Most of us are familiar with the term real estate, but there is often confusion over what exactly it means. You may know that the real estate business involves the buying and sale of property, but you may be surprised to learn how many different methods of real estate investing are out there and how simple it is for anyone to benefit from a few basic principles.
But before you can understand how to start making money, you must have a firm grasp on a few basic concepts.
The simple definition of real estate is real property attached to a piece of land. Real property is anything permanently attached to the land, such as buildings and other structures. Real estate includes a few different categories that will be discussed later. But the most basic definition is property made up of land and buildings.
Real estate is a legal and business concept that refers to an interest in property consisting of land and structures. The term real relates to land, and estate refers to the interest of the person, corporation, or government institution that owns the land. It includes the land and any structures or natural resources within the property lines.
You may hear the terms land, real property, and real estate used interchangeably, but there are small distinctions. Real property refers to any object or structure permanently affixed to the land. Any property that can be removed, such as vehicles, appliances, products, livestock, etc., is personal property.
Real estate encompasses both land and the real property and comes with a bundle of rights the owner receives automatically. Understanding this bundle of rights and what it allows you to do is crucial to success in the real estate business.
Real estate comes in many different shapes and forms, and it can encompass anything from a single-family home to an office building to a warehouse to a vacant lot. Real estate can be divided into four categories: residential, commercial, industrial, and land.
Residential is often the easiest type of real estate for beginners to understand because everyone who's bought a home or rented an apartment has some experience with it. Residential real estate refers to buildings designed for housing. It includes single-family homes, duplexes, ranches, triplexes, condominiums, townhouses, bungalows, and small apartment buildings.
Residential property is typically either owned by the person living in the home or a landlord who rents it out to individuals as an investment property.
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Commercial real estate refers to buildings used for business purposes. In most cases, the owner or tenant will be a business with one exception - large multi-family apartment buildings. A multi-family apartment with more than four units is classified as commercial because large corporate landlords and accredited investors usually own them.
They are more complex to manage than smaller residential homes. But most commercial buildings are designed to accommodate businesses, including office buildings, shopping centers, strip malls, restaurants, hotels, and other locations where companies offer customers products or services.
Industrial real estate is often included under the umbrella of commercial properties but varies slightly. Industrial properties are those that deal with the development or manufacturing of goods and products. Common industrial facilities include warehouses, factories, distribution centers, research and development buildings, assembly plants, and storage.
Industrial facilities are exclusively designed for business purposes but are distinct from offices or retail buildings.
The final type of property is vacant land or raw earth with no permanent structures built on top of it. Even without a building attached to it, raw land is still considered real estate because someone owns it and can sell or develop it as they see fit.
Many real estate investors look for raw land in prime locations because it offers immense earning potential and the ability to develop it from scratch. Or you can always purchase raw land in the hopes that will appreciate and sell it for a profit at a later date.
You may have heard someone say that real estate is the best way to create wealth. While homeownership is an excellent way to start building equity and achieve more financial stability, simply purchasing a primary residence and hoping it gains value likely won't make you rich. But there are many different real estate investing methods that allow you to earn passive income or collect substantial fees without quitting your nine-to-five. Here are some of the most common real estate investing techniques.
Wholesaling is a popular investment technique because it allows you to earn sizable fees without owning real estate or risking your credit. Wholesalers earn fees by scouting under-market properties on behalf of other investors. House flippers and landlords are always on the lookout for homes being sold at a discount because it offers more earning potential. But these deals can be challenging to locate and get under contract.
As a wholesaler, you search for motivated sellers who may be willing to sell their home for a discounted price in exchange for a fast close - either because they're about to go into foreclosure or experiencing a sudden life change. You convince them to sell you the property at a rock-bottom price, have them sign a wholesale contract, then sell that contract to an investor at a markup.
As long as you offer it at a price that still allows the investor to do any necessary renovations and still turn a profit, they will gladly let you keep a fee to save them the legwork. Although it takes hard work and a good understanding of the local housing market, wholesaling is a great way to get started in real estate investing if you need more money or credit to buy property.
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House flipping is another popular strategy that allows practitioners to collect large returns in a relatively short amount of time. House flippers purchase distressed properties at a discount, put money into renovating them, and then turn around and sell those properties at the market rate.
The technique involves more work than wholesaling and requires you to use your money or credit to purchase the property. You will also be responsible for paying for carrying costs (such as taxes, insurance, utilities, etc.) and renovations. But if you study local home values carefully and crunch the numbers, you can expect a much larger return than wholesaling.
If you are good at home improvement projects, you can do some work yourself. Or you can outsource the entire process by hiring contractors, wholesalers, and real estate agents to handle the groundwork while you manage the project. As a result, house flipping is a great strategy for earning additional income, even if you're working a full-time job.
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Many investors just want to earn passive income and don't want to deal with all any of the responsibilities of owning property or interfacing with investors, agents or homeowners. In that case, you should look into REITs. A real estate investment trust (REIT) is a company that purchases and manages income-producing real estate. REITs sell shares to investors and pay dividends based on the performance of the real estate.
Many REIT's are sold on public exchanges and function just like a stock. However, the return is correlated to the performance of the real estate assets in the company's portfolio rather than the sale of goods and services. You can also find REITs that focus on a particular sector - such as healthcare, shopping centers or industrial buildings - as well as general investments that are well diversified across the entire real estate market. If you're interested in stocks and securities, consider adding REITs to your portfolio.
