Real estate investing is a lucrative venture for those looking to diversify their portfolio, grow wealth, or generate passive income. However, it can be a complex and daunting process to navigate without the right guidance and knowledge. Whether you are a seasoned investor or new to the game, it’s important to have a clear understanding of the basics.
In this blog, we will explore the key steps and considerations involved in getting started in real estate investing. From defining your investment objectives to selecting the right properties, we provide you with the insights and tools you need to succeed. So, read on to learn everything you need to know about how to investment in real estate.
Steps to Follow When You Start Investing in Real Estate
Real estate investing requires time and effort, but it pays off in the long run. Before jumping headfirst into the world of real estate investing, you need to do research and have a solid plan in place. Here are some key steps to follow when starting to invest in real estate:
Define your goals.
Start by defining your real estate investing. What do you hope to achieve through real estate investments? Are you looking to generate passive income or build long-term wealth? Knowing your goals can help guide your investment strategy.
Research and learn.
Before you start real estate investments, it’s important to understand some key concepts . You need to understand the following.
In the past decade, real estate has grown exponentially. Infrastructure development, Stable GDP, demographic trends such as rapid urbanization, and higher returns have led to continuous growth in the real estate sector.
Real estate investors, must understand the market trends in the area where you intend to invest. Research market trends and understand what is expected in the future. This gives you an idea of what to expect and the best real estate investment property for your portfolio.
For example, if you are a real estate investor looking to invest in the Kenyan real estate market, here is what you should know.
- We expect continued growth in the middle-class population. This means that the demand for quality housing and commercial real estate investment property will continue to soar. As a real estate investor, if you can cater to the demands of the middle class, you are likely to make a decent return on your investment.
- Increase in investment in infrastructure. Infrastructure development is expected to continue in 2023 and the coming years. This will drive the demand for real estate in areas with improved connectivity. You need to identify such areas and capitalize on them.
- Rise of co-working spaces and flexible working spaces. The growth of startups and entrepreneurship creates the need for co-working spaces and flexible working spaces. Investors who take advantage of such opportunities are likely to see good returns.
- Focus on sustainability. With the high focus on the environment and climate change, investors may want to focus on building sustainable buildings that use renewable energy. In the coming years, we are likely to see projects that are eco-friendly and energy-efficient in high demand.
- Affordable housing. Investors who provide low-cost housing solutions are likely to get strong returns. The demand for affordable housing is on the rise.
- Interest in commercial real estate. There may be increased demand for industrial spaces. Investors who can capitalize on this will get a good return on their money.
Understanding real estate valuation is necessary for investment analysis. It’s important to understand the basic concepts of real estate valuation. The value of a property can be defined as the present value of future benefits that an investor will get. To determine the value of a property, you must consider the economic and social trends, government regulations, and current environmental conditions that determine demand, scarcity, and transferability.
Real estate investors need to understand the valuation method used to determine the price of a property. In so doing, you can determine whether the market price is fair and in line with market trends.
Before you invest in a property, you need to understand local and government regulations. For example, if you are buying land, you need to confirm whether the title is freehold or leasehold. Additionally, confirm whether the land is under the control of the community. For instance, in some areas of Narok, the land is under the control of the Maa Community.
It’s important to consider the impact of taxes on your rental property. Consider the property taxes you will incur when choosing how to invest in real estate. For example the tax on rental properties is different from Real estate investment trusts. Determine the tax implication of the property you intend to purchase.
When you set your sights on a real estate property, you need to decide how you want to pay for it and whether there are financing options. For example, if you opt to buy an apartment from a company like Mivida, you need to be aware that not all financial institutions will offer mortgages. Do your research and know the financing options available.
Rate of return
The rate of return is an important metric that you need to determine before buying a property. There are different ways to calculate the return on investment. You need to do research and come up with the correct method. For example, here is how the cost method works.
Let us say you buy a property for Ksh 1,000,000 in cash. You add repairs and management costs of Ksh 300,000. The value of the property is Ksh 2,000,000. To calculate the rate of return, follow the below steps:
Add the buying price plus the repair costs. Ksh 1,000,000 + 3,000,000 = 1,300,000
Subtract the cost from the current value. 2,000,000 less 1,300,000 = 7,00,000.
Using the cost method, determine the rate of return.
From the above, you can calculate the annualized return of the property by dividing the rate of return by the number of years you intend to the property.
Educate yourself as much as you can about the real estate market and the various investment options before you make a decision.
Assess your finances.
Determine how much capital you have to invest and the level of risk you are comfortable with. Consider working with a financial advisor to help you make informed decisions.
Building relationships with real estate professionals such as agents, attorneys, and contractors can be invaluable in finding investment opportunities and navigating the legal and financial aspects of real estate investment.
Choose your investment strategy
Decide whether you want to invest in rental properties, commercial properties, or other real estate ventures. Each strategy comes with its risks and potential rewards, so do your due diligence.
Conduct thorough due diligence
Before making any investment, be sure to research the property and the surrounding area. Look at comparable sales data, consider potential repairs or renovations needed, and assess the overall market conditions.
Have a solid exit strategy.
Plan for how you will eventually sell or dispose of your investment, whether through a sale, long-term rental, or other means.
Investing in real estate requires careful planning and consideration. By following these steps, you can set yourself up for success in real estate investment.
