Whether you've just decided to start investing in real estate or been investing for years, you're likely to still have some questions about the process. With that in mind, we've put together a real estate FAQ for beginner, intermediate, and advanced real estate investors. You'll find answers to some of the most frequently asked questions about adding real estate to your portfolio.
Real estate investing 101: Beginner real estate investing questions
How can I get started investing in real estate?
While buying an investment property and collecting monthly rent is perhaps the most classic example of investing in real estate, it's only one option. It's also possible to follow a fix-and-flip investment strategy, get involved with real estate wholesaling, or invest in a real estate investment trust (REIT).
Before you can start investing in real estate, get clear on your investment strategy, since each method of investing has different advantages and disadvantages. You'll need to learn what type of real estate investing works best for you before you can try to take your first steps building a portfolio.
Do I need to work with a real estate agent?
If you're following an investment strategy that involves buying property, a common real estate question is whether you need to work with a real estate agent. When you're new to the world of real estate investing, the answer to this question is usually a resounding "yes."
A good real estate agent will be able to provide you access to necessary platforms like your local multiple listing service (MLS), as well as guide you through the more complicated aspects of the transaction, like drawing up your first real estate contract and effectively negotiating with the listing agent.
That said, if you find paying real estate commission is eating into too much of your profits, many investors do end up getting their real estate license. So if your goal is to build a real estate investing business, getting your license may be something to consider.
How can I finance a real estate purchase?
To start, most investors finance the first investment property in much the same way they would any other real estate purchase: by getting a mortgage loan from a reputable lender.
In general, getting a traditional mortgage is a relatively simple way to finance buying a property at a competitive interest rate. However, there are limits to how many times you can use traditional financing methods to buy a home. Notably, Fannie Mae (OTCMKTS: FNMA) recently increased the number of properties you can finance from four to 10.
There also are plenty of alternative financing methods available. You could, for example, consider a hard money loan or transactional funding for wholesaling. However, before turning to either method, do your research so you're prepared for what each type of lending entails.
Where can you find great real estate deals?
There are plenty of places to find good real estate deals. Again, if you're new to real estate investing, your best resource is your real estate agent, who will be able to use the MLS to send you information about available listings in your real estate market.
On the other hand, if you're more interested in investing in real estate from a REIT angle, consider trying out Mogul, a Millionacres service, for commentary, tools, and guides on investing in REITs in real estate equities.
How can you determine the right list price for a 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. As an investor, you should rely on your 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.
How can I start to diversify my portfolio?
Once you've got a few real estate transactions under your belt, it's only natural to start thinking about how to diversify your portfolio. In this case, diversification is about adding variety.
For instance, if you've got most of your assets tied up in single-family homes, it might be worth considering some multifamily or commercial properties. On the other hand, if you're looking for a more passive real estate strategy, consider investing in REITs or real estate ETFs.
Should I form an LLC for my investing business?
As your business grows larger, it may make sense to limit your personal liability by forming a business entity. Generally, a limited liability company (LLC) is the entity of choice for intermediate real estate investors. It's usually considered easier to form and manage than either an S-Corp or C-Corp and still provides many personal liability and tax benefits.
However, ultimately, the decision of whether to form a business entity is a personal one. If you have specific questions on this topic, it may be worth talking to an experienced financial advisor, who can give you personalized advice.
How can I get started with long-distance investing?
After a while, many investors find better opportunities than are available in their local real estate market. To that end, you may want to consider long-distance real estate investing, buying in an area not local to you.
Your first step should be to research potential markets. Once you've decided where to invest, the next step is to put together a team of qualified experts. 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.
Should I investigate buying foreclosures?
Often, investors see foreclosures' low sale prices and associate them with sky-high returns, but investing in foreclosures is not for everyone. If you're considering this route, remember that foreclosures often take a lot more work to fix up, which can drive up your upfront cost and eat into those profits. There also can also be title insurance issues.
However, if you think investing in foreclosures is right for you, find a broker experienced with this type of property. In truth, the buying process for foreclosures is different because you'll be negotiating with a bank rather than a seller. With that in mind, it's crucial to have someone in your corner who understands how this process works.
Real estate investing 103: Advanced real estate investing questions
How can I avoid paying capital gains?
One popular method for avoiding paying capital gains tax on the sale of real estate is called a 1031 exchange. Essentially, this process allows you to use the proceeds from the sale of your investment property to purchase a new "like-kind" property and defer paying taxes until you sell that new property. When it's time to sell that one, though, you can simply do another 1031 exchange to avoid paying capital gains tax until you cash out of the business entirely.
With that said, there's a lot to know about 1031 exchanges before you attempt to complete one, so do your research beforehand and talk to a qualified tax professional about the process.
How can I start to make my investment strategy more passive?
If you're looking for ways to make your investment strategy more passive, there are plenty of ways to do so. However, the method you choose will depend on your investment strategy as a whole.
For example, if you mainly follow a buy-and-hold strategy, you could consider adding a property management company into the mix. But if your portfolio is made up mainly of REITs, you may want to consider moving your investments into a managed fund.
How can I start investing in commercial real estate?
Most people wait until they have plenty of real estate investing experience to think about investing in commercial real estate as an asset class, as the stakes with these types of properties are higher. Rather than investing a few hundred thousand dollars in a property, you could be on the hook for a few million.
But if you feel you're ready to go this route, the first step would be to decide what type of commercial property you intend to invest in. After that, it's about researching your financing options and putting together a team of experienced experts.
The Millionacres bottom line
Whether you're a beginning real estate investor or been in the business for years, use this guide as a resource for the answers to some of the most common questions asked by investors. However, if you don't see the answer to your question listed above, reach out to another qualified professional like a real estate agent or lender to see if they can point you in the right direction.