How to Add Real Estate to Your Investment Portfolio

Joseph Meyer
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Real Estate Investing Basics

Investing in real estate is extremely appealing because it can help transform your financial picture and make you a significant sum of money in the long run.

Some investors set goals to amass a 10, 20, or 30-unit apartment building and rent it out or sell it. Others buy a piece of land, planning to develop it into a commercial building or residential subdivisions, and sell lots to developers for profit. A commercial investor may look at properties that are in desparate need of repair and turn them into valuable, income-producing units that tenants will love … or make a bundle flipping the sites to a developer ready to start construction.

Here are some other reasons that people invest in real estate:

Renting out residences or commercial space can help you make a bundle of cash.

Buying property can give you the opportunity to capitalize on rising property values.

You can capitalize on a tax break by using the 1031 Exchange to defer capital gains.

Unlike the stock market, real estate can help secure assets and permanent, stable returns.

Real estate can be a good hedge against inflation.

It can be the best investment for your money if you don't have a lot of money to begin with.

Real estate is fairly easy to understand, regardless of your level of knowledge, and you can find a professional with the expertise you need in virtually every market.

Types of Real Estate Investments:

If you’ve ever considered real estate investing, you’ve probably heard the term “the” invest stack. The idea that real estate investors can combine investments in several asset classes to form a “stack” to shield them from financial challenges is a common anecdote among investing experts. The idea is that the more varied your invest stack, the better prepared you’ll be for the ups and downs of investments over time.

The most common approach to building a real estate invest stack is to begin with a number of passive investments. Rising housing prices have been a boon for first-time home buyers, who can leverage current housing prices and rising rents to build equity and live in or rent out their homes. However, learn more about these kinds of investments before making any decisions.

Single-Family Houses

There are two ways to add real estate to your investment portfolio. You can either purchase a single-family home or commercial property.

The advantage you have with a single-family home is that you are able to work on the property yourself, which allows you to save some money. Another advantage of a single-family house is that you have a lot of options to choose from. You can find large homes that have enough space to rent out or small homes with land that might be a good project for you to flip.

The disadvantage of single-family houses is that they can cost a lot of upfront cash. You’ll want to purchase a home at a bargain price and put in a lot of time and money to increase its value.

Small Multifamily Properties

Multifamily properties can come in a variety of sizes. But most of them can be classified as small, medium, or large property classes. In contrast to single family properties, multifamily properties aim to create entire properties. Consequently, small multifamily properties generally have 12 units or less with a smaller amount of land. This size is often acceptable for people who are thinking about starting out in real estate investing and who are not yet experienced.

Medium multifamily properties, on the other hand, can range in size from 18 to 50 units and are usually large properties with big amounts of land. However, both small and large multifamily properties may not be suited for new investors since they are generally complex properties.

Large multifamily properties generally have over 50 units, sometimes even ranging up to 200. These properties are usually located in major cities and are used for an array of different uses, from housing to offices. Because large multifamily properties are typically complex, new investors should stay away from these properties.

Large Multifamily Properties

Some investors are lucky enough to have the capital to buy numerous multifamily properties and manage these properties themselves. While these investors get to take advantage of the cash flow, they also have to take on the management role themselves. It can be a struggle to try and manage that many properties, and there will be many logistical issues to work out.

The best way to save yourself from all of the management headaches is to hire a firm that has extensive experience in that area. While a one-off property here or there might be manageable, if you plan on buying dozens of properties like this, you need to have someone who knows how to handle it all.

Some of the property management firms are likely to buy your property as well in exchange for managing it for you. Many investors specialize in one or two types of properties while leasing out or selling the others. This way, they are able to manage a large array of properties without it becoming overwhelming or an undertaking that takes away from their other goals.

Commercial Investments

Commercial real estate is typically purchased based on your income expectations and on your unique investment strategy.

Just like an individual house, an investment real estate company will purchase a commercial property, list it in the MLS and in their own listings, and then sell it.

Just like with a residential home, you can go to an investment firm, speak to a real estate agent, and then purchase the property yourself.

Tax Liens

Tax liens, which mean that you are allowed to take an ownership position on virtually any and all types of assets. You are allowed to collect money on their behalf.