The Best Ways to Start Real Estate Investing
Investing in real estate in the long term can be a rewarding endeavor, but it requires a significant amount of knowledge and preparation to succeed. Here are some of the several strategies that investors can use to maximize their returns and minimize risks in real estate investing.
Invest in rental real estate properties.
One of the most common ways to invest in real estate is to purchase rental properties. This involves buying a property, leasing it out to tenants, and collecting rent payments as a source of income. This can be a great strategy for long-term wealth building, but it’s important to carefully consider factors such as location, property upkeep, and rental income when choosing properties to invest in.
Rental properties give you direct real estate investments exposure . Buying apartments has become quite popular. For example, you can buy a two-bedroom apartment from companies such as Mivida and rent it out or list it on Airbnb.
Here are the pros and cons of rental properties.
Pros of owning a rental property
- Gives you a regular income.
- You can take advantage of the tax deductions.
Cons of rental properties
- The management of tenants can be tedious. You may need to hire a property management company
- Damage from tenants may be expensive, resulting in losses.
- Income reduction when houses are vacant.
Another popular strategy for real estate investment is house flipping. This involves buying a property, renovating it to increase its value, and then selling it for a profit. This strategy requires deep market knowledge and a significant upfront investment, and there is no guarantee that the market will favorably support the sale price.
Advantages and disadvantages of house flipping.
- May provide high returns in a short time.
- Requires a deep understanding of the market.
- May tie up capital for a long period.
Real Estate Investment Trusts (REITS)
Real estate investment trusts (REITs) are another investment option for those looking to invest in real estate without the time and expense of owning properties themselves. REITs allow investors to purchase shares of properties managed by the trust, with dividends paid out based on the success of the properties.
Investing in real estate investment trust is a good way to enter the real estate investing market. You can start with a small amount of cash and grow your portfolio over time.
Overall, the most important aspect of investing in real estate is to thoroughly research and analyze each potential opportunity before committing to any funds. By doing so, investors can make informed decisions that will help them achieve their financial goals.
Advantages and disadvantages of REITs
- They are a solid investment for those who desire a regular income.
- REITs are long-term, cash-producing leases.
- The leverage associated with traditional rentals does not apply to REITs.
Real Estate Investment Groups (REIGs)
REIGs are ideal for people who don’t want to deal with the hustle and bustle of running and maintaining real estate properties. If you want to venture into indirect real estate investing then real estate investment group is perfect. It requires a capital cushion and access to financing. REIGs are like mutual funds that invest in real estate.
In a real estate group, a company will build a set of apartments or condos, and investors will buy them. The investor can own one or multiple properties, but the company manages all the properties. The property manager maintains and advertises vacant spaces in exchange for a percentage of the rent.
Standard REIGs leases are in the investor’s name. The units pool a portion of the rent to guard against vacancies. This will ensure you will receive an income even if your unit is vacant. Here are the advantages and disadvantages of REIGs.
Advantages of REIGs
- The investor is hands-off.
- Provides income and property appreciation.
Disadvantages of REIGs
- Income risk In case of high vacancies.
- Fees may be high.
- Poor management may result in a reduction in income.
Real Estate Crowd Funding
Real Estate Crowdfunding is done through online real estate platforms. The platforms connect investors with real estate developers. Investors buy into a property and become shareholders.
Pros and Cons of Real Estate crowdfunding
Advantages of real estate crowdfunding
- You can invest in one or several real estate projects.
- offers a low entry point into real estate.
- Gives investors geographical diversification.
Disadvantages of real estate crowdfunding
- Tend to be illiquid and have lock periods.
- Charge management fees.
- Requires a lot of due diligence.
Real Estate Investment Tips
Investing in real estate requires careful planning and strategic decision-making. You need to have a solid understanding of the real estate market and the best practices for making successful investments. Here is a list of key tips to keep in mind to help you navigate.
Consider the location and investment timing.
One important factor to consider is location. When choosing a property to invest in, look for areas with strong growth potential, good schools, a low crime rate, and desirable amenities such as parks, restaurants, and shopping centers.
Assess your financial situation and choose the right financing option.
Another tip is to be mindful of your financing options. There are a variety of ways to finance a real estate investment, including taking out a loan and using your funds. It is important to assess your financial situation and choose the option that best fits your needs and goals.
Develop a long-term strategy.
It’s crucial to have a long-term strategy. The strategy should include property management and staying up to date on market trends and regulations.
Tap into a hidden market.
Homes and properties with distressed sellers who have not yet put them on the market are likely to be a good buy. Buying cheaply gives you a chance to get a higher return.
Don’t overstretch yourself.
Avoid overstretching yourself, as it may cause bankruptcy. Make sure you maximize your resources but don’t overstretch them. Don’t overborrow to invest in real estate, as this may result in losses and bankruptcy.
Investing in real estate is one of the best options when looking for wealth-growth strategies. It’s important to ensure careful planning and research when you invest in real estate. By following the steps outlined in this article, you can be on your way to building a successful portfolio.
However, it’s important to remember that real estate investments can also be risky. That’s why it’s critical to seek the help of a financial advisor who can provide valuable insights and guidance to help you make the best investment decisions. With their expertise, you can navigate the complex world of real estate and find the best deals.