When you’re a new investor, the real estate investing world can be overwhelming at times. Before jumping in, it’s helpful to do as much market research, learn from those that are experienced and to ask the right questions.
We’re breaking down commonly asked real estate questions by new investors to better prepare you and your business.
1. How can I get started in real estate investing?
There are many investment strategies that exist that are successful for others. A classic example is the buy and hold method, purchasing an investment property and collecting monthly rent to create passive income. It’s also possible to utilize the fix and flip strategy, invest in a real estate investment trust or get involved in real estate wholesaling.
Each investment strategy has its own advantages and disadvantages. You’ll need to learn which type of real estate investing works best for you and your financial goals before taking your first steps into building your portfolio.
2. How can I learn about real estate investing?
Real estate education is critical to successful real estate investing. It’s recommended to become familiar with the many different aspects that go into each investment strategy such as property search, analysis, financing, tenant screening, etc. There are several sources you can use to learn the real estate basics, both free and paid. In our age of technology, anyone can access information on real estate investing. Some of these sources include books, podcasts, blogs, newspapers, etc. It’s important to gather information from current and reputable sources.
3. Do I need to work with a real estate agent?
If your investment strategy involves buying a property and you are new to real estate investing and/or the industry. It is highly recommended to work with a good real estate agent that will be able to walk you through the tedious aspects of the transactions and provide access to platforms like the MLS (multiple listing service).
However, many investors end up getting their own real estate license to create more profits per deal. If your goal is to build a real estate investing business, getting your license is truly something to consider
4. How can I finance a real estate purchase?
Just like you would in any other real estate purchase, most investors finance their properties by getting a mortgage loan. Getting a traditional mortgage at a competitive interest rate is one option. However, there can be limits on how many times you can use traditional financing and it’s often a much longer and more in-depth process.
There are of alternative financing methods to consider such as a hard money loan or transactional funding for wholesaling. Private and hard money lenders like Coastal Equity Group are less strict in their loan requirements, fund quickly and offer a variety of flexible terms. Wholesaling is great for those getting started because it requires no down payment or any of the investor’s personal capital. Allowing new investors to save up the profits they earn from wholesaling to use as a down payment on a rehab or buy and hold property.
5. How Should I Structure My Real Estate Investing Company?
The most common way to structure a real estate business is by forming an LLC (limited liability company). An LLC is a separate legal entity that allows you to obtain a tax identification number, open a bank account and do business under its own name. The primary advantage is that its owners also known as members have “limited liability”, which signifies that under most circumstances the members are not personally liable for the debts and liabilities of the LLC.
The LLC option is typically easier to form and manage than either an S-Corp or C-Corp which both still provide personal liability and tax benefits. Ultimately, how you decide to structure your real estate investing company is a personal decision. If you have specific questions, please consult with a professional tax or financial advisor who can provide personalized advice.
6. What does ARV mean?
A property’s ARV refers to its after repair value. Learning how to accurately calculate a property’s ARV is a skill that even the best investors still strive to perfect. Being able to understand and to properly calculate a property’s after repair value will allow you to make better investment decisions and to calculate your profits better.
To determine whether a specific property is a good deal, keep in mind the price of the property; second, be able to inspect the property and estimate the cost of repairs; and ultimately, analyze the numbers to verify whether or not the ARV will be greater than the initial cost of the property plus the repairs. It is recommended that your calculated ARV be at least 10 percent higher than the property plus repairs, if not, it is likely that your profits will be minimal.
7. How can I determine the right list price for my property?
Whether you’re following a buy-and-hold or a fix-and-flip strategy, you’ll eventually need to know how to effectively price a property for sale. An investor should rely on an experienced and knowledgeable listing agent, who can perform a comparative market analysis (CMA) to help you take an educated guess at the fair market value of the property
8. How can I avoid paying capital gains?
The 1031 exchange is a popular method to avoid paying capital gains tax on the sale of your real estate property. Essentially, this process allows you to use the proceeds from the sale of your investment property to purchase a new and “like-kind” property. Allowing you to defer paying taxes until you sell that new property. When it’s time to sell that one, you can simply do another 1031 exchange to avoid paying capital gains tax until you cash out the business entirely. There’s a lot to know about 1031 exchanges before you attempt to complete one, it’s imperative to do your research beforehand and talk to a qualified tax professional about the process.
9. How do I determine the rent to charge for my property?
The rental value of a property is critical. If over-estimated, the property may remain vacant for a long period of time. If it is too low, it may result in negative cash flow. To get a fair estimate of the monthly rental value, you will need to look for comparable properties and consider the local market conditions. Through an appraisal, you can request a market rent analysis to be completed. Most lenders will evaluate your debt service coverage ratio (DSCR) to gauge your ability to repay the loan. Understanding how much rent you will need to cover your monthly mortgage payments is vital. Visit Coastal Equity Group’s YouTube page to learn how to calculate your DSCR.
10. How can I get started with long-distance investing?
As a new investor, you should consider purchasing an investment property close to your home. Many investors start to branch out in search of better and more profitable opportunities outside their local real estate market. However, it is advisable to start investing in areas outside your local market once you gain enough experience. In this scenario, your first step should be to research potential markets. The next step is to put together a team of qualified experts in that area. At the very least, you’ll need a knowledgeable real estate broker and lender. However, if you’re planning on following a fix-and-flip strategy, you’ll also need to connect with a few experienced contractors.