Real estate investing is a proven way to create income outside of your primary job and grow lasting wealth. If you haven’t yet started investing in real estate, you need to know yourself and whether or not you’re better suited for active or passive investing. Are you going to invest in commercial or residential real estate? You will need to ask yourself these questions, do extensive research, and define what wealth means to you. Use our guide below to get your started!
There are two kinds of real estate investments:
Active vs Passive Real Estate Investing
If you’re looking for something action-oriented, active real estate investments are the way to go. Active real estate investments require the investor to get hands-on and manage their property. They can be exciting, but they come with their own set of challenges. Successfully maintaining a property is hard work, especially if you plan to rent it out.
Active investors embrace asset and/or property management. They bring real estate experience and expertise to the project which drives success. They implement a business plan that propels rent growth and appreciation. Their level of involvement encompasses the buy-sell decisions, the business plan, the capital improvement plan, income targets, and more. Some will also involve themselves in property management.
Before you decide to be an active investor, make sure you have the time! Many people think they do, allowing their enthusiasm to get in the way of realty. Full time jobs and family obligations tend to come first, which leaves little time to dedicate to the success of your investment.
Active real estate investments requires work from the investor. Many investors hire a property manager to handle things such as managing tenants, repairs, and other aspects of the property. Active home investments can be more profitable than passive ones, but they require more time and money to get started.
Many investors also flip houses. To flip a house means, quite simply, to buy low and sell high.
Find the property in the worst shape in the best neighborhood. Put in the time, money, and sweat equity needed to renovate the home and bring it in line to compete with comparable homes on the market.
Then, sell the home at a profit, ideally within a few months.
Buyers favor homes already rehabbed where they don’t have to do the work. They will pay more than the price of the house prior to the flip. You’re pricing the home for the buyer to get the move-in ready home they want, while you get paid for the work you did on the rehab itself. If all goes as planned, you can take the cash you made and invest it in the down payment on your next flip. The house flipping process works for those who have the courage to deal with the stress of both the rehab process and the fact that there is no guarantee the house will sell quickly.
For those that do have the time, the next step is to take an honest assessment of your expertise. Were you born into this business and taught it by your family? Is it something that you work in everyday? Have you had a mentor show you step-by-step what it takes to win in real estate investment? If not, you better learn it quickly or perhaps you’re better suited for passive investing done fractionally. There are many ways to invest passively. Passive investors want the benefits of real estate investing without the headaches of management. These people hire trusted professionals to do the management for them. That means they need to do their research up front and make sure they’re working with reputable people.
Passive real estate investments don’t require any direct management from the investor, and it’s not hard to learn how to become a successful passive real estate investor. In this kind of investment, you’re investing your capital, not your time. The passive approach is great for those who want to diversify their portfolio without getting directly involved in the business. Another advantage of passive investing is that it doesn’t require a large sum of money to get started.
Decide on Commercial or Residential Real Estate
Once you decide if you’re a better match for active or passive investing, the next step is to decide what type of real estate you want to invest in.
When most people think about investing in real estate to build wealth, they consider the opportunities to invest in residential properties. However, commercial real estate investing is an avenue worth considering. Commercial real estate includes; retail, office, industrial, hospitality, storage, and multifamily (resident occupied real estate – five units and larger). The success of the businesses operating within your commercial property space factors into the success of your investment, so this option isn’t for the faint of heart! With commercial properties, factors may include additional physical requirements such as a need for a loading dock, ingress/egress, parking, and potential for foot traffic.
With residential property, areas to consider include the neighborhood, proximity to major highways, and school districts. Residential real estate is resident occupied real estate that is four units or smaller. It includes single family homes, duplexes, triplexes, and quads. Many people view residential as an entry point into real estate investment.
More and more people are renting today than at any other time in the last 50 years, which makes now a great time to own properties. The market for commercial multifamily real estate is strong with no sign of slowing down anytime in the near future. Real estate can provide you and your family with a tax-free source of passive income, a safer investment portfolio, and a beautiful property. Whatever you decide to invest in, make sure that it will provide you with positive cash flow from day one!
For comments or inquires contact:
Alex Khodadad, Broker, CPA
1930 Contra Costa Blvd.
Pleasant Hill, CA 94523
#toprealtorwalnutcreek #walnutcreekrealty #topwalnutcreekrealestateagent
#toprealtorconcord #concordrealty #topconcordrealestateagent