two approaches to take.
First, you can rent all or part of your home out via a platform like Airbnb. In New York, there are definitely restrictions that apply, but essentially it’s okay to rent out a room for less than thirty days, just not an entire home.
The second option is to sublet your apartment. Again, in New York, there are laws in place that affect subletting. Sublets of entire units are only legal if the term of the lease is 30-days or longer.
Given the potential restrictions, why go this route? Because, it will earn some income while you gain hands-on experience dealing with tenants.
When someone else is occupying a space that you own, or are responsible for, it can lead to a host of challenges. How will you handle it if there’s a maintenance issue? What if the tenant is late with payment, or doesn’t pay at all? Are there adjustments that need to be made to the space to make it more enticing to potential renters?
So, for the cautious investor who wants to gain experience as well as income, treating the initial foray into real estate investing like a gig, rather than a career, is a good move.
The OPM Approach
One reason many people don’t invest in real estate is because they don’t have the cash to put down on fix-and-flip properties or multi-unit properties suitable for rental income.
In order to get around this valid, but not insurmountable, difficulty is to go the OPM route: Other People’s Money. Why would someone co-sign a mortgage, or put up the cash needed for a down payment?
Because you are offering something they don’t have: time. It takes time to fix a property so that it can either be sold or turned into viable rental units. It also takes skills, like construction or project management, that you may have. If you don’t, you still have the time to educate yourself about the needs of the property and find the right people to do the work.
In terms of the actual amount of money needed (when it comes to fix-and-flip), a general rule of thumb is to expect to pay 70 percent of the After Repair Value (ARV) of the property, minus the cost of the repairs needed. So, if the property will be worth $350,000 after repairs, but you need to rehab the kitchen and bathroom and take care of some general cleaning, repairs and painting at a cost of about $50,000 then you should pay no more than $195,000. Not all of this needs to be cash, obviously, but mortgages do come at a cost so the less you and your partner-with-money borrow, the better.
If you put time and energy (sweat equity) into the project that’s equivalent to the financial investment your partner made, then (using the above example) you and your partner may split a profit of more than $150,000. It’s vitally important to make sure the details of the partnership, from investm
Multi-unit properties have a different formula, but essentially you want to make enough money in rents to cover any debt (mortgage) and expenses (repairs) plus an additional 15 percent, minimum.
The Hands-Off Approach
If you want to invest but have no desire to own a property, fix up a property or manage a property there is an option: REITs.
Real estate investment trusts can be compared to mutual funds except that REITs are companies that own commercial real estate (office buildings, retail spaces, apartments, hotels). Dividends are paid to investors, or re-invested.
There are many kinds of REITs but new investors may want to consider going with publicly traded REITs, purchased through a broker, online or in person.