Purchasing rental properties is one of the most common forms of real estate investing practiced by ordinary people. This, of course, involves purchasing residential real estate and leasing it to tenants for a profit. Almost everyone has a friend, family member, or neighbor who owns an investment property down the block or rents out an unused portion of their own residence. With the rise of rental apps like Airbnb and VRBO, renting out empty properties or spare rooms is easier than ever.
Some landlords handle all the responsibilities of leasing, managing, and maintaining properties on their own while others hire a property manager, a brokerage, and a team of real estate professionals to manage their portfolio. You can start with one rental property and eventually expand all over town or purchase a duplex, and rent out the other unit to help pay off your mortgage faster.
There are many different ways to approach rental property investing, and it offers a great way to earn passive income. It requires more responsibility than REIT investing because you are responsible for owning and maintaining the property. But it's often less labor intensive than flipping or wholesaling and provides consistent cash flow over a long period of time.
Syndication is when you organize a group of investors who all pool their capital to purchase a real estate asset. You may know of a great deal but don't have the funds or experience to buy it all on your own. If you have a group of friends or colleagues with disposable income, you could approach them about the deal and see if they're interested in investing. You may decide to contribute some of your own capital or just organize the investment and collect a percentage of the returns for organizing and managing the deal.
Syndication typically involves the purchase of large commercial properties or the development of a new home or building. With multiple hands in the pot, you'll want to be sure the payout is large enough that everyone can profit. Plus, on more significant deals, it helps to have a team of investors to share the responsibilities and diffuse the risks.
Syndication is a bit more complex than other methods because it often involves larger deals. Plus, if you're the one raising the capital, you must do your due diligence to ensure it's a safe investment. But if you have the knowledge and access to deals or spare cash that's burning a hole in your pocket, syndication is a great way to earn substantial payouts without doing much hard labor.
Mortgage note investing is a smart yet often overlooked real estate investing technique. Every time someone gets a loan from a mortgage lender, they are required to sign a legally binding contract that compels them to pay back the loan - which is known as a mortgage note.
The mortgage note requires the borrower to make regular payments toward the outstanding balance until the loan is completely paid off. But lenders rarely keep these mortgage notes on their books for the duration of the loan. Instead, they bundle them into large groups and sell the contracts to third-party investors to offset the risk of default. These new investors essentially become the new lender and receive passive income from the borrower.
Mortgage note investing requires enough cash to pay the outstanding debt (or whatever price the lender is willing to accept). Plus, if the borrower stops paying, you will be required to initiate foreclosure or risk losing your investment. But if you can learn how to navigate the secondary mortgage market, note investing is a relatively stable way to earn passive income that doesn't require you to be responsible for the maintenance of the property.
Real estate is a large and dynamic industry with many opportunities available for those interested and willing to learn. Typical careers in real estate include real estate brokers, appraisers, inspectors, property managers, developers, contractors, mortgage brokers, title officers, and many more.
Some require licensure, and others do not. Formal education is required for certain positions, while others require only high school or relevant experience. Real estate careers can be full-time salary positions or based on commission. Real estate is a business that attracts talent from all walks of life because it offers so much opportunity and flexibility. So, if you're considering a career in real estate, you can rest assured that there is far more opportunity beyond being an agent and investor.
A real estate license is issued by the state government. It gives agents and brokers the right to represent clients in real estate transactions, including home buyers, sellers, tenants, landlords, businesses, and more. While you don't need a license to buy or sell real estate, you do need a license to represent another party in a real estate transaction.
A real estate license gives an agent or broker the right to market a property, host open houses, find buyers or sellers, field offers, give advice, negotiate on a client's behalf and help with the closing in exchange for a fee. You can do all those things independently with a property you own. But you must be licensed to do so for someone else in exchange for a fee.
Keep in mind that not all realtors have a real estate license. Realtors are members of the national association of realtors, including agents and other real estate professionals like investors and property managers. So, if you hear the term realtor, don't automatically assume it's referring to a licensed real estate agent.
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The real estate business is the industry and trade surrounding buying, selling, or otherwise monetizing real estate. While not everyone works in the real estate industry full-time, most of us will be involved in the real estate business at some point.
Whether you're a first-time homebuyer, a part-time real estate investor, or you've decided to become a real estate agent as a career change. Nearly everyone engages in the real estate business at some point in their lives - which is why it's crucial to know the ins and outs.
A real estate developer is an individual or company that finances and manages the construction or remodeling of a new building. Development is under the umbrella of real estate investing but is often more complex and capital-intensive than other techniques.
Developers may purchase vacant land and create new structures from scratch, or buy rundown buildings and convert them to new homes, commercial spaces, or industrial buildings. Real estate development is a lucrative field but often requires more experience, education, and connections to be successful.
No, many facets of the real estate business do not require a degree. For instance, there is no education requirement to become an investor, and brokers and agents typically only need a high school diploma and a real estate license. However, certain professions or firms may require a degree.
For example, if you want to become a real estate attorney, you'll need a law degree, or if you want to join the best real estate firm in New York, a bachelor's degree in business or finance may help. But ultimately, real estate is a business full of opportunity for many people from countless different industries and fields and you certainly don't need a degree to succeed.
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If you're interested in getting into the real estate business, but don't know where to start, the first step is to do your research. Understand the basic concepts and how the money is made. Then assess your own interests and resources to decide what path makes sense for you.
If you do your homework and have patience, there's no reason you can't earn passive income or even find a new career in the real estate industry.
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