What Is Real Estate Investing?

What Is Real Estate Investing?

Real estate investing is simply buying a property and hoping to make a profit from it. Real estate investments generally offer little liquidity, but require a lot of cash up front, so it is not for everyone. This article will look at some ways in which property can be purchased, sources of investment capital, and foreclosure investment.

Purchasing Property

There are 7 ways in which you can acquire property for real estate investing. They are through banks, public auctions, real estate wholesalers, government entities (like Freddie Mac), market listings, real estate agents and private sales. After the investor has found a property, they then have to come to a sale price with the seller. As well, they will have to come up with terms for the sale. At this point the investor should have a real estate agent or broker assisting them in the process. For the investor to show that they are serious about purchasing the property they will make an offer to the seller. This is an offer of “earnest money”, which may or may not be returned to the investor, depending on the circumstances. This offer is an offer of good faith. It gives the investor time to properly check out the property and to get all necessary financial arrangements in order.

Source Of Investment Capital

Due to the high cost of real estate investing, investors will very seldom pay full cash for the property. The investor will usually take out a mortgage on the property, or some other sort of debt. In real estate investing the amount paid through debt or a mortgage is known as leverage. The investor’s own money is known as equity. There is a measurement called Leverage To Value. It measures the amount of risk involved in investing in the property. The more leverage involved in the purchase, the more risk for the investor. However, investors like it if they have higher leverage because that will mean more money for them if all goes well.

If there is a lot of repair that needs to be done to the property, a bank may not put up the money. Now, the investor will have to go to a private loaner in order to get the money they need for the investment. Due to the nature of the investment these loans are usually short term with very high interest rates.

In some instances, there is no leverage needed. This generally only happens with really large companies like Real Estate Investment Trusts, hedge funds and pension funds. With no leverage, as mentioned earlier, the risk is reduced to nothing. However, the potential gain is also reduced.

Man holding a model house and a hand full of money.

 Foreclosure Investment

Companies and individuals can be involved in investing in properties that are being foreclosed. That is to say, a property whose owner has not paid the mortgage past 90 days of the due date. Properties can be bought at a foreclosure auction. These auctions are open to the public. They can also be bought before the auction by interested investors. If the property does not sell then it is given to the mortgage loaner. These types of investments are looked favorably upon by many investors as the money the bank asks for is no higher than the mortgage. The investor is able to raise the price of the property, therefore raising the profit.

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