You can acquire tax liens in one of two ways. The first way is to purchase tax liens from an existing lender or tax debt holder at a small discount. They’re offering the liens to the public for a discounted price for one of two reasons. The first reason is because tax collectors may have already tried to collect on the lien, and their best chance of collecting is selling the lien to you. The second reason is that they’re no longer interested in pursuing the collection of the tax liens.

The second way to purchase tax liens is by redeeming them yourself. You can do this by going to the courthouse in the debtor’s county and looking up the latest documents that have been filed in the case. If the case hasn’t been settled, you may need to contact the county clerk to determine where the last information on the case is available. Then you can file a lien report and a claim of lien. If there is more than one lien claim on the property, your lien is considered subordinate to the lien claim that was placed first.

Notes

From the Big Show: Real Estate Investing For the Beginner

Real estate investment trusts are a tricky business venture. Many are just fronts for chasing hot real estate markets up the mountain to get their company. But that doesn’t mean that there aren’t good real estate investment trusts out there.

If you are looking to add real estate into your portfolio, you’ll need a way to manage it. This means you’ll need a real estate investment firm. You can purchase individual properties and manage them yourself, or you can hire a professional property manager. The challenge with doing it yourself is that these rental properties are going to take up a lot of your time. You need to manage the tenants, the maintenance on the properties, and so on. Managing a property is sort of like having a part-time job. This puts a large amount of stress on you to be available day and night.

If you don’t have the time or interest to manage your properties, it may be in your best interest to get a professional property manager. This will allow you to buy and own new properties without the added stress of managing them.

Leverage in Real Estate Investing

Real estate investment is a good way to build wealth. However, most real estate investors recommend targeting just one property … preferring to buy a single home and to only get into the business of wholesaling or home flipping … or acquiring two or three properties. This way, you can really focus on becoming a good real estate investor.

If you pursue the one property-one investor strategy, do what you can to find the best possible property that you can afford. Your goal should be to build wealth. You do this by producing revenues by renting out the property and by building equity. You build equity by paying off the mortgage against the property; and you build equity through appreciation of the property.

If you want to build wealth, focus your efforts on generating revenues and on paying off and building equity. Sure, you can expect appreciation of the property, but look at it as icing on the cake. If you build wealth by generating rents and by building equity, you should expect appreciation of the property because these two pieces together will likely compensate for any appreciation that you did not receive because you did not hold the property long enough.

Making Your Plan

If you’re still new to the financial world, the idea of buying real estate might elicit some ambivalence. After all, it’s a big investment – you’re basically putting a roof over your head … or you’re putting a roof over someone else’s head … and you’re relying on that investment to make money. While it’s important to have a solid plan, if you make sure to take all the right steps, real estate is an investment that can comfortably support your financial goals.

Self Managing vs. Property Management

Real estate investing can be a fun and rewarding endeavor. However, real estate is just that “ real. The process can be complex (both emotionally and logistically) and will typically require a considerable amount of time, work, and money.

All that can lead many people to the (usually misguided) conclusion that real estate investment is a bad idea. Let’s not make that mistake here. Like most things in life, real estate investment is neither good nor bad – just like a hammer. It all comes down to how it’s used.

Owning property can be one of the largest passive income sources you can have, if you approach it correctly. The key is to reduce the onerous parts as much as possible. Many DIY investors take a special interest in their own holdings in the belief that it will make them more money and allow them to build wealth with their own two hands. As much as I like to DIY things, this is one area that I have to wholeheartedly disagree with. There are several reasons why you should not manage your own investment properties.

Where to Go From Here

Investing in real estate is one of the best methods of preserving your wealth and building your portfolio. Real estate has several characteristics that make it such a solid investment. For example, real estate is largely a “safer” investment than many other investments, it’s more tangible than intangible, and there’s greater liquidity via the buying and selling of property compared to other investments. To learn more about real estate investment and to get started in your own real estate investment career, check out the following books:

  • “I Want My Pot of Gold: A Complete Guide to Investing Successfully in Gold and Silver,” by Jim Rogers
  • “Die Broke: A Radical Four-Part Financial Plan,” by Suze Orman
  • “How to Retire Happy, Wild, and Free,” by Jim Yoo
  • “Young, Broke, and Beautiful: A No-Nonsense Guide to Your Bank Account, Your Business, Your Life,” by Chris Balish
  • “Real Estate Mastery,” by Mark Ford