real estate investing basics
Nov 7, 2019

Are you looking for a way to create long-term wealth with the money you have right now? One of the best methods for building up finances involves making investments in real estate. For instance, the average commercial real estate sale totaled around $1.2 million in 2019.

There are a lot of benefits you can obtain from investing in commercial real estate. Regardless of whether you’re new to investing or have experience, commercial real estate investments may seem daunting. To help you get started, we’ve compiled some real estate investing basics below.

Essential Real Estate Investing Basics

1. Attain a Diverse Investment Portfolio

Well-seasoned investors know that a diverse investment portfolio is in an individual’s best interest. Nonetheless, this basic rule may allude first-time investors breaking into the market.

Diversification is a strategic investment plan to balance risk versus reward. To put it differently, an individual will invest in various high and low-risk investments like stocks or mortgage bonds to get the most from their money.

Keep in mind that each person will achieve different results based on their financial goals and asset allocation.

2. Cash Flow vs. Appreciation

There are many ways to make money from real estate investments. However, there are two basic streams of revenue that we’ll focus on here: cash flow income and real estate appreciation.

    • Cash Flow Income. Cash flow income is revenue that you receive continuously. Let’s say you buy and operate an apartment complex. The income you receive from your resident’s rent checks would be considered your cash flow income.
    • Real Estate Appreciation. Real estate appreciation refers to the increase in a home’s value over time. A property’s value can increase due to renovations or the state of the real estate market. This process is popular for house flippers and DIYers.

Both options have advantages and disadvantages. For this reason, investors must weigh the pros and consand their financial situation to determine which is more advantageous.

3. The 1% Investing Rule

The 1% investing rule is a great rule of thumb when buying a rental property. The rule is as follows:

Rent you charge/purchase price (this combines initial price and potential renovation) x 100

Let’s test this rule out. If you purchase property for $100,000 and it takes $20,000 to renovate it, then your total purchase price is $120,000. After doing some research, you find that rent for a property of equal value can go as high as $1,200. In the end, our math problem looks like this:

$1,200 (rent)/$120,000 (purchase price) x 100

Since $1,200 is exactly 1% of $120,000, then this property has the chance of being a good investment. This rule is not set in stone,nonetheless, the 1% rule can help you make a quick assessment of how profitable a certain real estate investment may be.

4. Real Estate Investments and Taxes

One of the most important real estate investing basics is understanding the impact of taxes. Several personal factors impact every person’s taxes. To elaborate, common factors include the type of investment and investment vehicles.

To explain further, there is a slew of different investment types—stocks, mutual funds, bonds, and more. In comparison, investment vehicles refer to any method by which individuals can invest.

Typically, there are two types of taxes—income taxes and capital gains taxes—that concern your investment revenue.

To demonstrate, let’s take the previous examples of investing in an apartment building.

Due to that investment providing cash flow income, you can expect an income tax on that cash flow. Comparatively, if you sell the building and its value has increased above its original price, that is a capital gain. Thus, that revenue will receive a capital gains tax.

5. Active and Passive Investments

Understanding active and passive investments can help diversify your investment portfolio. To elaborate, investing in both active investments and passive investments can be financially savvy.

An active investment can be seen as an investment requiring more hands-on involvement from the investor.

A great example of this is the ongoing trend of house flipping. Buying a house and then renovating it takes a lot of physical work and knowledge to execute. Thus, house flipping can be seen as an active investment.

In comparison, passive investments are more accessible for first-time investors. An example of a passive investment is investing in a mortgage bond.

Again, investing in a passive or active investment is a personal decision. Ample consideration of one’s financial goals should be taken to determine which is best.

Make The Most Out of Real Estate Investments

With a better idea of some real estate investing basics, you’re ready to start investing.

Consider partnering with a company like AVANA Capital to guide you!

AVANA is a commercial real estate debt fund that instructs clients on how to best invest. In addition, AVANA has flexible commercial real estate loan options available to you.

Some loans include construction loans, SBA 504, and bridge loans. With a thorough team with real estate expertise guiding you, you can rest assured that your path into the world of commercial real estate investments will be a fruitful one.

For more information on how AVANA Capital can assist you with your commercial real estate investments, contact their team of specialists today!

 

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