The first thing to understand about real estate investing is that it is different than the usual stock and bonds, often called “standard assets”. Real estate investing is also, for some, uncharted territory.
However, this does not mean it should be avoided resulting in a missed opportunity. Real estate investment can be a reliable way to generate substantial returns, if executed correctly. It can create a constant stream of income while also decorating your portfolio with opportunities such as, appreciation potential, portfolio diversification, and tax advantages.
Even though there are many positives to real estate, it can seem intimidating without knowing where to start. Below is a general overview of the fundamentals of real estate investing and several ways to get started right away.
What is real estate investing?
Real estate investing exists for the purpose of owning a residential structure to solely generate investment returns through income or market value appreciation. There are three categories in real estate. These categories are residential, commercial, and industrial.
Residential real estate consists of single family homes, multi-family homes, townhomes, and condominiums. There are also multi-family homes that people use as a living space. Residential real estate is not for a working space, soley living. If a home has more than four units, it is considered a commercial property.
Commercial real estate is only properties used to house businesses. Commercial real estate is defined as office, retail, land or multi-family. An example of a retail would be a restaurant, and land would be a farm. Multi-family is any large apartment buildings.
Industrial real estate is any business that has an industrial purpose. Industrial business include; shipping or storage facilities, factories, and power plants.
Along with real estate property types, there are also three key ways to make a profit from investing; interest from loans, appreciation, and rent.
Interest from loans or in real estate terms “debt” is an arrangement where investors lend money to a real estate developer and make money off of the interest payments. Debt investing is important because it provides a constant cash flow for an investor. There are different types of debt categories included in the capital stack. There is a debt called senior debt, junior debt, and mezzanine debt. There is also debt that is secured and that is unsecured. Debt that is secured is safer and has more advantages for the investor if the property was to foreclose.
Appreciation has to do with ownership of an equity. Equity is ownership in real estate and is what gives the investor the ability to earn money from the sale of that equity. Appreciation means increase value of a property over time and represents potential profit for an investor when the property is sold. There is preferred equity or common equity.
Rent is another way to earn a profit off of real estate investment. It is when an investor owns a property and then lease the property to earn income. Rent income can provide a regular stream of income.