The Art of Learning Real Estate Quickly|
by Alex Cosper, November 10, 2014
Many people are still struggling financially due to the economic collapse that started with the housing
market in 2007 then the broader market the following year. Since then the cost of living has gone up
while incomes have mainly remained flat or down. Although the economy is always unpredictable, it's
best to prepare in some way for your financial future. The following information can help individuals
investing in real estate for passive income.
Ways to Invest in Real Estate
There are various ways to invest in real estate. Some ways require a lot of initial capital while
other ways don't require much money at all. Here are the most common ways to invest in real estate:
- Buy a home then flip it for a profit
- Buy a home then rent out a room for passive income
- Buy a home then rent out the entire home to pay for itself
- Buy a home and grow crops to sell
- Buy a foreclosure property at an auction
- Buy a commercial building and sublet to various businesses
- Invest in real estate stocks
- Invest in REITs (real estate investment trust)
Brokers, Agents and Investors
The real estate industry is made up of brokers, agents and investors. While brokers and agents
require certain licenses in most places, depending on the state, investors do not necessarily need
such credentials. Both brokers and agents act as middlemen in facilitating property transactions
between buyers and sellers whereas investors do not necessarily need to be involved in those services.
A real estate broker can be an individual or a firm, while an agent is an individual who works for
an individual broker or a brokerage firm.
Traditionally, brokers have represented sellers while
agents have represented buyers, unless there is a dual agreement that allows the broker or agent to
represent both buyers and sellers. Both brokers and agents earn commissions off sales.
It is illegal for these professionals to facilitate real estate
transactions without a license, although in some states attorneys are allowed to play this role without
real estate credentials. Each state has its own requirements for obtaining a real estate license.
The leading industry trade association is the National Association of Realtors (NAR), based in Chicago,
in which members are known as Realtors. The advantage to being a member is having access to Multiple Listing
Services (MLS), which is a national database of industry activity. Real estate investors who do not
have employees and simply want to play the market do not necessarily need
licensing, but it's always wise to double check state laws.
Most home buyers do not have enough cash to pay for a property outright, so they get a loan from a
bank and make a down payment, then make monthly mortgage payment over the course of many years.
Added to this investment will be interest payments. The terms for such loans vary among banks and
depend on your financial standing, which usually requires good credit and steady income.
Some people use borrowed funds to make a down payment then pay back the lender with income from tenants.
Another way to finance a home investment is to find several investors who pool their money and then
share the profits once the home is sold. It's possible to buy and sell a home very quickly in a
booming market, but in a slow market this strategy can be risky.
Supply and demand are the most basic principles that affect prices. If there are many homes for
sale in your market but not many buyers then home sales will likely be slow. If banks decide to
keep a lot of foreclosures off the market, it can artificially drive up home values. Another way to
profit is when a buying frenzy drives up housing prices. When it comes to buying property, investing
in real estate for passive income can be profitable over a long time frame.
Renting and leasing can be interchangeable terms, depending or the rental or lease agreement.
Sub leasing refers to leasing out property that you do not own to a third party. The advantage to sub leasing
is that you do not have to come up with a big down payment and you will only be responsible for monthly
rent payments instead of long term mortgage and interest payments.
The main risk of leasing or sub leasing property is if the lessee (the tenant) is not able to make a
payment and you are stuck coming up with the payment to the bank or property owner yourself. It works
well in areas with high employment but can be risky in areas of high unemployment.
The one bright spot about a housing market crash is that it produces a lot of foreclosures that can
be purchased at a very low price. A foreclosure occurs when an owner can no longer afford to make
mortgage payments and does not have enough equity in the home to do a refinance or a short sale.
A refinance is when the bank that technically owns the home renegotiates the terms and gives you
a cash advance. A short sale is when you cannot repay the loan but you find an investor to make a
deal with the bank to pay off the loan at a discount.
Foreclosures are the result of loan defaults in which the home owner has lost a job or has accumulated
too much debt to meet monthly mortgage requirements. The bank repossesses the home then sells it at an
auction to the highest bidder. In the case of foreclosures, investing in real estate for passive
income is attractive if you are able to make a purchase at an extremely low price.
Out of the several ways of investing in real estate for passive income, owning equities such
as stocks or REITs require very little on your part as others do the work to raise the property value.
In either case you are not physically involved with maintaining the property. Stocks are fairly easy
to trade whereas REITs can take a long time for the investment to pay off. Both can be purchased
through stock exchanges. If you are interested in these investments you should speak with a financial